By -
Jan 22, 2013
Hindustan Unilever Ltd. (HUVR), the Indian
unit of the world’s second-biggest consumer-goods company, was
downgraded by at least two brokerages amid concern that higher
royalty payments to its parent will shrink profits.
Credit Suisse Group AG cut its rating to neutral from outperform and Emkay Global Financial Services Ltd. lowered its recommendation to reduce from hold. The Mumbai-based maker of Dove shampoo said royalty payments to Unilever will rise to about 3.15 percent of revenue from the current 1.4 percent.
Such an increase in royalties is a “big negative” because it would reduce profit margins without leading to any significant gains for the company, Nitin Mathur, an analyst with Espirito Santo Securities Ltd. said. Hindustan Unilever’s sales of shampoo and skincare products are slowing and the increased payment will make things worse, he said.
“This is absolute bad timing,” Mathur, who has a sell rating on the stock, said in an interview. “When your domestic business is suffering you are actually increasing royalty.”
The royalty Hindustan Unilever pays will increase in phases through the year ending March 2018, the company said in a statement yesterday.
The new agreement will be take effect Feb. 1 and the royalty increase in the period through March 2014 is estimated to be 0.5 percent of revenue, it said.
The seller of Surf detergent already has access to its parent’s global portfolio and it’s unlikely that increased payments would automatically lead to new and better products for India, Sachin Bobade, analyst at Brics Securities Ltd. said.
Shares of Hindustan Unilever fell 3.3 percent to close at 480.90 rupees yesterday, the lowest level since Aug. 8. India’s benchmark BSE India Sensitive Index fell 0.6 percent.
“The royalty agreement is designed to help us grow competitively,” Chief Financial Officer Sridhar Ramamurthy said in a conference call. “Given the increased intensity of competition particularly from global players, it is absolutely critical that we have access to world class innovations and superior best practices.”
This will be the second Asian unit of Unilever, which is based in London and Rotterdam, to increase royalty payments in the past two months. PT Unilever Indonesia on Dec. 12 said that total royalties would increase to 5 percent of its revenue beginning 2013, compared with 3.5 percent last year.
Hindustan Unilever yesterday reported third-quarter profit that missed analysts’ estimates, as competition reduced sales of shampoos and skincare products.
Unilever owns about 52 percent of the Indian company, according to its website.
To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net
To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net
Credit Suisse Group AG cut its rating to neutral from outperform and Emkay Global Financial Services Ltd. lowered its recommendation to reduce from hold. The Mumbai-based maker of Dove shampoo said royalty payments to Unilever will rise to about 3.15 percent of revenue from the current 1.4 percent.
Such an increase in royalties is a “big negative” because it would reduce profit margins without leading to any significant gains for the company, Nitin Mathur, an analyst with Espirito Santo Securities Ltd. said. Hindustan Unilever’s sales of shampoo and skincare products are slowing and the increased payment will make things worse, he said.
“This is absolute bad timing,” Mathur, who has a sell rating on the stock, said in an interview. “When your domestic business is suffering you are actually increasing royalty.”
The royalty Hindustan Unilever pays will increase in phases through the year ending March 2018, the company said in a statement yesterday.
The new agreement will be take effect Feb. 1 and the royalty increase in the period through March 2014 is estimated to be 0.5 percent of revenue, it said.
Shares Fall
“The company could theoretically raise royalty again in 2019 once this phased increase in royalty payments has been carried out, which would be a concern,” Arnab Mitra and Akshay Saxena, analysts at Credit Suisse in Mumbai, said in a note to clients. “This will lower fiscal 2015 earnings by 6 percent,” they wrote.The seller of Surf detergent already has access to its parent’s global portfolio and it’s unlikely that increased payments would automatically lead to new and better products for India, Sachin Bobade, analyst at Brics Securities Ltd. said.
Shares of Hindustan Unilever fell 3.3 percent to close at 480.90 rupees yesterday, the lowest level since Aug. 8. India’s benchmark BSE India Sensitive Index fell 0.6 percent.
“The royalty agreement is designed to help us grow competitively,” Chief Financial Officer Sridhar Ramamurthy said in a conference call. “Given the increased intensity of competition particularly from global players, it is absolutely critical that we have access to world class innovations and superior best practices.”
This will be the second Asian unit of Unilever, which is based in London and Rotterdam, to increase royalty payments in the past two months. PT Unilever Indonesia on Dec. 12 said that total royalties would increase to 5 percent of its revenue beginning 2013, compared with 3.5 percent last year.
Hindustan Unilever yesterday reported third-quarter profit that missed analysts’ estimates, as competition reduced sales of shampoos and skincare products.
Unilever owns about 52 percent of the Indian company, according to its website.
To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net
To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net
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