Given Hindustan Unilever declared a 15.5% net profit growth in the December quarter, the downgrades of its stock by as many as 12 brokerages that have followed?its share price has fallen 7.3% over the past 2 days?have more to do with its proposed hike in royalty payments to its parent than with the low volume growth (5%) that several analysts have pointed to. Under the plan, HUL will increase royalties from 1.4% of turnover at present to 3.15% by FY18. Given that HUL stock prices rose 32.1% versus the Sensex?s 26.2% between January 1, 2012 and 2013, one view is shareholders are being too picky?indeed while the Sensex fell 24.6% between January 1, 2011 and 2012, HUL stock rose 28.4%. A lot, of course, depends on the period you choose?over 4 years, HUL rose 2.1 times versus the Sensex 2 times, but over 5 years, HUL rose 2.4 times while the Sensex fell marginally.
The HUL downgrade turns the spotlight to a slew of MNCs who are getting higher royalty shares from Indian subsidiaries after the government did away with the ceiling on such payments. At a basic level, the move was a sensible one since, if a company benefits from a relationship?in terms of technology transfer or use of brand names?why shouldn?t it pay for it? In the case of Maruti Suzuki, one of the companies that gets adverse attention in a report by Institutional Investor Advisory Services (IIAS) on royalty payments, it could be argued that if Suzuki didn?t give it technology or its brand name, who would buy a Maruti car? And if a global parent spends a lot on R&D passed on to local subsidiaries, surely this has to be paid for? Without getting into each specific case, IIAS finds that for 25 Indian firms paying more royalties to their global parents, the Ebitda margins are significantly lower than for the BSE 100, as are growth in sales, Ebitda or PAT between 2008 and 2012?IIAS also gives examples of firms who are paying royalties but no dividends. In which case, shareholders are justified in asking whether they are paying too much for the contributions of the parent firm.
