INSUBCONTINENT EXCLUSIVE:
Though Hindustan Unilever Limited (HUL) delivered better than expected operating performance in the December quarter for the 2022-23
financial year (Q3FY23), cuts in earnings estimates -- on account of a hike in royalty payments -- hit investor sentiment.
The royalty hike
Royalty will increase over a staggered manner, from 2.65 per cent of turnover in FY22 to 3.45 per cent in FY25
increase in royalty by 80 bps to 3.45 per cent in the next 2-3 years and termination of GSK Consumer OTC products distribution contract
convincing about growth acceleration being around the corner
the company is one of its preferred staple picks, the stock is likely to take a short-term beating, given the negative sentiments around the
royalty angle, believes the brokerage.
Some brokerages have, however, kept faith in the ability of the company to offset the increase in
growth, backed by strong and sustained growth momentum in core categories, scale-up of nutrition and discretionary business (by market
development and innovation) and margin improvement on premiumisation and cost-saving initiatives.
HDFC Securities says that with raw
material costs softening, the royalty increase will not pinch much but will limit the margin expansion
The brokerage expects demand to pick up gradually while margin recovery will be faster
The brokerage has made a 1-2 per cent cut over FY24/25.
Going ahead, lower input costs (crude oil and benign palm oil prices) will help the
company to boost volume growth
ICICI Securities expects the company to take further price cuts and grammage increase to pass on the benefits, which would help the firm
promotions, which would also help it grow volumes
Gross and operating margins have already started improving sequentially and further improvement in coming quarters is imminent
