The contentious issue of royalty payments by Indian companies to their international parents has been in focus ever since Hindustan Unilever Ltd (HUL) decided to hike its fees to Unilever by 80 basis points (bps).
HUL’s royalty fee now stands at 3.45 percent, which is still lower than that paid by Nestle India to Nestle S.A. at 4.5 percent of the total turnover. The street verdict is that royalty fees eat into the earnings available to shareholders, and solely benefits the parent.
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“We are not simply gifting away money to the parent. It is for operational support and manufacturing capabilities,” said Suresh Narayanan, Chairman and Managing Director, Nestle India, in the Q4 earnings concall.
“Nestle S.A. owns 2,000 brands, which we at Nestle India get access to. The science and technology we borrow from them helps in our growth. The logic behind royalty payments has not changed one bit,” he said.
He cited the example of the millet project. Nestle India has signed a memorandum of understanding with Nestlé R&D Centre, which is a subsidiary of Nestle S.A., and Nutrihub, ICAR-Institute of Millet Research, for integrating millet into its product categories.
“For the millet project, Nestle SA is capable of doing more than Nestle India. It can help us in operational capabilities, thus fuelling exponential growth in the category,” he said. The parent will help its Indian offshoot in building consumer awareness, collaborating with start-ups and promoting sustainable and regenerative agricultural practices.
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That said, investors will be keenly watching out for any hike in Nestle India’s service fee to Nestle S.A., which is up for renewal in 2024. Any disappointment for minority shareholders might come at a cost to the stock, which currently trades at a pricey valuation of 87x price-to-earnings ratio.
