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MC Explains: Why has HUL’s 80 bps royalty hike proposal upset shareholders?

The dent to earnings from HUL's proposed hike in royalty payable to Unilever is one aspect, but investors are unable to see the rationale for the hike. What are their main concerns and what's the way forward?

January 25, 2023 / 10:37 AM IST
In an investor call, HUL’s MD and CEO Sanjiv Mehta has called on everyone to look at royalty hike as any other operating expense and consider the benefits coming

In an investor call, HUL’s MD and CEO Sanjiv Mehta has called on everyone to look at royalty hike as any other operating expense and consider the benefits coming

Hindustan Unilever’s proposal to hike the rate at which it pays royalty to its parent Unilever has irked shareholders. Its share price had fallen on Friday by about 4 percent in a visible sign of displeasure and while the slide did not worsen in subsequent trading sessions, it has not regained lost ground either.

HUL’s MD and CEO Sanjiv Mehta told the Economic Times newspaper in an interview that investors will understand the merit of the proposal once the management engages with them. Although the size of the increase is not much in percentage terms, it appears investors were taken by surprise and did not understand the need for an increase. There is also uncertainty on whether the next renewal will see another hike, as the new agreement’s tenure is shorter at half of the earlier one.

What happened on the royalty front?

HUL has been paying a royalty on its sales every year to Unilever, which owns a 62 percent stake in it, for usage of its trademarks, brands, technology and services under a 10-year agreement that’s ending on January 31, 2023. HUL in return gets the rights to use Unilever-owned trademarks/brands, technology and access to central services (such as global procurement of raw materials).