Lower royalty payout is likely to boost EPS of MNCs’ local units

Mumbai: Locally listed units of large multinational consumer companies could see a 5-12 per cent increase in fiscal 2020 estimates of earnings per share if their minority shareholders reject proposals to pay more than 2 per cent of revenue as royalty to overseas parents.

Companies like Hindustan Unilever Ltd, Nestle India, Colgate Palmolive India and GSK Consumer Healthcare must obtain the approval of a majority of minority shareholders before April to pay royalties beyond the 2 per cent mark for the ongoing fiscal year.

Colgate, Nestle and GSK Consumer pay an over 2 per cent royalty and need to secure approvals from minority shareholders. HUL pays a little less than 2 per cent, plus 1 per cent as ‘fees for central service’ from parent Unilever Plc.


“In a scenario of rejection by minority (shareholders), if the aggregate pay-out to the parent goes down to 2 per cent, there could be meaningful earnings upgrades for our coverage,” CLSA said in a note to clients. “We estimate an upgrade of 5-12 per cent for the four companies, with the highest upside for Colgate and Nestle.”

According to JM Financials’ estimates, HUL could save as much as Rs 555 crore, or 6.4 per cent of EBITDA, in the fiscal year through March 2019 if the minority shareholders reject an over 2 per cent royalty.

HUL is expected to pay 3.4 per cent of EBITDA as royalty in FY2019. GSK Consumer, Colgate and Nestle are expected to save Rs 65 crore, Rs 153 crore and Rs 311 crore, respectively.

In fiscal 2018, Colgate Palmolive paid Rs207 crore, or 4.78 per cent of net sales, to its US-based parent as royalty. GSK Consumer paid Rs 128 crore, or nearly 3 per cent of its turnover of Rs 4,377 crore, to GlaxoSmithKline.

Theoretically, capping royalty at 2 per cent would mean savings of 6 per cent of EBITDA for HUL and GSK-Consumer, and 12 per cent for Colgate and Nestle, said Vicky Punjabi, vice president of equity at JM Financials. “But we believe minority shareholders may not want to argue against status quo and will approve the practice” of paying over 2 per cent royalty, he added.

In 2017, a committee led by Uday Kotak suggested an approval from a majority of minority shareholders in case royalty to an MNC parent is in excess of 5 per cent of revenues. The committee believed there was value in brand and technology, but stated that shareholders must be allowed to vote on the terms and conditions of such pay-outs.