Shares of Hindustan Unilever Ltd (HUL), the country's leading fast-moving consumer goods (FMCG) player, fell over 4% in intraday trade on Friday even after the company reported decent earnings in the quarter ended December 31, 2022. The third quarter earnings were in line with market expectations, but investors remained concerned about the proposed hike in a royalty payment to parent, Unilever. The company has proposed to increase royalty fees to the parent (Unilever) from current 2.65% to 3.45% (by 80 bps).

Extending losing streak for the second straight HUL shares opened 3.5% lower at ₹2,556 against the previous closing price of ₹2,650.25 on the BSE. During the session so far, the largecap stock has dropped 4.2% to ₹2,540.05, while the market capitalisation slipped to ₹6.07 lakh crore. The FMCG stock has tumbled 5% in the last two sessions compared to 0.5% fall in the BSE Sensex.   

HUL shares touched a 52-week high of ₹2,741 on December 9, 2022, while it hit a 52-week low of ₹1,901.80 on March 8, 2022.    

HUL has underperformed the BSE FMCG index in terms of one year returns. The sectoral leader has gained 10% in the last 12 months as compared to 16% rise in the BSE FMCG index. The stock has given a muted return of 2% in a six month period, while it has fallen 3.7% in a month. In the last one week, HUL shares have gained 1.5% as compared to 2% rise in the BSE benchmark Sensex.

For the third quarter ended December 31, 2022, the FMCG major reported a net profit of ₹2,505 crore for the third quarter, up 12% year-on-year from ₹2,243 crore in the year-ago period. The revenue rose 16% YoY to ₹14,986 crore in Q3FY23, driven by strong growth in the home care segment, which witnessed 32% growth.

Earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter stood at ₹3,537 crores, up 8% year-over-year. EBITDA margin declined 180 basis points to 23.6%.

Analysts view on HUL earnings

Post Q3 results, JM Financial has given “Buy” rating with a target price of ₹2,875, a potential upside of 8.5% from the current market price, citing that earnings were broadly on expected lines. The agency said that the market is now more focused on estimating the damage that occasional tinkering of royalty rates could do to the intrinsic value of the stock.

“Management alluded to rural slowdown likely bottoming out but didn’t sound too convincing about growth acceleration being around the corner, in our view. A lot of the hopes are still pinned more on government actions and macro rather than on factors that HUL would drive on its own. The hike in royalty to Unilever (80bps hike over three years) takes near-term earnings down by c.2-3% but sentiments down by likely a few notches more.… HUL is one of our preferred staples plays but the stock is likely to take a short-term beating given the negative sentiments around the royalty angle,” it said in a report.

ICICI Securities has maintained an “Add” rating with a price target of ₹2,650, saying that earnings were in line with estimates. “HUL’s 3Q results met consensus expectations; however, increase in royalty and central service fees have been a dampener. However, overall impact on operating margins shall be offset with mix-improvement (premiumisation) and scale-benefits,” it said in a report.

As per the agency, the proposed increase in royalty fees to the parent (Unilever) increased from current 2.65% to 3.45% (by 80 bps). “This will take effect in a staggered manner; around 45 bps increase from Feb’2023 to Dec’2023, 25 bps from Jan to Dec’2024 and ~10bps from Jan 2025. Out of 3.45%; 1.95% is allocated towards royalty for trademark and technology while 1.5% towards central services agreement (procurement, marketing etc),” ICICI said in the report.

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