Unilever's India unit shares slip on higher royalty fees

A pedestrian walks past the Hindustan Unilever Limited (HUL) headquarters in Mumbai

By Praveen Paramasivam

CHENNAI (Reuters) -Shares of consumer goods major Hindustan Unilever (HUL) fell 4.3% on Friday as a deal to pay its UK parent higher royalty fees overshadowed a bigger-than-expected rise in quarterly profit.

HUL said the royalty and central services fees it pays its majority owner Unilever would increase to 3.45% of turnover over three years from 2.65.

Shares were last down 3.3% at 2,564 rupees on Dalal Street, compared with the median price target of 2,890 rupees, according to Refinitiv data.

"Royalty mars a splendid show," brokerage Nuvama Research said after HUL reported a 12% jump in quarterly profit. Still, there is a risk of another increase after five years when the new deal expires, the brokerage added.

The new deal is effective Feb. 1 and replaces the expiring 10-year contract.

According to Prabhudas Lilladher analysts, the deal would shave 2% to 2.8% off per-share earnings for fiscal 2024 and 2025.

HUL Chief Executive Sanjiv Mehta said the Dove soap-maker gets "equivalent value" from Unilever in the form of better products, innovation and technology to compete with rivals better.

Last year, Unilever had said the United States, India and China are three of its key growth markets, underlining plans to grow in India on increasing use of the internet and expansion of the economy.

"HUL will continue to receive faster innovation, greater capability and support from business of Unilever globally," Ritesh Tiwari, finance chief, said.

The deal is also competitive and within the range when compared with peers, according to HUL. Several global players, including Colgate-Palmolive, Procter & Gamble and Nestle , have business in India.

However, some analysts played it down with Motilal Oswal saying the royalty hike is "not a concern." Meanwhile, ICICI Securities called it "a dampener."

HUL also said India's rural pockets are showing signs of recovery as "the worst of inflation is behind us."

($1 = 81.2300 Indian rupees)

(Reporting by Praveen Paramasivam in Chennai; Editing by Nivedita Bhattacharjee and Sohini Goswami)