HUL shares fall on royalty fee hike even as many cheer Q3 numbers

Mumbai: Analysts were unfazed by Hindustan Unilever's hike in royalty payout to its parent Unilever, with some of them raising their price targets on the stock after its December quarter consolidated net profit beat analyst estimates aided by recovery in rural demand.

Shares at India's largest FMCG player, however, fell nearly 4% to its lowest level in three weeks as a section of Dalal Street perceived the 80-basis point hike in royalty fees as against the interests of shareholders.

JM Financial said HUL's stock remained one of its preferred staples plays even if the stock takes a short-term beating given the negative sentiments around the royalty angle.

Motilal Oswal said operating performance was in line with expectations and that "royalty increase was not a concern". Recovery in rural demand and commodity cost reductions will help HUL get back to the mid-to-high teens earnings growth trajectory that it exhibited for the four years before Covid, the brokerage firm said.

Of the 32 analysts that reviewed the earnings, 16 of them have a 'buy' rating while 15 remain 'neutral'. Only one analyst has a 'sell' rating. On aggregate, analysts marginally raised the target price to ₹2,900 per share from ₹2,892 earlier, showed a Bloomberg poll of analysts.

Morgan Stanley was enthused by the gradual improvement in rural demand and easing inflation, but the company's market developments (nutrition and BPC) will continue to weigh on EBITDA margins as the company will increase advertising and promotion spends.

"The 80bps increase (in royalty) implies a negative ~50 bps and ~70 bps margin impact for F24 and F25, respectively. This is subject to appropriate regulatory approvals. The management remains committed to deliver its double-digit earnings long-term growth agenda," the US brokerage firm told clients.

Citigroup said the rural recovery cheer is dampened by higher royalty, while revenue growth is driven by underlying volume growth.