HUL shares drop on concerns over increased royalty payout to parent

As per the new arrangement, the royalty and central services fees will increase from 2.65 percent to 3.45 percent of the overall turnover. The increase will be effected in a staggered manner over a three-year period.

MD & CEO Sanjiv Mehta said that the last royalty increase happened in 2013 and the company has doubled its turnover during this period. He further added that he company shares a very "symbiotic" relationship with Unilever.

Brokerage firm JPMorgan believes that an increase of 80 basis points in royalty and central services can weigh on the near-term stock sentiment. However, it sees limited impact from this and is hopeful that other margin levers could mitigate much of this impact.

For the December quarter, Hindustan Unilever reported domestic volume growth of 5 percent for the December quarter, at the upper end of the CNBC-TV18 poll of 4-5 percent.

The volume growth figure of 5 percent was higher than the 4 percent growth seen in the September quarter and 2 percent during the same period last year.

For the December quarter, Hindustan Unilever's revenue grew 16.3 percent from last year to Rs 15,228 crore. The figure was also higher than a CNBC-TV18 poll of Rs 14,860 crore.

Net and operating profit, which increased 11.7 percent and 8 percent from last year, were also higher than expectations.

However, the company's EBITDA margin declined 180 basis points from last year to 23.2 percent from 25 percent. The margin figure was also 40 basis points lower than the CNBC-TV18 poll of 23.2 percent.

HUL's growth during the quarter was led by the home care business, which saw revenue growth of 32 percent from last year and volume growth of double-digits. The management took calibrated price hikes during the quarter in the Fabric Wash and Household Care portfolios to offset input cost inflation.

The company's beauty and personal care business saw 10 percent growth during the quarter, led by the skin cleansing portfolio, which grew in double-digits with a mid-single digit volume growth. Prices were cut in the soaps portfolio during the quarter as palm oil rates cooled off. However, delayed onset of winter impacted the skin care portfolio.

CEO Mehta said that the company is seeing better improvement in the rural market compared to urban areas. He also said that value growth has grown from 6 percent to 8 percent in the December quarer.

Besides soaps, HUL also cut prices in its tea portfolio. Mehta said that net material inflation came down to 18 percent in the December quarter and even as it is still at "very high levels," it has stopped increasing and is moving downwards.

Amnish Aggarwal of Prabhudas Lilladher said that the volume growth numbers are broadly in-line with their estimates of 4.5 percent and 15 percent topline growth. He also said that the pressure on EBITDA margin was visible even in the past as palm oil prices came off the highs. "I think the worst of inflation is definitely over and as we go along, I think the margin expansion on year-on-year basis also should set in for a quarter or so," he said.

Citi also believes that despite the increase in the royalty rate, the management maintained its long-term double digit earnings compounded annual growth rate (CAGR) guidance, which will be driven by a combination of revenue growth and modest margin expansion.