Hindustan Unilever Slumps After CLSA Recommends Sell

Hindustan Unilever Ltd., the Indian unit of the world’s second-biggest consumer-goods company, fell the most in two years in Mumbai after it was downgraded by at least 11 brokerages.

Shares declined 4.3 percent to close at 460.05 rupees, the most since January 2011. It was the worst performer on the benchmark BSE India Sensitive Index.

CLSA Asia Pacific Markets slashed its recommendation to sell from outperform. Credit Suisse Group AG, Nomura Holdings Inc. and Morgan Stanley lowered their ratings on the Mumbai - based company after it said royalty payments to parent Unilever will increase.

The ratings have been lowered after third-quarter sales volume growth were a “big disappointment” and on higher royalty pay-out, Vivek Maheshwari and Bhavesh Pravin Shah, analysts at CLSA, wrote in a note to clients yesterday.

The royalty Hindustan Unilever pays will increase to 3.15 percent of revenue in phases through the year ending March 2018, the company said in a statement yesterday. The company reported third-quarter profit that missed analysts’ estimates.

The company’s announcement on higher royalty payments is a “big negative” because it would reduce profit margins without leading to any significant gains for the company, said Nitin Mathur, an analyst with Espirito Santo Securities Ltd. Hindustan Unilever’s sales of shampoo and skincare products are slowing and the increased payment will make things worse, he said.

‘Bad Timing’

“This is absolute bad timing,” Mathur, who has a sell rating on the stock, said in an interview. “When your domestic business is suffering you are actually increasing royalty.”

The consensus rating, or the average of recommendations, updated by analysts, dropped to 2.54 today, from 2.9 at the start of the year. Five denotes a buy and one a sell, according to data compiled by Bloomberg.

The new agreement on royalty payment will take effect Feb. 1 and the increase in the period through March 2014 is estimated to be 0.5 percent of revenue, it said.

“The royalty agreement is designed to help us grow competitively,” Chief Financial Officer Sridhar Ramamurthy said on a conference call. “Given the increased intensity of competition, particularly from global players, it is absolutely critical that we have access to world class innovations and superior best practices.”

Unilever controls about 52 percent of the Indian company, according to its website.

Brokerages including Jefferies India Pvt., Fortune Equity Brokers India Ltd., and Religare Capital Markets Ltd. maintained their ratings and reduced their estimates for the company’s earnings in the year ending March 2014.

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