Nestle India shareholders vote against hiking royalty payment to parent

Nestlé India shareholders have voted against hiking royalty payment to its parent – Nestle SA.

According to its stock exchange filing, 57.17 per cent shareholders voted against the resolution to hike royalty payment not exceeding 5.25 per cent of net sale.

It had proposed to hike the royalty over a period of five years by making an increase of 0.15 per cent per annum over the current royalty fees of 4.5 per cent per annum which would be effective July 1, 2024.

In its report dated May 3, Institutional Investor Advisory Services (IIAS) advised shareholders to vote against the resolution to hike royalty payment to its parent.

IIAS stated in its report, “The current proposal for increasing royalty payments to 5.25 per cent of net sales in a staggered manner over a five-year period (0.15 per cent each year) starting July 2024 is based on a McKinsey & Company study evaluating the value brought by Nestlé S.A. We are unable to support the resolution.”

It said in its report that Nestlé India’s revenue growth has outpaced the revenue growth in other geographies over a five-year period (4.6 per cent growth in Nestlé India’s revenue versus 0.03 per cent growth for other geographies).

It further said that Nestle SA R&D spending has remained relatively constant over the past decade and India’s royalty payments contribute to over 4.5 per cent of overall R&D spending albeit a 2.1 per cent contribution to global sales.

IIAS added that the parent’s marketing and administration expenses have also contracted at a CAGR of 1.2 per cent over a ten-year period.

The proposed maximum rate of 5.25 per cent is also higher than royalty payments by other MNCs in India, it said.

“In Indian currency, Nestlé India’s revenue has grown at a CAGR of 11.5 per cent over the last five-year period. Assuming a growth rate of 12 per cent, the aggregate license fees for next five years comes to Rs 6090 crore at the existing rate of 4.5 per cent of net sales and Rs 6700 crore at the revised rates resulting in an increased payout of Rs 610 crore over the five-year period.”

It added, “Since the increasing revenue compensates the group by way of sales linked royalty, we do not approve of a further increase in royalty rates as increased royalty payments will exceed revenue growth. Further, as a good practice, the company should have capped the royalty payments as a percentage of profits.”

“Categories in which Nestle plays globally may not easily come to India and also disruptive innovations in existing categories which the parent does globally may get impacted due to shareholders not hiking royalty payment,” Vishal Gutka, Vice President consumer at HDFC Securities.

The shareholders voted in favour of appointing Suneeta Reddy as an independent non executive director of the company, not liable to retire by rotation, with effect from 5th April, to hold office for a term of five consecutive years. 

First Published: May 18 2024 | 1:53 PM IST