Nestle India Shareholders Reject Plan To Raise Royalty Fee To Swiss Parent

Shareholders of Nestle India Ltd. have turned down the company's proposal to raise the royalty payout to its Swiss parent.

The resolution did not pass, with 57% of its shareholders voting against the proposal, the Maggi noodles-maker said in a stock exchange filing on Friday.

About 71% of public shareholders who collectively hold a 37.24% stake in Nestle India voted against the resolution, according to voting records. Of these, institutional investors hold a 21% stake, while the remaining 16.24% is held by the general public and other non-institutional investors.

The promoters — Nestlé S.A. and Maggi Enterprises — hold 62.76% stake in Nestle India. But the controlling shareholders are ineligible to vote as the potential change would be classified as a related party transaction.

Nestle India had earlier in April announced its plans to increase the general license fees, or royalty, from 4.5% to 5.25% of turnover over a period of five years. The new fee, which was to take effect on July 1, was decided to be paid in a staggered manner by making an increase of 0.15% per annum.

The revised royalty rate was derived based on a McKinsey & Company study evaluating the value brought in by the parent company, Nestlé S.A. Nestle India sought a fairness opinion from Bansi S. Mehta & Co. and KPMG Assurance and Consulting Services LLP for the McKinsey study.

For 2023, the packaged food company reported total sales of Rs 16,790 crore, with a net profit of Rs 2,390 crore.

"This is a short-term positive as there could potentially be cost savings due to no royalty hike," according to Abneesh Roy, executive director, Nuvama Institutional Equities. "We don’t expect the parent to cut down on R&D support given India is one of the most important consumer markets for any company and anyway it [Nestlé S.A.] is already getting 4.5% royalty."

Why Royalty Hike Is Being Opposed

Proxy advisory firms InGovern Research Services and Institutional Investor Advisory Services expressed concerns about the proposed increase in royalty fee and recommended that investors vote against the resolution.

"The royalty hike was unjustified and not comparable to any of its peers," InGovern founder and managing director, Shriram Subramanian told NDTV Profit.

Nestle India is already paying a much higher percentage of royalty when compared to Hindustan Unilever (3.45% of sales) and Colgate-Palmolive India (4.9% of sales). "Without proper cost benefit analysis, the increase in royalty payout if approved will further increase the gap in royalty paid by Nestle vis-à-vis its peers," the Bengaluru-based firm said in its report.

There is also a lack of a compelling justification for the increase in royalty from the current arrangement. "Higher payout of royalty without any clear disclosure of any added advantage to the company, could have a negative impact on the bottom line, and the amount of dividend payout to shareholders could be impacted," reasoned InGovern when it suggested investors to vote against the proposal.

Furthermore, the board is recommending that the increased royalty payment be calculated based on the total sales. Since this amount is significant, the increased royalty payout should only apply to any incremental sales, not the net sales, according to the advisory firm.

According to Iias, Nestlé S.A. is directly compensated for India’s accelerated revenue growth due to existing license fee at 4.5% of sales. Nestle India's revenue grew 4.6% outpacing the revenue growth of 0.03% in other geographies in the past five years.

Moreover, the current royalty payments in India make up over 4.5% of Nestlé S.A.'s research and development expenses, which is more than twice the revenue contribution. With a growth rate of 0.2% annually, the group's R&D spending remained constant over the last ten-year period. Likewise, the parent's annual marketing and administration expenditure has been static and has degrown at a CAGR of 1.2% over a ten-year period.

Over the past five years, Nestle India’s revenue has grown at a CAGR of 11.5%. Assuming a growth rate of 12%, the aggregate license fees for next five years will amount to Rs 6,090 crore at the current rate of 4.5% of net sales. With the revised rates, the license fees would be Rs. 6,700 crore, resulting in an additional payout of Rs 610 crore over the five-year period, according to Iias. "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 higher royalty payments will exceed revenue growth."

"Furthermore, as a good practice, the company should have capped the royalty payments as a percentage of profits," said Iias.

Shares of Nestle India closed 0.82% lower on Friday, as against a gain of 0.28% in the Nifty 50. The stock has fallen 10.57% year-to-date.