Nestle India reviews general licensing agreement - Angel Broking

Nestle India's (Nestle) Board of Directors has approved a staggered increase in the royalty rate (paid to promoter Nestle SA) @ 0.20% per annum over the next 5 years effective January 1, 2014. This royalty is paid on third party sales and is net of tax. Post the approval, the royalty would be 4.5% of net sales. As per the company Nestle SA had requested two years ago for a review of the two decades old royalty rates and subsequently substantiated the same by a study conducted by Mckinsey & Co. This study was subjected to a fairness review by two Indian firms who independently used different valuation methods and recommended ranges of royalty rates which were similar to that of Mckinsey & Co. This increase approved by Nestle India board is based on the lower limit of the ranges established by the two Indian firms.

We believe this move is negative for Nestle India, which is already facing stiff competition and slow growth in India. We maintain our Neutral rating on the stock.

Source : Equity Bulls

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