Nestle India dips on royalty payment concerns

The board approved an increase in royalty payment by 0.20% a year for the next five years effective January 1st, 2014 to its parent firm Nestle SA.

Nestle India is trading lower by 2% at Rs 4,612 in otherwise firm market after the company increased its royalty rate to 4.5% from the earlier 3.5% of sales.

“The board of directors of on Friday approved an increase in royalty payment by 0.20% a year for the next five years effective January 1st, 2014 to its parent firm Nestle SA,” FMCG major Nestle India said in a regulatory filing.

This increase approved by Nestle India board is based on the lower limit of the ranges established by the two Indian firms.

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.

Meanwhile, analyst Angel Broking maintains Neutral rating on the stock and believes this move is negative for Nestle India, which is already facing stiff competition and slow growth in India.

The stock opened at Rs 4,650 and hit a low of Rs 4,595 on BSE. As many as a combined 178,000 shares have already changed hands on the counter till 1350 hours against an average sub 20,000 shares that were traded daily in past two weeks on BSE and NSE.