Fairval

Notes on Indian equities, sectors and economy

Indian FMCG MNCs getting ripped on royalty

Posted by fairval on March 27, 2013

Royalty rates have been going up in MNCs operating in India. The table below from a Nomura report shows prevailing rates amongst sundry FMCG and other companies.

Image

5% of sales appears to be rather high for FMCG companies which certainly don’t spend nowhere near that in R&D. Here I am assuming royalty is more to do with paying up for global parent’s R&D support. Can’t be for branding, since local cos anyway spend more than 10% of revenue on advertising. Can’t see how a Colgate India benefits from a Colgate ad in the US.

R&D spends in FMCG appear to be low. Indian companies like Marico and Dabur spend less than 0.5% on R&D.This could be lower than what global cos spend.

Unilever Plc spends Euro 1bn annually on R&D, or about 2% of sales. Further, its local sub HUL spent 0.7% on its India P&L on R&D in FY12. So how much of global R&D in Unilever is happening for India hard to say, since the India ops is anyway spending on this account. Also, cost of doing R&D in India is low, so 0.7% in India is perhaps equal to 2% abroad. Further, the Indian arm could well be doing some work from which the parent benefits.

Colgate Palmolive spent $259mn on R&D in 2012 on revenue of $17bn, or about 1.5%. In India, it spend 0.22%. The global parent is charging the Indian arm 5.2% as royalty, which clearly appears to be excessive then.

Maruti Suzuki spends 1% of its India revenue on R&D, and is charging Indian arm 5%. In auto industry, R&D spends are far higher compared to FMCG. Suzuki Motor Corp spent Y109bn on R&D in FY12, on global revenue of Y2512bn, or about 4.3% of sales. Dailmer AG spent Euro 4.8bn on R&D in 2012, or about 6.7% of its revenue.

So high royalties are understandable in auto, cetainly not in FMCG. Bosch could charge a lot more than it charging. Bosch India spent 1.4% on R&D, and paid 1% royalty. The global parent could well be spending more than 10% on R&D, Bosch is reportedly most R&D focussed automotive company in the world.

Advertisements

One Response to “Indian FMCG MNCs getting ripped on royalty”

  1. shiva kommareddi said

    Interesting. I didn’t know that parents cos charged a management/ royalty fee.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: