BackRising royalty payments a cause for investor concern
In the year ended March, the top 25 listed local subsidiaries saw royalty payments rise well in excess of sales, profit growth
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Rising royalty payments by multinational companies is a concern for investors. The top 25 listed local subsidiaries saw a 23.8% annual increase in royalty payments in the year ended March, well in excess of the average growth in net sales of 15% and 13.1% in net profit, according to a report Espirito Santo Securities prepared with Institutional Investor Advisory Services.
The government may even reconsider its decision to remove caps on royalty payments, Mint reported on 23 September.
The report also considers the average royalty rates prevailing in 2007-08 and 2008-09, and the two financial years to March, showing that higher royalty payments have been accompanied by a decline in profitability in five out of the 10 top companies ranked by royalty as a percentage of sales, and excluding those where royalty rates declined.
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The past five years have also seen the business environment weaken, and margins for companies such as ABB Ltd and Bosch Ltd could have declined even without the royalty hit. That margins would have been higher if not for higher royalty payments is obvious. But they have not caused an across-the-board decline in margins, nor are they solely responsible for lower profitability.
Shareholders are likely taking a dim view of rising royalty payments, especially when business is bad. What is left to be seen is what happens when the economy recovers. Will these shares underperform or will the royalty factor be forgotten?
Higher royalty rates could become palatable if companies can show a tangible and substantial improvement in performance. Otherwise, the chorus for a return to the status quo on royalty caps will grow louder.
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