Starting with Ignis, Maruti Suzuki to lower royalty payment to Japanese parent

Maruti Suzuki India Ltd (MSIL), which reported a 2.96% increase in net profit for the third quarter at Rs 1,799 crore, on Thursday said its Board has approved a revision in the method of calculating royalty, which would result in lower royalty payments to parent Suzuki for new model agreements starting with Ignis.

The decision is likely to be implemented after approval by the Board of Suzuki Motors Corporation (SMC).

The development seems important considering the fact that MSIL provides a considerable share of Suzuki Motor's revenues. The company has a market value of close to $45 billion, which translates to about 1.5 times that of its parent.

MSIL's royalty payment to its parent Suzuki has apparently been in the attention of corporate governance and proxy advisors. A report on the company, by Institutional Investors Advisory Services (IiAS) in 2015 had termed Maruti's royalty payouts "extortive". The report said that through the past 15 years, the royalty paid to Suzuki has grown 6.6 times to Rs 21,415 per car sold while average sales realization per car increased by only 1.6 times. The MSIL spokesperson then had dismissed the report saying that it has no relevance to any issue before shareholders and those are the views of IiAS.

According to the industry experts, MSIL has been doing its bit to bring down the royalty paid to its parent company over the years. For example, in order to insulate the company from the foreign exchange fluctuations and reduce the average royalty rate to 5%, MSIL in 2015 announced that it would start paying royalty in Indian rupees instead of Japanese Yen for all new models starting with the Vitara Brezza. For the fiscal 2016-17, the company is reported to have paid a total of Rs 3,848 crore at 5.8% of net sales. In the previous fiscal of 2015-16, it stood at Rs 3,244 crore at 5.7% of net sales. In a parallel effort, MSIL has been ramping up its R&D centre in Manesar so as to play a bigger role in product development done in collaboration with Suzuki.

Meanwhile, the company during the latest result announcement said that it has sold a total of 431,112 vehicles during the October-December quarter, a growth of 11.3% over the same period of the previous year. While sales in the domestic market stood at 400,586 units – a growth of 12.4 %, exports were at 30,526 units. The operating profit grew 22.1% to Rs 3037 crore on account of higher sales volume, cost reduction efforts, lower sales promotion expenses and forex benefit, partially offset by adverse commodity prices.

Total income during the quarter under review stood at Rs 19,528.1 crore as against Rs 19,793.3 crore in the year-ago period.

During October-December period this fiscal, total vehicle sales grew 11.3% at 4,31,112 units. Domestic sales stood at 4,00,586 units, a growth of 12.4%, while exports were at 30,526 units.

Q3 NET JUMPS 2.96%

• Total income during the quarter under review stood at Rs 19,528.1 crore as against Rs 19,793.3 crore in the year-ago period.
   
• During October-December period this fiscal, total vehicle sales grew 11.3% at 4,31,112 units