Mumbai: The royalty payments of Maruti Suzuki India Ltd to its Japanese parent have surged as India’s biggest car maker has stepped up the introduction of new models such as the Ritz and Eeco as it fights off competition to hold on to its top ranking.
In the fiscal ended 31 March, royalty payments to Suzuki Motor Corp. rose 47% to Rs1,000.93 crore from Rs679 crore a year earlier. Maruti has been introducing at least one new model every year since 2003.
Royalties are typically calculated as a percentage of net sales and derived from the use of an asset or a fixed price per unit sold of an item. Royalty as a percentage of net sales rose marginally to 3.5% from 3.3% a year ago. The upper limit on royalty as a percentage of net sales has been capped at 5% by the Reserve Bank of India. It’s factored in after reducing the value of the imported content.
According to Ajay Seth, chief financial officer at Maruti, the company paid royalty on 86% of its total unit sales, 5% more than a year ago. In fiscal 2009-10, the company sold 1.18 million units in the domestic and export markets.
While the number may rise in the next few years, analysts aren’t too perturbed by the increased payout.
“In order to ensure that market share does not taper off, new model launches are a necessity and not a choice,” said Joseph George, analyst at BNP Paribas Securities India Pvt. Ltd. Royalty payments are a proxy for research and development expenses, he said.
While Maruti launched eight new models in a span of 20 years from 1983 to 2003, it has introduced a similar number since that time, George said.
Maruti needs to introduce new models as rivals try to capture market share with releases such as Ford India Pvt. Ltd’s Figo, Volkswagen India Pvt. Ltd’s Polo and General Motors India Ltd’s Beat.
Meanwhile, the spiralling royalty costs may be reined in once Maruti’s in-house research and development centre at Rohtak in Haryana is set up. The company wants to produce a car designed and developed indigenously from this facility by 2012.
“The India designed and developed car will help the company reduce their royalty bill gradually,” said Mahantesh Sabarad, analyst at Fortune Equity Brokers Pvt. Ltd.
Royalty payments in the years ahead will be a function of a host of factors, said Maruti’s Seth.
“It will depend on the kind of work we do there, and the use of technology,” he said. While there may be a reduction in the outgo, it’s premature to put a number to that, he said.
Typically, new models attract a higher technical fee. As the model matures in its life cycle and the investment on fixed costs is amortized, royalty on the model diminishes, eventually exempting it from the fee.
Seth said the Omni, 800 and Gypsy models do not attract any royalty. Maruti currently sells the 800 only in tier II and tier III cities, and will eventually discontinue its entry-level model. The phasing out of the 800, sales of which have been averaging 1,500-2,000 a month, will not have much impact on the royalty outgo.
If the company phases out the Omni, which has been averaging 8,000 units a month or 10% of total sales, overall royalty outgo may rise as buyers switch to a new model.
Maruti’s shares dropped 3.88% to close at Rs1,283.15 each on the Bombay Stock Exchange.
A report released on Tuesday by Prabhudas Lilladher Pvt. Ltd showed that Ebidta (earnings before interest, taxes, depreciation and amortization) margins per car decreased to Rs34,000 in the fourth quarter of last fiscal compared with Rs39,000 in the previous quarter. “The aggressive pricing of the recently launched Wagon R and price cuts by other manufacturers make us believe that the industry’s profitability is in for a decline,” the report said.