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Photo: Ramesh Pathania; Graphic: Paras Jain/Mint

Photo: Ramesh Pathania; Graphic: Paras Jain/Mint

Maruti’s royalty to Suzuki to increase further

Maruti’s royalty to Suzuki to increase further

Mumbai: India’s biggest car maker, Maruti Suzuki India Ltd, will be paying a higher royalty to its Japanese parent Suzuki Motor Corp. after the government removed a cap on the amount local companies pay their overseas partners for transfer of technology.

Suzuki and other foreign companies had been seeking more liberal royalty norms, capped at 5% of domestic sales and 8% of exports, for several years, Maruti Suzuki chairman R.C. Bhargava said.

In April, the ministry of commerce and industry issued a notification removing the cap and permitting Indian companies to pay royalty to their technical collaborators without seeking prior government approval.

Photo: Ramesh Pathania; Graphic: Paras Jain/Mint

“Suzuki decided that Maruti Suzuki India would now conform to Suzuki’s global royalty payment strategy," Bhargava said in a telephone interview.

Royalty payments have been typically calculated as a percentage of net sales and derived from the use of an asset or a fixed price per unit sold, minus the value of imported content.

After the notification, Suzuki got a free hand in fixing the technical fee it can charge Maruti Suzuki on newer and existing models.

Typically, new models attract a higher fee. As the model matures in its life cycle and the investment on fixed costs is amortized, royalty on the model is reduced, eventually exempting it from the fee. With the exception of the Maruti 800, Omni and Gypsy, all models in Maruti Suzuki’s stable attract royalty.

Maruti Suzuki’s net sales for the three months ended June 2010 were Rs8,050.6 crore and recurring royalty was 5.1%. Maruti paid Suzuki Rs123.6 crore more during the quarter than what it would have paid without the revision in the royalty rate. The net royalty burden for the quarter was Rs413 crore, 81% higher than in the same quarter last year.

In the first quarter of fiscal 2009-10, royalty as a percentage of net sales was 3.6%. The deregulation came into effect from December, requiring Maruti Suzuki to pay an additional 0.8%, or Rs65 crore, retrospectively for the four months to March.

According to Vineet Hetamasaria, vice-president of research at Mumbai-based brokerage Pincmoney, a subsidiary of Pioneer Investcorp, the royalty burden on the company, which had been rising due to the addition of newer models in its product portfolio, is set to rise further with no cap on the upper limit.

“This is a structural change and will have a recurring impact," he said.

In fiscal 2009-10, Maruti paid royalty on 86% of its total unit sales, 5 percentage points more than a year ago. The company had sold 1.18 million units in the domestic and export markets.

Experts say the entire Indian automobile industry will feel the impact of the deregulation.

Other auto makers with foreign collaboration, such as ToyotaKirloskar Motors Ltd and Honda Siel Cars India Ltd, are not listed in India and don’t have to disclose figures.

“It impacts not only every international model launched in India, but also part makers which have foreign collaborations and supply to auto makers directly or indirectly," said Pankaj Chadha, director of the automotive practice at global consulting firm Ernst and Young.

It will even cover model launches from Tata Motors Ltd’s Jaguar and Land Rover stables in India which are governed by the country of origin rule relating to where the models are designed and developed.

As the move inflates the cost per model for Maruti Suzuki, the company might have to build the higher royalty payment into the price of its automobiles, Bhargava said. But the car maker hasn’t taken any call on pricing action yet.

In the three months ended June, the higher royalty burden, among other factors, singed Maruti Suzuki, which said profit fell by 20% to Rs465 crore from Rs583 crore a year earlier. The company’s earnings were way off the estimate of Rs653 crore by five analysts polled by Mint on 21 July.

Still, Ernst and Young’s Chadha said the liberalization of the royalty regime was a positive move.

“It incentivizes the (foreign partners of) auto makers for better model launches at a quicker pace," he said.

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