Maruti’s proposal to pay royalty to Suzuki in rupees for future models is a welcome move. From 2008-09 to 2013-14, the auto industry has been through a period of boom and slow down. But the company’s royalty as a percentage of sales has moved up steadily to almost 6 per cent of net sales in this period from around 3 per cent. A mix of reasons such as appreciation of the yen, vehicle launches, and Government moves have been behind the increase.
In December 2009, in a move to encourage FDI and technology transfer, the Government also removed the cap on royalty payable for technical collaboration by companies in India. Prior to the removal, the cap was fixed at 8 per cent on exports and 5 per cent on domestic sales.
The steady increase in royalty outgo has been contested by minority shareholders and proxy investor advisory firms. Companies, including Maruti, were seen to be favouring their parents through higher royalties when they weren’t being as liberal in dividend payments.
The announcement to pay royalty in rupees helps address the influence of the aspect of currency fluctuations at least. It comes at a time when the company plans to come out with a compact SUV, an SUV and a small truck (LCV) in the next one-two years. While it is not sure whether royalty would be paid in rupees for these vehicles, future models for which technical agreements have not yet been worked out are expected to benefit from this move. Typically, the newer the vehicle, the higher the royalty. So this move could give a leg-up to profitability over the medium-term as the company will be able to save on hedging costs as well as conversion losses to a certain extent. Exports and component imports though may still need hedging.
Improving localisation to help
While this is the latest move to bring down currency-related risks, the company has addressed this issue through a few other measures as well. Maruti has been focusing on improving local sourcing of inputs/components both by the company and by its vendors. From about 25 per cent of sales two-three years ago, the import content has come down to 16 per cent of sales in 2013-14. It is expected to drop further to about 12 per cent. Secondly, the company has taken steps towards reducing its dependence on Suzuki for design and development. It has set up its own research and development centre at Rohtak in Haryana, with its engineers co-designing some of the recent models such as the Ertiga with Suzuki and developing the K-series engines locally. Over the longer term, the increased contribution from India will also bring down the royalty outgo.