New royalty payment structure may benefit both Maruti, Suzuki
NEW DELHI: The new royalty payment arrangement between Suzuki Motor Corp. and Maruti Suzuki India Ltd is expected to be beneficial for both the Japanese parent and its most valuable subsidiary in India, as the local unit is expected to outpace industry growth in India in the next few years.
According to the new pattern announced after the fourth quarter earnings, royalty payment of Maruti Suzuki has been delinked from the fluctuations in the currency market. Also, after the sales of a certain model reaches a threshold—to be set by the parent—the royalty to be paid by Maruti will come down, boosting the company’s Ebitda (earnings before interest, taxes, depreciation and amortization), or operating margin.
Suzuki will also reimburse the money that Maruti spends for research and development work in India, which will also strengthen the books of its subsidiary. The Suzuki Motor Corp. board has already cleared the new arrangement. The new royalty pattern was approved by the board of Maruti Suzuki after the third quarter results of FY18.
According to R C Bhargava, chairman of Maruti Suzuki, as the Indian market continues to grow, the amount of royalty would also have grown proportionately. “Now, when we reach a particular number of volumes automatically the royalty will be reduced. So, we have an advantage.”
“It’s an arrangement that will be beneficial for both Maruti and Suzuki. Though Suzuki will get a royalty at a lower rate, the actual amount they receive as royalty will be more as Maruti sells more cars in the Indian market,” Bhargava said in a phone interview to Mint.
Had it not been for the new pattern, the royalty that Maruti pays would have consistently increased in the future as the size of the Indian automobile market is tipped to grow annually at 9-10% in the next 4-5 years.
On the other hand, Suzuki, which depends on Maruti for a significant share of its revenue, will get more royalty, though at a lower rate, as the new arrangement states reduction in royalty payments once a certain level of volumes has been achieved.