Parent Suzuki lives off Maruti's profits

Indian arm's FY13 royalty payment amounted to 102% of Suzuki Motor's standalone profit after tax

Maruti Suzuki India Limited (MSIL)'s royalty payment in 2012-13 was more than parent Suzuki Motor Corporation's standalone profit. This has raised the question of whether the subsidiary is shoring up the low profitability of the Japanese carmaker at the expense of Indian shareholders.

Royalty payments made by MSIL in 2012-13 amounted to 102 per cent of Suzuki Motor Corporation (SMC)'s standalone profit after tax (PAT). MSIL forked out Rs 2,453.8 crore as royalty. SMC's non-consolidated net income, primarily from its Japanese operations, was only Rs 2,402 crore in the year. The profit after tax of MSIL was Rs 2,392 crore in 2012-13.

MSIL's royalty payments have gone up from 55.6 per cent of its PAT in FY09. It had increased its royalty payout from 2.7 per cent of net sales in FY2008 to 5.75 per cent in FY13.

That Suzuki's margins in Japan were wafer-thin was reflected in its non-consolidated net income, only 2.6 per cent of net sales in 2012-13. However, despite the large royalty burden, MSIL made a net income of 5.6 per cent on net sales in the same period.

MSIL had blamed the huge increase in royalty payouts on the appreciation of the yen against the rupee. Besides, in 2012-13, about 0.6 per cent of the royalty on net sales was not retained by Suzuki (only 5.1 per cent was retained) but was transferred to Fiat for providing MSIL diesel engine technology. Based on this calculation, MSIL paid Rs 2,173. 24 crore to the Japanese giant, 90.4 per cent of Suzuki's standalone PAT.

According to the Reserve Bank of India (RBI), the yen appreciated 88 per cent between FY08 and FY13 against the rupee. As a result, MSIL had to fork out more rupees to pay the royalty, which is pegged to the yen. According to MSIL's annual report and RBI, the yen was pegged at 35p in FY08 and 51p in FY10 but went up to 66p in FY13.

MSIL Chairman R C Bhargava said: "In FY08, royalty was 2.7 per cent of net sales. In FY13, we will pay 5.1 per cent of net sales to Suzuki as royalty because of the appreciation of the yen. Had the yen been stable against the rupee, the increase of royalty as percentage of MSIL's net sales would not have been so exaggerated. It would have been slightly more than what we paid in 2008 as percentage of sales."

The cause of worry - as pointed out by mutual funds and equity analysts, who have also opposed Suzuki's decision to set up a Gujarat plant as a fully-owned arm - is that the steady increase in royalty payments as percentage of sales impacts the earnings of minority shareholders.

Mutual funds had in a letter a few days ago argued that royalty should be linked to absolute sales and the percentage should come down as sales increase.

They also argue that royalty should not be paid on total sale value of a car but on the car's net of bought-out components.

Royalty as a percentage of sales to Suzuki, Bhargava argued, had come down from 5.27 per cent in FY11 to 5.19 per cent in FY12 and 5.1 per cent of net sales in FY13 to Suzuki. He argued the additional 0.6 per cent royalty on sales (which makes the total royalty payout in FY13 to 5.75 per cent ) was an additional burden which had been kicked in for payment to Fiat for the diesel engine they provided. Though it is paid to Suzuki, the Japanese giant passes it on to the Italian company.