Margin boost ahead for Maruti Suzuki due to lower royalty structure

Higher operating leverage and localisation will also aid margins

The Maruti Suzuki (MSIL) stock on Monday gained four per cent on expectation that the company's operating profit margins would expand due to a fall in royalty rates to parent Suzuki, higher localisation at its Gujarat plant and operating leverage as the plant scales up production.

If royalty rates fall 150-200 basis points (bps) from the current 5.3 per cent of sales, the operating profit margins, according to analysts, will improve 40-50 bps over the next couple of years. HSBC estimates at least 25 per cent of Maruti's sales in FY19 should have a lower royalty. The new rate will