Maruti's royalty payouts to Suzuki up over six times in 15 years: report

Maruti Suzuki's royalty payments to its Japanese parent Suzuki have increased over six times per car sold over the past 15 years, proxy advisory firm Institutional Investor Advisory Services (IiAS) has said.

While Suzuki's consolidated R&D spend per vehicle (including motorcycles) averaged 4 per cent of sales, its royalty payments from Maruti are 6 per cent of net sales.

Royalty payments aggregated 5.7 per cent of net sales and 36 per cent of profits before royalty in 2014-15.

Over the past 15 years, royalty paid to Suzuki, has grown 6.6 times to Rs21,415 per car sold, while average sales realization per car has increased only 1.6 times, according to IiAS.

''Suzuki needs to explain the basis of charging Maruti very high rates of royalty,'' IiAS said in a report.

Most multi-nationals charge their Indian companies royalty. This royalty is typically charged for either the brand and / or product technology.

The basis for this charge is that the global brands have been developed outside India, as is the product research and technology. There is some merit to this argument, but the question is how much should be claimed.

Maruti cars are for the most Suzuki's products that emanate from the research and development undertaken in Japan. Yet, Maruti has been a stronger brand in India than Suzuki. To the extent that Maruti uses Suzuki's technology, it must pay royalty. But how much is enough?

According to IiAS, Maruti's royalty payouts are extortive. Maruti has been paying royalty to Suzuki for its car manufacturing technology since inception. Over the past five years (2010-11 to 2014-15), Maruti's aggregate payout towards royalty was Rs11,870 crore  ($17.16 billion) while the 5-year profit before tax (PBT) aggregated to Rs1,6770 crore ($2.57 billion ).

In 2014-15 alone, Maruti Suzuki's royalty expenses aggregated 36 per cent of profit before tax and royalty, according to IiAS.

Over the past 10 years, Maruti Suzuki's royalty payments increased from 13 per cent of pre-tax pre-royalty profits to almost 40 per cent as prer the company's annual reports.

Maruti Suzuki India, however, said it would pay royalty to parent Suzuki Motor Corp for all future models in Indian rupees instead of Japanese yen to mitigate risks due to foreign exchange fluctuations.

Maruti Suzuki also said the IiAS report has "no relevance to any issue before shareholders".

"We have seen the IiAS report. It has no relevance to any issue before shareholders. These are the views of IiAS on royalty charged by a company. At this point this matter does not call for any comment,'' a Maruti Suzuki spokesperson said.

Sources close to the company said while profit after tax and EBIDTA margins have more than doubled and stock price trebled since 2012, royalty ratio is almost unchanged.

There is negligible change in royalty all these years, while other parameters of business performance (profit, sales, market-share etc) have improved substantially.

Royalty as percentage of sales was 5.6 per cent in the first quarter of 2015-16 against 5.4 per cent in 2011-12. This compares to EBIDTA ratio rising to 16.7 per cent from 7.6 per cent in 2011-12 and PAT (Profit After Tax) as percentage of net sales jumping to 9.1 per cent as compared to 4.7 per cent in 2011-12.

Also, stock price has risen to Rs4,022 in April-June 2015-16 from Rs1,348 in 2011-12.