This will be a major shot in the arm for the Indian company as it will negate the vagaries in foreign exchange
Maruti Suzuki, the country’s largest car maker, will shift entirely to a rupee-denominated royalty pay system by 2022, a top company official said.
This will help negate the vagaries in foreign exchange for the Indian entity as around 60 percent of its current royalty payment is made in yen.
Speaking to Moneycontrol, RC Bhargava, Chairman, Maruti Suzuki, said, “As new models get launched, the rupee denominated royalty payment to Suzuki will rise. By 2022, all models will get covered under this (rupee).”
All new models such as Brezza, Ignis, Swift and Dzire have moved to the rupee system. Since the next generation Wagon R features a new platform, it will also join the rupee pay system for royalty. Other models such as Alto, Eeco, Baleno, Ciaz, Ertiga and Gypsy will progressively move away from yen.
A single percent appreciation in the yen hurts Maruti’s earnings before interest, tax depreciation and amortisation (EBITDA) by 1.2 percent, analysts said. As of Q2 end, the company paid 5.7 percent of sales in royalties.
Maruti is the single largest profit generator and the highest revenue contributor for Suzuki Motor Corporation. In addition to royalty, the parent also receives dividend and a share in the profits due to its 56 percent stake in the Indian subsidiary.
In addition to moving away from yen denominated payments, Maruti is simultaneously boosting its local R&D spends. This will help reduce dependence on the parent company for technology in not just product development but in new engine and transmission technology as well.
While a lower royalty would look like negative news for Suzuki, which is making a multi-crore investment for new capacities in India, ever-growing sales in India and exports from here will provide a boost to its topline.
For the record, Maruti is targeting sales of 2.5 million units a year by 2023, up from 1.77 million units clocked in 2018. It has consistently pushed new models into the market and simultaneously expanded its retail reach to accommodate its expanded line-up.
Suzuki is pushing for hybrid and electric vehicles in India and other parts of the world, riding high on its partnership with fellow Japanese giant Toyota Motor Corporation.
The two companies are sharing powertrain and vehicle development technology with a special focus on driving down the initial cost of acquisition of electric and hybrid vehicles.Osamu Suzuki, the 88-year-old Chairman of Suzuki Motor Corporation (SMC), had asked company's executives to target sales of 1.5 million electric cars a year in India by 2030 through Maruti Suzuki, which is readying for launching its first electric car in 2020.