The shift to a rupee-denominated royalty payment system by 2022 envisaged by Maruti Suzuki to its parent Suzuki Motor Corporation will suffer a delay of nearly two years.
A significant majority of Maruti Suzuki India Ltd’s (MSIL) models will be shifted to rupee-based payment system from yen-based system by 2023, 2024, as per the company chief financial officer Ajay Seth.
“By the year 2023, 2024, virtually 95-96 percent of the models would have moved to the rupee formula,” Seth told analysts.
MSIL did not provide the reasons for the delay. Royalty payment, which is fixed in nature depending on the model, is computed every quarter by MSIL and shared publicly.
The Delhi-based carmaker, with a share of 49 percent of the domestic passenger vehicle (PV) market, had planned to move entirely to rupee-denominated royalty pay formula by FY22 to escape the adverse risk of the yen-rupee fluctuations.
A one percent appreciation in the yen hurts Maruti’s earnings before interest, tax, depreciation and amortisation (EBITDA) by 1.2 percent, according to analysts.
In an interview to Moneycontrol in January 2019, R C Bhargava, Chairman, Maruti Suzuki India, had said that as new models get launched, MSIL will completely shift to the rupee-based royalty system by 2022.
By early 2019, models like the Vitara Brezza, Ignis, Swift and Dzire had already moved to the rupee system with the balance still being in yen.
As of the end of December quarter (FY21), Maruti Suzuki’s royalty payment to Suzuki Motor Corporation (SMC) stood at 4.9 percent of net sales, which were lower than the 5.3 percent paid in FY20.
In FY19, it was 5 percent, whereas in FY18, it stood at 5.4 percent, according to the timely disclosure made by Maruti Suzuki.
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 profits for its 56 percent stake in the Indian subsidiary.
The shift to a rupee-based payment system was agreed upon between MSIL and SMC in FY18. As per this formula, royalty on all models launched by MSIL after January 2017 was to be paid in rupees. Ignis was the first model to move to the new formula.
The second agreement on royalty payment is that if a certain model achieves a certain level of volumes, the royalty on that model would come down.
“As we go along, there will be no uncertainty with respect to any exchange variation on account of royalty; that will go away and there will be a fixed amount that we know we will pay (to SMC),” added Seth.
In FY20, MSIL had clocked domestic sales of 1.46 million units, down 16.7 percent compared to FY19. This excluded exports of 102,171 units, down during the same year. In FY21, till end of January, the company registered total domestic sales of 1.05 million units, down 15.4 percent compared to the same period in FY20.
Before 2019, MSIL had set a sales target of 2.5 million units a year by 2023. The COVID-19 disruption has forced many companies to redraw their sales plans. According to data shared by the Society of Indian Automobile Manufacturers (SIAM), the domestic PV segment recorded a fall of 13.2 percent to 2.05 million units in FY21 till the end of January compared to the same period last year.