Maruti Suzuki shows a yen for currency stability with switch to rupee royalty

Written by fe Bureau | New Delhi | Updated: Sep 5 2014, 10:52am hrs
Maruti SuzukiMaruti Suzuki India will pay royalty to parent Suzuki Motor (SMC) in rupees instead of yen.
Maruti Suzuki India will pay royalty to parent Suzuki Motor (SMC) in rupees instead of yen, thus shifting the risk of foreign exchange fluctuations to the parent firm, chairman RC Bhargava told shareholders at the annual general meeting on Thursday.

However, this change would not lead to any immediate gain for Maruti as this new arrangement would kick in only once the company signs a new product agreement for future launches. Right now the launches, like its mid-size sedan Ciaz which would hit the roads sometime next month or any further launches already planned and lined up would continue to be governed by the current agreement where forex risk would continue to lie with Maruti. According to a company official the new arrangement may kick in from FY19.

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On all future models the royalty will be expressed in rupees... and not (in) the yen so that we are not exposed to the variation in the exchange rate which has been happening in the past, Bhargava said.

Maruti, in which Japans SMC holds 56% stake, pays royalty on a per-car basis in yen for use of technical know-how and use of the parents brand name. During FY14 the company paid a royalty of R2,486 crore or around 6% of its net sales.

Illustrating how the new arrangement when it comes into force would help the firm, a company official said that currently royalty is paid on a per-car basis in yen, which would change to rupee. Earlier, if the royalty was like 100 yen per car and the rupee became weaker, Maruti paid more in rupee terms. Now, the payment will remain constant, so for example if royalty is at R100 per car, and the rupee becomes weaker, SMC will earn less.

Bhargava also said that with Maruti enhancing its research and development capabilities future royalty payouts would decrease. More and more R&D work will be done in India and royalty calculation would be based on work done here and our expenditures on R&D will be rewarded in the form of reduced royalty, he said.

On the Gujarat plant, Bhargava said that the plant would be commissioned in 2017 and urged shareholders to exercise their franchise favourably in the voting that is to take place sometime next month to let Suzuki own and invest at the facility.

The new plant in Gujarat would be owned by Suzuki, which would manufacture the vehicles and provide them to Maruti at no cost, with no mark-up on account of return on capital employed. The Gujarat company would not sell cars to anyone else anywhere, it would not make any profit or loss or accumulate any surplus. It would be Maruti which would realise all the profits arising from the production in Gujarat, Bhargava said.

The company needs to take the approval of its minority shareholder for this proposal as it is a related party transaction.