Institutional Investor Advisory Services (IiAS), a proxy advisory firm, is convinced Maruti Suzuki’s royalty payments are extortive; although it concedes that much of the car maker’s portfolio is the result of research and development (R&D) in Japan, it feels the amounts paid out are too high. It points out that over the past five years (FY11-FY15), the aggregate
payout was R11,870 crore while the five-year profit before tax (PBT) aggregated R16,770 crore. It is unhappy with the company’s performance and feels the move to higher-priced sedans from smaller cars has resulted in a very limited increase in per car realisations.
The fact, however, is that the small car segment has not been growing—it has de-grown every year between FY12 and FY16 and also in the six months to September—whereas both, the Swift Dzire and the hatchback, Swift, have been runaway successes. Maruti has been able to capture the rise in consumers’ aspirations who feel they get more bang for the buck by paying a little more for slightly bigger cars. That explains why there has been only one launch in recent times in the small car space, the Kwid from Renault. Given a choice between the Alto K10—an upgraded model of the Alto—which is available at R3.82 lakh and the more spacious and better Swift, which comes for R4.5 lakh, or the Hyundai i10 (hatchback) at R4.4 lakh, customers have chosen to trade up the price curve to what is called the premium compact segment. The share of first-time buyers in Maruti’s total volumes went up to 46% in Q1FY16 from 43% in FY15, a clear indication that customers are attracted to its products. And most analysts believe that as the product mix shifts towards premium vehicles, the average selling price will increase.
Indeed, despite losing out to the competition—a decade ago Maruti’s market share was close to 50%, but this fell to 36% in 2012—the company has fought back to recover lost ground and it now commands an enviable share of 46-47%. That should be appreciated because the market has been extremely competitive in the last several years, especially after Hyundai entered the country, and there are any number of models vying for the consumer’s attention. Clearly, the technology that went into the making of the cars had a lot to do with it, and while one might feel Maruti is paying a very high royalty, without the technology, the company could never have commanded the market share that it does today. Maruti’s ebitda margins currently are in the region of 16%—to be sure, it has gained from falling commodity prices, like every other player has—and the profit before tax has more than doubled between FY12 and FY15. If analysts prove right, the PBT this year will come in upwards of R7,900 crore, a jump of over 60% over FY15. Even if the final results are short of estimates, it would be a sterling set of numbers.
IiAS talks of Suzuki’s entry into India, in collaboration with the government, almost as if it were a crime. The fact is Suzuki had the vision to enter the Indian market way back in 1983 in partnership with the Indian government. That is foresight and what visionary managements are all about; if the partnership gave the company an ‘edge’ in India, then that is to its credit.
This paper defended the high royalties on several grounds, primarily the company’s tremendous performance vis-a-vis peers and second capital appreciation and dividends that the stock returned to investors. One cannot dismiss the performance of a stock—which ultimately benefits the shareholders—saying it is a simplistic argument. The proof of the pudding is in the eating; after all, if institutional shareholders have owned the Maruti stock in large quantities over the last 10 years —they have upped their stake in the carmaker by about 6% from 23.9% to 30.1% between March 2010 and September 2015—surely they believed the company would deliver? Moreover, it is not as though the stock has merely outperformed, it has outperformed by a wide margin trebling over the past five years or so.
And it is not some illiquid counter where the price has been driven up or rigged by a bunch of speculators. After the June quarter results, Kotak Institutional Equities (KIE) raised the target price for the stock from R4,500 to R5,000.
In fact, it is surprising some analysts compare the performance of stocks like Hindustan Unilever(HUL) to that of an Emami; comparing the quality of the managements of these two companies is simply ridiculous and, in the last six fiscals, HUL’s dividend payout ratio—dividend distributed to net profit—at more than 80%, is way higher than that of most companies. In the six years to March 2015, for instance, the quantum of royalty they paid increased by 15% to 34%. But top MNC subsidiary stocks have appreciated by anywhere between 20% and 46% compounded. MNC subsidiaries may be paying out royalty and the rates may seem high, but these are there for everyone to see. In contrast, most Indian promoters are able to siphon out funds and their dividend track record is poor. That is why stocks like HUL, Maruti and Nestle are able to command high multiples over an extended period of time even as the brands created by them have been rolled out in India.
Carping over royalty payments when MNCs are bringing in technology or brands or processes that support core businesses and, in turn, help companies grow profits and revenues is uncalled for. And, as for suggesting that small shareholders be asked to approve royalty payments, that’s being presumptuous.
shobhana.subramanian
@expressindia.com