Maruti begins paying royalty to Suzuki in rupees with Brezza

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Mumbai: Car market leader Maruti Suzuki India Ltd will start paying royalty to its Japanese parent in rupees instead of yen on the new models starting this financial year, reducing the impact of cross-currency volatility on its financials.

The Vitara Brezza, Maruti Suzuki’s first compact sports utility vehicle, which was launched on 9 March, is the first model for which the firm will pay royalty in the Indian currency, three people familiar with the matter said on condition of anonymity.

“This is a step towards insulating the company from the foreign exchange fluctuations,” one of the three persons said.

Going ahead, as older models gets phased out and new ones get added to Maruti’s portfolio, the currency risk will get eliminated, the person said.

A Maruti Suzuki spokesperson declined comment on the matter, saying that the company is in the “silent period” ahead of its fourth-quarter earnings announcement.

The move, analysts say, is positive for the local arm of the Japanese car maker that has its fortunes closely tied to the movement of the Japanese yen. Every 1% appreciation in yen impacts the company’s Ebitda (earnings before interest, tax, depreciation and amortization), an indicator of operating profitability, by 1.2%, said Nitesh Sharma, an analyst at Phillip Capital India Pvt Ltd.

Since the beginning of 2016, the yen has appreciated 10.31% against the Indian rupee.

“It’s a positive move and will help the company mitigate the risk associated with currency volatility,” said Sharma, pointing out that this ties in with Maruti’s attempts to increase local content in its products to reduce imports and exposure to the yen.

Both recent launches—the premium hatchback Baleno and the Vitara Brezza—have locally sourced parts to the tune of 98%.

Maruti’s exposure to the yen is in the form of the royalty it pays to Suzuki Motor and imports of raw materials.

In an earnings call after declaring its quarterly results on 28 January 2016, chief financial officer Ajay Seth said Maruti’s exposure to yen amounted to 21-22% of its revenue.

Payment in rupees is likely to bring down the yen exposure to 15-17%, said Ashish Poddar, an analyst at advisory IDBI Capital.

In fiscal year 2014-15, Maruti’s imports made up 16% of its net sales while royalty as a percentage of sales was 5.7%.

The change in the currency in which royalty payments are made is part of an agreement that Maruti signed with its parent in September 2015 which allowed it to make the currency switch for new models that it plans to introduce over the next 10 years.

The Brezza is the first of those and will be followed by the Ignis micro SUV, which the company plans to introduce during the festive season later this year.

Yen-denominated royalty payments will continue only on existing models, chairman R.C. Bhargava said last year.

An analysis of the company’s average net profit margins over the past 11 years shows that the Japanese currency has been one of the most important variables in the company’s profitability, Mint reported on 1 May 2015.

In quarters when the yen weakened, and consequently the rupee strengthened, Maruti Suzuki’s profit soared. The converse was equally true.

Fiscal 2016 turned out to be a year when the yen’s movement did not work to Maruti’s advantage. For the quarter ended 31 March, the rupee weakened by 7.34% against the yen.

Analysts expect this to have an impact on the company’s quarterly earnings.

Phillip Capital’s Nitesh Sharma expects Maruti Suzuki’s Ebitda margin to advance only four percentage points compared to a quarter ago.

This could mar an otherwise strong year for Maruti Suzuki, which ended fiscal 2016 with record sales of 1,429,248 units, an increase of 10.6% from a year ago. It’s domestic sales stood at 1,305,351 units—another record.

Despite the impressive operational performance, Maruti’s shares shed over 19% in the January-March quarter while the benchmark Sensex has dropped 3% over the period. On Wednesday, Maruti shares rose 4.42% to Rs.3,734.60 while Sensex gained 1.91% to 25,626.75 points.