Maruti shares rise 3.6% as board approves reducing royalty rates on new models

Mumbai: Shares of Maruti Suzuki India Ltd on Monday surged over 3.6% after the company said its board approved reducing royalty rates for new models.

The stock touched a high of Rs9,609.95 on the BSE and gained as much as 3.59% in intraday trade. At 9.56am, it was trading at Rs9,588.35 on the BSE, up 3.35% from its previous close, while India’s benchmark Sensex rose 0.81% to 36,343.36 points.

“This is long term positive for the stock. While the quantum of reduction has not been disclosed, we estimate more than 25% of sales in FY19 should have a lower royalty (without factoring any new model post the new Swift). Overall, we remain positive on Maruti’s market share and earnings growth potential and see strong quarterly performance and successful negotiation for a lower royalty charge with Suzuki as key near-term stock price catalysts,” said HSBC Global Research in a note to its investors.

The new method will be applicable on all new models launched by Maruti Suzuki since January 2017, starting with the urban compact hatchback Ignis. Maruti Suzuki pays royalty for some of its products in Indian rupees, which protects the company’s earnings from adverse currency fluctuations, Mint reported.

“Currently, the company pays around 5% of revenues to Suzuki as royalty, and assuming that is reduced to 3% on new models, that translates to a 50 bps (basis points) tailwind for margins in FY19e. Not just the amount, but many other nuances are still unclear. There is an existing arrangement to reduce royalties in line with the ratio of work Maruti contributes to the R&D of the vehicle; for instance on Brezza, it was already much lower,” the report added.

HSBC Global has maintained its buy rating on the stock with a target price of Rs10,400 a share on the back of its better long-term earnings outlook.

Brokerage firm UBS estimates a 100-200 bps royalty reduction on new models can add 40-80 bps to the Ebit (earnings before interest and tax) margin over fiscal year 2018-20. The brokerage house has upgraded the stock to “buy” from “neutral” and increased its target price to Rs11,000 from Rs9,100 earlier.

The company on Thursday reported a 3% rise in its net profit to Rs1,799 crore for the December quarter against Rs1,747.20 crore a year ago. Net sales for the quarter increased by 13.9% to Rs18,940 crore. Operating profit or Ebitda (earnings before interest, taxes, depreciation and amortization) rose 22.1% to Rs3,037.8 crore as a result of the cost savings implemented by the company. Operating margin expanded by 104 bps to 16% from 14.96% in the year-ago period.

Of the 50 brokers tracking the Maruti stock on Bloomberg, 41 have a “buy” rating, nine have a “hold” rating and two asked investors to sell the stock.