Pace of growth in Suzuki Motor's India earnings from Maruti declines

The pace of growth in Suzuki Motor Corporation’s (SMC) earnings from its prized Indian subsidiary Maruti Suzuki has started slowing down, primarily because of a lower increase in dividend income compared to

previous few years. Royalty share, too, is down and will continue to see a gradual decline in the near future.

Even though the Japanese auto major earned a record Rs 55.75 billion (income in Yen and after tax may vary) in royalty and dividend income from Maruti in FY18, the Y-o-Y growth stood at 9 per cent. In the two preceding years (FY17 and FY16), the growth had hit a high double-digit rate of 33 and 24 per cent, respectively. The dividend per share had grown from Rs 35-Rs 75 between FY16 and FY17 but it grew marginally in FY18 to Rs 80. The amount of Rs 55.75 billion (without taxes) would roughly account for one-fourth of Suzuki’s operating profit.

SMC owns about 56 per cent shares in Maruti and therefore gets a bulk of dividend. Dividend income had more than doubled to Rs 12.73 billion in FY17 but increased only marginally to Rs 13.58 billion in FY18. This has a direct correlation with the annual profits, which rose by five per cent last year vis a vis growth of 37 per cent in FY17. The dividend payout ratio at Maruti Suzuki is capped at 40 per cent of the profit and for FY18 the payout is under 38 per cent of Rs 77.21 billion.

Besides dividend, Suzuki also gets a royalty from Maruti for its contribution in vehicle development at the Indian subsidiary. Royalty, calculated as a per cent of net sales, came down to 5.4 per cent in FY18 from 5.8 per cent in FY17. Maruti's board as well as Suzuki board have approved the new royalty mechanism under which payments to Suzuki will be made in rupee and not in yen for new products (Exchange rate fluctuations sometime results in a bigger yen income for Suzuki and a higher outgo for Maruti). Maruti will also get a volume-linked discount from parent on royalty based on certain volume milestones.

The three new models — the Ignis, Dzire and Swift — have already come under the new royalty mechanism and all models are expected to be covered by 2021. Maruti Suzuki Chairman R C Bhargava said last month that royalty was capped at five cent under the new mechanism and by 2021 royalty was expected to be lower than five per cent. A higher research and development work for newer products in India also means a lower royalty sharing.

Even though Maruti Suzuki has benefitted from the R&D of parent Suzuki, proxy advisors have in the past raised concerns over the quantum of royalty payments. A report by IiAS in 2015 said through the past 15 years the royalty paid to Suzuki has grown 6.6 times to Rs 21,415 per car sold, while average sales realisation per car has increased only 1.6 times. “While Suzuki’s consolidated R&D (research & development) spend per vehicle (including motorcycles) averaged four per cent of sales, its royalty payments from Maruti are six per cent of net sales,” it argued.

A Sebi panel headed by Uday Kotak last year had recommended that companies need to take shareholders’ approval if royalty exceeds five per cent of the turnover.

Bhargava said even though the per cent of royalty/dividend may not grow the amount of money that Suzuki gets from India should keep increasing due to the projected increase in car sales leading to higher revenue and profits. Maruti Suzuki aims to sell two million units by 2020, from 1.77 million vehicles last year.