Maruti to pay royalty to Suzuki in Rupees for new cars

From this financial year, Maruti Suzuki will start paying royalty to Suzuki in Rupees instead of Yen on new models starting with the Vitara Brezza. The step is expected to protect the company from foreign exchange fluctuations. The move to pay royalty in Rupees is part of an agreement between Maruti and Suzuki, which was signed in September 2015.

The Yen has appreciated 10.31% against the Rupee since the start of 2016. Every time there is an appreciation of 1% in the Yen, it impacts Maruti’s Ebitda (earnings before interest, tax, depreciation and amortization) by 1.2%.

The Vitara Brezza, which was launched earlier this year, is the first model for which the firm will pay royalty in Rupees. For older models, royalty will be continued to be paid in Yen. With new models being introduced, and old ones getting phased out, Maruti will look to eliminate the risk of being affected by foreign exchange fluctuations.

Maruti is also attempting to increase local content in its cars. Around 98% of the parts used in the Vitara Brezza and Baleno are locally sourced. This will help in reducing imports or raw materials and along with the move to pay royalty in Rupees, it will reduce the company's exposure to Yen.

At present, Maruti’s exposure to Yen is 21-22% of its revenue. The move to pay royalty in Rupees is expected to bring this down to 15-17%. In FY 2014-15, Maruti's imports as a percentage of net sales stood at 16%, while royalty was 5.7%.

Source: Live Mint