Suzuki pinch to Maruti-Suzuki !!!

The over-dependence on its Japanese parent for launching new models in quick succession is proving costly for Maruti Suzuki. In the June 2010 quarter, the country’s largest passenger carmaker reported a 20% fall in net profit to `465 crore despite a 27% YoY jump in net sales. This is largely due to a sharp rise in the payment of royalty and technical fees (RTF) to its parent, Suzuki Motor, for use of its technology and brand. Though the company doesn’t divulge RTF figures on a quarterly basis, it is captured under ‘other expenses’, which was up 42% on an aggregate basis during the quarter and 14% on a per unit basis. Royalty and technical fees are now the second-largest cost head for Maruti after raw material costs. The company had earlier told ET that RTF is fixed at 5% of the revenues for domestic sales and 8% in case of exports. On top of that, in the June 2010 quarter, the company made a one-off payment of `65 crore to Suzuki Motor as an adjustment for the past RTF dues. This resulted in a sharp contraction in operating margin to 7.6% of net sales, one of the lowest in the last five quarters. Operating margin fell despite favourable raw material environment. The company’s raw material cost rose by 25.9% YoY during the quarter, less than 27% jump in net sales during the period. This resulted in over 60 bps improvement in raw material intensity to 75.5% of net sales in the June quarter compared with 76.1% a year ago. The net profit was also hit by a sharp 53% fall in other income to `100 crore as the company withdrew cash from its treasury operations to fund its capex programme. The company is investing nearly `1,700 crore to raise its manufacturing capacity by 25% to 1.25 million units per annum. Maruti Suzuki also bore the brunt of the 2% hike in excise duty in the last budget and its indirect outgo was up 51% during the period, much faster than the 25% YoY increase in sales volumes. The duty burden was up 21% to `32,818 per unit and was only partially compensated by a 1.6% increase in net sales realisation during the period. The future looks equally challenging for company, given its RTF commitments, the possibility of a further rise in metal prices and its capex. The operating margin in the passenger car industry has in general softened in recent years due to rising competitive intensity and now hovers around 12-13% of net sales. This puts Maruti at a disadvantageous position vis-à-vis its domestic competitors such as Tata Motors and Mahindra & Mahindra who don’t have to incur royalty payments. This would not have been a big issue if Maruti had charged premium pricing for its latest models. But the company seems to have decided against it for fear of losing market share.

Source: Economic Times