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Old 26th July 2010, 23:51   #1
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Default Over-dependence on Suzuki proving costly for Maruti

Today I have seen this article in ET. Mods please remove this thread if already posted.

Over-dependence on Suzuki proving costly for Maruti-Stocks in News-Stocks-Markets-The Economic Times

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.
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Old 27th July 2010, 00:20   #2
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Yes it is open secret Suzuki is milking MSIL. After they have got full control of MSIL I don't think Maruti is going to negotiate either.
Independent directors and other board members in India are for getting perks and rubber stamp the board decisions rather then standing for welfare of company and minority share holders.
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Old 27th July 2010, 10:09   #3
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Originally Posted by rnidumolu View Post
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.
It's no disadvantageous position IMO. It's simply the difference between just a screwdriver-technology assembler (MSIL) and a real manufacturer (Tata/M&M). As far as technology is concerned MSIL is nothing but a beggar and we all know this; beggars can't be choosers.
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Old 27th July 2010, 10:27   #4
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.... MSIL is nothing but a beggar and we all know this; beggars can't be choosers.
Well said, Sandeepmdas! I always wonder, whats stopping maruti from investing in R&D which in turn will strengthen their roots to consolidate the no.1 position in the market. But i dont think MSIL is bothered about it, they are happy mass producing tin box after tin box and "screwing them up" in assemblies ! I seriously hope atleast now, they get their act together and start bringing out something of their own.. indigenous you see
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Old 27th July 2010, 11:09   #5
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^^ another reason could be typical "indian mind" that is working on MSIL, "Why to risk the comfort zone? " This also has been one of the major reasons of India doing great in service industry rather than being an inventors of technology.

just like the way the majority of the crowd would prefer being a salaried and working under someone, rather than taking the risk to start something of their own (including me ).
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Old 27th July 2010, 11:42   #6
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IMO, Maruti is not a company. Id rather call it the Indian subsidiary of Suzuki. Its like all the JVs in China where international manufacturers cannot set up shop alone. Would be best if Suzuki takeover Maruti altogether so that they can have full control, else we do not know what VW might be planning.
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Old 27th July 2010, 11:56   #7
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Its too late for Maruti, its nothing more than a Suzuki subsidiary and a dumping ground for phased out models.
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Old 27th July 2010, 14:08   #8
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I dont see a reason why Maruti should have an issue. Maruti is a subsidiary and is controlled by Suzuki. Suzuki provides them with cars and spends R&D budget. They just do the assembling here. RTF is a way for feeding back into Suzuki R&D budget.

The market has got a lot more difficult for Maruti and they lost the 50+% market share they had. They will lose further in the coming decade as other companies attack their bread and butter low end hatchback segment. But Suzuki is not exactly the cause of their issues.
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Old 27th July 2010, 14:16   #9
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I thought there was some VW joint venture being talked about. This should surely reduce if not avoid over dependence on Suzuki. Surely they need to step up R&D spend and reduce dependence on Suzuki. That is why I feel what Tata and Mahindra have achieved is far more commendable.
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Old 27th July 2010, 14:21   #10
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Originally Posted by amitk26 View Post
Yes it is open secret Suzuki is milking MSIL. After they have got full control of MSIL I don't think Maruti is going to negotiate either.
And also milking the Indian People also. Right now I am in SA, and I see very less almost nil presence of this SUZUKI
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Old 27th July 2010, 14:28   #11
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VW JV is not between Maruti and VW its between Suzuki and VW.
And MSIL is a subsidiary of Suzuki.
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Old 27th July 2010, 14:33   #12
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This goes as a classic illustration to the saying, 'you cannot have your cake and eat it too'.
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Old 27th July 2010, 18:59   #13
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I dont see a reason why Maruti should have an issue. Maruti is a subsidiary and is controlled by Suzuki. Suzuki provides them with cars and spends R&D budget. They just do the assembling here. RTF is a way for feeding back into Suzuki R&D budget.

The market has got a lot more difficult for Maruti and they lost the 50+% market share they had. They will lose further in the coming decade as other companies attack their bread and butter low end hatchback segment. But Suzuki is not exactly the cause of their issues.

+1 to that skywalker.

IMHO this is only a stock-market issue. Its a legacy due to the nature of the joint venture between the government of India and Suzuki, and the path followed to achieve the current share-holding pattern (IPO, then the government offloading most of its residual stake etc). This was fine in a growing market with OK competition. Even in March '10 the same analysts would have only recommended a buy/hold on the stock.

But I guess the last 2 quarters have changed the game. You have competition on different flanks. For example, the swift out-gunned the getz when nothing else was thrown at it (OK the UVA!). But now you have the i20, polo, figo, micra - so much choice! As a result Maruti is now throwing back everything it has only to slow-down its loss of market-share (new wagon-r, new estilo, swift with K series, alto with k series, eeco... whew!). That means huge ad spends, investments in the factory etc.

But the problem here is not the increased costs (production, ad spends whatever), because sales are very good when looked in a volume perspective. Problem is the royalty paid to Suzuki. Now when you have so many launches etc there will be increased royalty. Its a given. Every foreign auto company pays big royalties to its parent (Hyundai, for eg). The good thing is none of them have this legacy of being listed on an Indian stock-exchange, and the resulting scrutiny. Given that its market-share is only going to fall, Suzuki might just as well make an open-offer to existing Maruti share-holders and de-list it from the Indian exchanges. That will make it a wholly owned subsidary. And buy it some secrecy

BTW, methinks we are aligning closer to the international markets. For eg, Hyundai with its i10/i20 range showed us that we are ready for the same small car having different cc petrol engines, just like other markets. But Maruti maybe till now thought the consumer will only get confused about mileage etc (a la the palio?) and reject all variants. So the mantra remained same engine, different cars! But the new alto variant shows the shift in market perception. Time for a swift 1.4?
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Old 27th July 2010, 19:34   #14
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Quote:
Originally Posted by SkyWalker View Post
I dont see a reason why Maruti should have an issue. Maruti is a subsidiary and is controlled by Suzuki. Suzuki provides them with cars and spends R&D budget. They just do the assembling here. RTF is a way for feeding back into Suzuki R&D budget.

The market has got a lot more difficult for Maruti and they lost the 50+% market share they had. They will lose further in the coming decade as other companies attack their bread and butter low end hatchback segment. But Suzuki is not exactly the cause of their issues.
Well let me explain the problem , Maruti is owned only partially by Suzuki ( I think 54.2 %) so 45.8% of Maruti is owned by other people. So the case of Maruti-Suzuki is entierly different from other 100% subsidery of other car makers.

If MSIL gives out money in dividends then all share holders including Suzuki benifit but Suzuki is making MSIL give a big chunk of money in form of Royalty.

Ideally any public company need to take steps to increase profitabilty and bring value to shareholders . So MSIL should be doing it's own research and find mechanism to lower the Royalty stakes but since management control is with Suzuki it will not let Maruti do it , Maruti is biggest contributor to Suzuki revenues world wide.

There are many implications.
1. Maruti can not remain cost effective and competitive as royalty overheads are there.
2. Maruti despite just being 54%holding of Suzuki can not go to another company for technology licensing because the Royalty earner is dictating the terms.
2. Interest of people holding 45.8% share holding is not served.

Ideally independent directors and bord members nominated by finencial institutes should have stopped this loot of other share holders money. Prime purpose of independent directors and minority share holder board members is to protect interest of share holders but they are mute spectators.
In some other parts of the world this kind of corporate malpractices are keenly watched by regulators.

PS : Maruti was never a sole effort of Suzuki so it is good that company was not given on a platter to Suzuki. If Suzuki really has finencial muscle it should come up with an open offer to buy the remaining stake from other share holders. but as of today revenues of Maruti are more then Suzuki so reverse looks more logical that MSIL raises money and buy out parent in other markets, but for that a visionary local leadership is required not slave drivers planted from overseas.

OFF TOPIC :

Above may sound like unnecessary rant but just remember case of Keshub Mahindra who was independent director on the board of of Union Carbide India Ltd. and when UCL decided to do cost cutting for plant maintenance ideally he should have blown the whistle.
Recently after so many years he was awarded paltry 2 year imprisonment which he definitely deserves for remaining silent in the board to cost cutting exercise such as storing phosphen gas in one giant tank instead of multiple smaller tanks like in UC plant in France or not replacing the pipes specially when issue was raised in M.P. assembly

Last edited by amitk26 : 27th July 2010 at 19:38.
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Old 27th July 2010, 19:37   #15
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hmm wouldnt Hero Honda's case be similar?
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