Maruti Suzuki More Profitable Than Parent Company Suzuki

It is well known that Japanese automaker Suzuki is not a global force in the four wheeler market. The company no longer even has a presence in North America. The majority of the company's profit comes from Japan, with only a small portion contributed by Europe.

In this scenario, coming to Suzuki's rescue is its Indian subsidiary Maruti Suzuki India Limited (MSIL). We don't need to tell you how successful Maruti Suzuki is. But to put it in numbers and to provide a perspective, just the royalty paid by MSIL to parent company Suzuki is more than the latter's standalone profit.

During the FY 2012-13 MSIL paid INR 2,453.8 crore as royalty to Suzuki, which is 102 percent of Suzuki's own profit after tax (PAT), standing at INR 2,402 crore in the same year.

In fact, post FY2008 royalty payment by MSIL has increased from 2.7 percent of net sales to 5.75 percent. which is over 60 percent of MSIL's profit after tax (PAT).

According to MSIL the significant increase in royalty payouts is the result of the appreciation of the Yen against INR. However, despite the large royalty being payed, MSIL still managed to make a profit of 5.6 percent on net sales in the same period.

The huge percentage of royalty amount and the fact that it's more than what Suzuki earns on its own has raised the question of whether the parent company is making up for its low profitability at the expense of Indian minority shareholders.

To add to the worry is the present bone of contention - Suzuki's plan to start it's own manufacturing facility in Gujarat that will sell cars to Maruti at cost price.

"The cause of worry - as pointed out by mutual funds and equity analysts, who have also opposed Suzuki's decision to set up a Gujarat plant as a fully-owned arm - is that the steady increase in royalty payments as percentage of sales impacts the earnings of minority shareholders," reports Business Standard.
"They also argue that royalty should not be paid on total sale value of a car but on the car's net of bought-out components."

The matter has now reached SEBI, which wants Maruti Suzuki to either answer all the concerns of MSIL's minority shareholders or withdraw its plan to let Suzuki run the Gujarat facility. Read the BS article for a more detailed report.