October 27, 2015 / 3:05 PM / 4 years ago

Maruti says royalty to Suzuki to be less than 5 pct in 4-5 years

NEW DELHI (Reuters) - Maruti Suzuki said on Tuesday royalty payments to parent Suzuki Motor would fall to below 5 percent of net sales from about 6 percent as it increases the amount of in-house development.

Customers are briefed by the employees next to a S-Cross (front) and a premium hatchback Baleno at a showroom in Ahmedabad, October 27, 2015. REUTERS/Amit Dave

The lower royalties will boost margins and go some way to appeasing minority shareholders, several of whom have voiced discontent over high payouts to Suzuki, say analysts.

Maruti, whose market value surpassed that of Suzuki in July, contributes about a third of its parent’s revenue. Maruti is India’s leading carmaker, selling 1.2 million vehicles in the year to end-March.

“The capacity of Japan to develop and maintain models is limited. It has never dealt with a market that has 15 to 17 models ... so that (development) has to be in India,” Chairman R.C. Bhargava said.

“To the extent work is done in India, the royalty will be reduced ... If you look four to five years in the future, definitely it would be (below 5 percent),” he said after the company reported a 42 percent increase in quarterly profit.

Net profit for July through September rose to 12.26 billion rupees from 8.63 billion in the same period a year earlier, falling short of an average analyst estimate of 12.62 billion, according to Thomson Reuters I/B/E/S.

Net sales rose about 13 percent to 136 billion rupees, the company said, as India’s car trade continues to grow. India is expected to become the world’s third-largest car market by 2020, moving up three places.

Maruti, majority-owned by Suzuki, currently pays royalties for use of technical know-how and its brand name. It paid 26.6 billion rupees ($409 million) for the year to March, according to its annual report.

Lower royalties are expected to lead to cost savings of up to 100 basis points, some of which will translate to higher margins, according to Phillip Capital auto analyst Nitesh Sharma.

Maruti will also next month seek votes from minority shareholders to allow Suzuki to build and own a car plant in Gujarat and sell vehicles to the company at cost price, freeing up cash for other uses.

Voting will start on Nov. 16 and last a month, Bhargava said, adding the company had already met investors in Mumbai and Singapore and will meet those in Hong Kong and London next month.

The Gujarat plant is scheduled to open in May 2017 but Bhargava said it would be possible to open a few months earlier to take pressure off its existing plants that will be at full capacity by then.

Reporting by Aditi Shah; Editing by Sumeet Chatterjee and David Holmes

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