Maruti Slumps Most in Year After Unexpected Decline in Profit on Royalties
A worker cleans Maruti Suzuki India Ltd. cars at a showroom in Mumbai. Photographer: Adeel Halim/Bloomberg
Maruti Suzuki India Ltd., the nation’s biggest carmaker, slumped by a record in Mumbai after first-quarter net income unexpectedly fell and at least five brokerages, including Citigroup Inc., lowered their ratings.
The Indian unit of Suzuki Motor Corp. declined 12 percent to 1,195.45 rupees, the biggest drop since the shares began trading in July 2003. Maruti was the worst performer in the Bombay Stock Exchange’s Sensitive Index and the MSCI AC Asia Pacific Index today.
Maruti posted a 20 percent drop in profit, the first decline in five quarters, as it paid additional royalties to Suzuki and the depreciation of the euro against the rupee hurt repatriated income from its biggest export market. With the Indian government lifting restrictions on the payments that can be made to overseas partners from December, companies like Suzuki may be able to charge more in the future, said a Mumbai- based analyst.
“It’s a concern,” said Ajay Shethiya, an analyst at Centrum Broking Pvt. “Now it’s up to Suzuki to charge how much royalty they want.”
Maruti, maker of one of two cars sold in India, paid 1.9 billion rupees ($41 million) in additional royalties to parent Suzuki in the quarter, the company said without providing year- ago details. The payment also included 650 million rupees of charges due between Dec. 16 and March 31, Maruti said.
Cap Removal
India had capped the payment of royalty by local companies to their overseas technology partners at 5 percent of domestic sales and 8 percent of exports. Those caps were removed from Dec. 16, according to the website of the Reserve Bank of India.
Maruti paid about 9,900 rupees per vehicle as royalty to Suzuki in the fiscal year ended in March, Shethiya said. The payment could rise to as much as 15,000 rupees this year, he said. The company pays royalty on most of its models to Suzuki, Shethiya said.
Maruti’s Chairman R.C. Bhargava declined to comment on the royalty payments to Suzuki. Chief Financial Officer Ajay Seth didn’t answer calls to his mobile phone, seeking comment.
Hero Honda Motors Ltd., India’s biggest motorcycle maker, may also have to increase royalty payments to Japan’s Honda Motor Co., which owns 26 percent in the company, Shethiya said. Ravi Sud, the chief financial officer of Hero Honda, didn’t answer calls to his mobile phone seeking comment.
The company’s shares plunged 7.5 percent today, the most in more than a year.
The increase in royalty payments comes as Maruti is facing rising competition at home as carmakers including Volkswagen AG and Ford Motor Co. introduce new compact cars and expand factories in India.
Maruti’s net income fell to 5.84 billion rupees in the three months ended June, the company said July 24. That was lower than the 6.7 billion rupee average of 24 analyst estimates compiled by Bloomberg.
Citigroup cut its recommendation to ‘Hold’ from ‘Buy.’ Nomura Holdings Inc. changed its ratings on the carmaker to ‘Reduce’ from ‘Buy.’
To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net Vipin V. Nair in Mumbai at Vnair12@bloomberg.net.
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