Margin boost ahead for Maruti Suzuki due to lower royalty structure

Higher operating leverage and localisation will also aid margins

Ram Prasad Sahu

With Friday's 3% stock rally, Maruti emerged as the eighth most valued entity

The Maruti Suzuki (MSIL) stock on Monday gained four per cent on expectation that the company's operating profit margins would expand due to a fall in royalty rates to parent Suzuki, higher localisation at its Gujarat plant and operating leverage as the plant scales up production.
If royalty rates fall 150-200 basis points (bps) from the current 5.3 per cent of sales, the operating profit margins, according to analysts, will improve 40-50 bps over the next couple of years. HSBC estimates at least 25 per cent of Maruti's sales in FY19 should have a lower royalty. The new rate will be an addition to an existing arrangement, which reduces royalty in line with Maruti's contribution to research and development (R&D) of the vehicle, as was the case with the Brezza.
The other margin-related trigger is scaling up of the Gujarat plant in three phases, each with a capacity of 250,000 units. The company is expected to reach 150,000 units in

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First Published: Jan 30 2018 | 5:50 AM IST

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