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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