Semiconductor chip shortage may keep Maruti Suzuki's margin in check

 The declining trend in royalty payment unlikely to cushion the fall

A continuing downward trend in royalty payments by Maruti Suzuki to parent Suzuki Motor is unlikely to arrest the decline in the former’s margins.

Lower volumes owing to the shortage of semiconductors and a persistent increase in input costs will keep up the pressure on the company’s margins for the remaining quarters of the year and even next year, said analysts.

Earlier this month it said its vehicle production in September would tumble by 60 per cent.

Following muted Q1 earnings and the production cuts announced by the company owing to the chip shortage, most brokerages have pared their estimates by up to 50 to 100 basis points on margins for FY22 and FY23. One basis point is one-hundredth of a percentage point.

Maruti Suzuki India’s royalty payments to parent Suzuki Motor Corp, which used to be investors’ concern till three years ago, touched the lowest in a decade in the financial year ended March 31.

A spokesperson at Maruti Suzuki said the fall in royalty payments was expected.

“Royalty is covered in accordance with the revised agreement approved in January 2018 and accordingly it was expected to come down gradually.” It is payable on the models of Maruti Suzuki and Suzuki Motor Gujarat and on the same terms. The amount depends on the product mix during the year, the spokesperson added.

Maruti Suzuki has a contract-manufacturing agreement with Suzuki Motor Gujarat.