MUMBAI: The increase in royalty fees by Maruti Suzuki to its Japanese parent Suzuki, which triggered a slew of rating downgrades by brokerages and a drop in its stock, has raised fears about other multinational manufacturers following suit. Brokerages, in recent reports, warn about the possibility of higher royalty payments by Indian arms of some foreign engineering companies, including ABB, Areva, Cummins and Siemens, that may affect profitability and weigh down share prices.

“In the absence of greater clarity from managements of companies where the impact could be significant, the royalty issue is likely to remain an overhang, primarily for MNC players in the capital goods sector,” said Misal Singh and Arun Aggarwal, analysts at Religare Capital Markets, in a report.

In the week, shares of ABB fell 3.2%, Siemens dipped 3.9%, Areva T&D was marginally down, while Cummins rose 6.9% from the previous Friday. The BSE Sensex fell about 1.5% last week. Maruti shares, which dropped 12% on July 26 after the news of higher royalty payment, clocked weekly losses of 11.8%.

ABB pays royalty fees of approximately 2% of sales or 23% of profit before tax to its parent, while other engineering companies pay 1% of sales, according to Enam Securities.

“The T&D (transmission & distribution) industry has been witnessing a shift in technology towards 765 kV. Until now, most MNCs have been importing these from their parents and hence the royalty payments have been lower so far,” said Bhavin Vithlani and Akshen Thakkar, analysts at Enam. “However, as manufacturing of high-end technology rises, royalty could increase for ABB, Siemens and Areva,” they said, in a report.

Maruti’s royalty and technology fee payments were raised to 5.1% from 3.4%, a move that will impact the company operating profit margins by 1.7% in the years ahead, according to Elara Capital.

The government recently removed caps on all royalty payments by Indian companies to their foreign partners or parents, effective December 2009.

“Though higher royalty payments will boost investments in India, it will not be in the best interests of minority shareholders,” said a fund manager with a mutual fund, owned by a conglomerate.

Enam prefers Crompton Greaves and Cummins over ABB and Siemens among multinational engineering companies. “Crompton, post acquisition of Ganz, has been able to access high-end technology such as 765kV, GIS. However, with ABB and Siemens, incremental growth from some of the above technologies could be at lower profitability due to royalties,” Enam’s analysts said. “Cummins’ management has been prudent till date by increasing dividend payouts rather than royalty,” they added.

According to Religare, Indian-promoted companies such as Thermax and Voltas are less susceptible to increases in royalty payments. “We believe the probability of their royalty payments increasing is low as payments aren’t being made to parent companies (as in the case of MNC companies),” Religare’s analysts said.