In an announcement that shocked the Street, Japan’s Suzuki Motor Corporation (SMC), owner of a 56% stake in Maruti Suzuki India, said on Tuesday it would set up the new plant in Gujarat. Instead of Maruti Suzuki making the investment as originally envisaged, SMC will fund the plant through its wholly owned unit Suzuki Motor Gujarat Pvt Ltd (SMGPL).
SMGPL will manufacture vehicles and engine components exclusively for MSI cars, which will then sell them at home and overseas. The decision, approved by the MSI and SMC boards, sent the Maruti stock reeling and it lost 8.12% to close at R1,563.20 on the BSE.
Analysts questioned the rationale for housing the manufacturing operations in SMGPL and were apprehensive Maruti Suzuki may not not get the vehicles at the best price. “Although SMC says the vehicles will be sold at cost, we are not sure what kind of margins the listed entity will make,” said an analyst with a foreign brokerage.
Kotak Institutional Equities said the contribution margin on the sale of vehicles from Gujarat will be significantly lower than current margins, though the return ratio will be higher as Maruti would not be making any capital expenditure.
Proxy advisory firm IiAS observed that Suzuki appeared to be parking a profitable business in a 100% subsidiary, adding that the minority shareholders should have been allowed a say.
Suzuki will fund the first phase of the Gujarat plant and Maruti will indirectly fund the second phase, through the price of the cars purchased. “Yet shareholders of Maruti will not have an equity stake in the Gujarat entity, which will continue to be 100% owned by Suzuki,” pointed out IiAS.
In 2007, Suzuki had set up Suzuki Power Train to supply engines to Maruti Suzuki; the firm was recently merged with Maruti Suzuki.
Maruti Suzuki chairman RC Bhargava said both the Indian subsidiary and parent Suzuki would benefit from the new structure. “Our funds will not be invested in Gujarat so we will not be taking on the risk associated with capital expenditure. The money will available for marketing spends and R&D and we can also earn 8.5-9% returns if we invest it,” Bhargava said. Maruti Suzuki has cash reserves of about Rs 7,500 crore, while parent SMC has about Rs 25,000 crore.
Explaining the rationale for the move, Bhargava said Maruti had become a very important part of Suzuki’s profits and volumes. “Suzuki sees