Street unmoved by Maruti Suzuki's Gujarat plant clarifications

Mar 01 2014, 17:32 IST
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Shares of Maruti Suzuki slumped to a one-month low on Friday as brokerages raised further. Reuters Shares of Maruti Suzuki slumped to a one-month low on Friday as brokerages raised further. Reuters
SummaryShares of Maruti Suzuki slumped to a one-month low on Friday as brokerages raised further...

Shares of Maruti Suzuki slumped to a one-month low on Friday as brokerages raised further concerns after

the company issued clarifications on the proposed Suzuki-owned plant in Gujarat. Shares of the automaker fell 5.33% intra-day on Friday, before closing 4.54% lower at Rs 1,586.30.

On Thursday, Maruti Suzuki in a release titled ‘Information on Gujarat Project’ gave clarifications on what price the cars would be sold to Maruti Suzuki, on post-contract scenario and the capex requirements. “The capex needs of SMG (Suzuki Motor Gujarat) would be met by i) the depreciation amount available with the subsidiary, ii) by an amount generated as net surplus from the car pricing and iii) by Suzuki Motor Corp infusing fresh equity, to the extent necessary,” the company release said.

According to brokerages, the disclosures are negative for the stock. CLSA in a note said that now Maruti will fund part of the future capex at Gujarat through a mark-up in transfer pricing, while an earlier communication suggested additional funds would be put in by Suzuki. The deal would impact margins and earnings growth post FY18 for Maruti. “Maruti’s margins on vehicles in Gujarat plant will be average 6% lower than at Haryana plant (13%),” it said.

Meanwhile, analysts feel Suzuki shareholders are likely to benefit from the Gujarat plant. “From an earlier guidance of zero profit for Suzuki, Maruti now says it needs to make a profit to fund future capex. Even if Suzuki pumps in additional equity, costing will only fall marginally. More troubles for minority shareholders are exposed, while super-rich profitability and return on equity (ROE) are expected for Suzuki,” CIMB said in a note.

Analysts question why Maruti Suzuki kept away from investing in the plant since the company sits on Rs 6,000 crore worth of cash as on December quarter. “According to the above, i and ii (referring to the company release) are funding by Maruti Suzuki for future capex; iii is funding by Suzuki. Given Maruti Suzuki’s surplus reserves, we are still not clear on why Suzuki ownership is required in this structure,” Morgan Stanley analysts Binay Singh and Yashesh Mukhi said in a report.

On January 28, while announcing the move, the company said the board took the decision as “implementing the expansion through a 100% Suzuki subsidiary would result in substantial financial benefits to Maruti Suzuki, and its minority shareholders”. Then the scrip plunged 9.4% in intra-day trade. Year-to-date, the scrip has shed more than 10%.

Barclays downgraded the stock to ‘equal weight’ when the proposal was announced. “A higher share of earnings from distribution is a structural shift of the earnings profile. We reduce our FY14/15E EPS by 1.3% and 0.5%, respectively, and believe that the risk of earnings deterioration and cash drain by Suzuki is likely to remain an overhang in the near-term,” the brokerage said.

“MSIL’s earnings profile will become more volatile depending upon the capex needs at Gujarat. In years of high capex, Maruti’s profit may remain flat despite higher volumes and higher revenues,” added Nomura analysts Nishit Jalan and Kapil Singh on Friday.

Analysts feel Suzuki should have opted for a cleaner way and question the rationale behind the proposed structure. “If Suzuki has excess cash on its balance sheet which it wants to utilise to help Maruti, there are other cleaner ways — extend a loan or give one-year credit on royalty, etc,” Jefferies said in a note. “We wonder why this structure is needed in the first place. How would any proposed benefits of a separate management, location not accrue if SMG were a 100% subsidiary of Maruti?” Jefferies analysts added.

While brokerages feel the move could have an impact on the Maruti's earnings, proxy advisory firms say the move is unfair for minority shareholders. “The new structure regarding leaves several questions unanswered. Although the structure and the manner in which it has been announced is well within the scope of existing regulation, we believe Maruti has denied minority shareholders a say in the directional changes undertaken by management,” said Institutional Investor Advisory Services.

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