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.