Maruti Suzuki info on Gujarat Project to address investor issues

On January 28, 2014, Maruti Suzuki had announced a deal whereby 100% subsidiary of Suzuki will be set for manufacture on land owned by the Indian subsidiary. This announcement failed to receive the approval of investors while the company has recently announced revised terms to make the deal more plausible. This was despite the fact that it was not required under law for the company to seek approval from minority shareholders.

The board meeting which lasted over four hours was attended by SMC Chairman Osamu Suzuki wherein it was decided to rework the financial model where capacity extension at Gujarat was concerned. The outcome of the meeting was that entire capex for Gujarat project would be funded by depreciation and equity from Suzuki Motor Corporation and there will be no added margins on cars sold by Suzuki to Maruti.

MSILThe new unit in Gujarat will manufacture cars for the Indian car maker in accordance to its requirements and Suzuki will be infusing capex to the tune of INR 3000 crores. Added expansion will be funded through incremental capex, depreciation cost and new equity introduced by the parent company. This will allow Maruti Suzuki to purchase vehicles from the Gujarat plant directly at manufacturing prices itself which will be at a lower price as compared to those produced by Maruti Suzuki at the Haryana plant. The plant will operate on a ‘no profit, no loss’ basis and if both parties mutually agree to terminate the contract anytime in the future, all facilities at Gujarat will be transferred to Maruti Suzuki India Limited at book value.

Following this decision, 75% of minority stakeholders have agreed to the new deal. Suzuki holds a majority stake in Maruti to the tune of 56% while the rest is held by institutional investors which include four insurance companies and 12 mutual funds.

A group of investors in Maruti Suzuki India Limited are putting added pressure on the auto manufacturer to shelve plans for Suzuki new plant coming up in Gujarat. This decision follows Suzuki announcing plans to invest $488 million on the new plant while Maruti has abandoned its earlier plan to set up the factory itself.

A group of 16 investors have written a letter to Maruti Management citing fears that this will lead to shift in manufacturing activity away from the Indian company and more towards Suzuki. Sseven fund houses, including HDFC MF, ICICI Prudential MF and Reliance MF have written to the company asking it to reconsider this step which in their opinion would cause certain constraints where sharing of profits is concerned.

Investors feared that the new Suzuki funded plant will mean it would be more profitable for the Japanese automaker and Maruti Suzuki would not be the one reaping benefits of rising domestic sales.

The plan states that Maruti will be purchasing vehicles produced by Suzuki at the new plant and sell these in the markets as against the current situation where Maruti itself produces and sells their own cars.

Though Maruti Suzuki will continue production from its two plants in Manesar and Gurgaon, which have a combined capacity of 1.5 million units per annum, added numbers will come from the new Suzuki plant and stockholders fail to see how this will benefit India’s automaker in the long run. The new Suzuki plant is expected to commence production in 2017 and will have an initial annual capacity of 100,000 cars, all of which will be supplied to Maruti.

Concerns over new Suzuki plant in Gujarat caused Maruti Investors to protest against this new plant. They fear this agreement will not benefit Maruti in any way.