The Telegraph
Wednesday , January 29 , 2014
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Suzuki to steer Gujarat plant

New Delhi, Jan. 28: Suzuki Motor Corporation of Japan will invest $488 million (about Rs 3,050 crore) to set up a car factory in Gujarat, which was originally proposed by Maruti Suzuki India.

The surprise announcement dented the Maruti scrip 8 per cent, its biggest fall in a year-and-a-half.

The Suzuki investment in the Mehesana plant will be through Suzuki Motor Gujarat, a new subsidiary. The plant will be ready by 2017 and supply cars exclusively to Maruti Suzuki India.

Maruti chairman R.C. Bhargava said this would allow them to focus on product development and marketing.

“The original intention was that Maruti would do the expansion. The option that Suzuki gave us was a better one. The board has accepted the proposal. It is fundamentally a more attractive proposition than our own investment,” he said.

The project will create Suzuki’s first wholly owned car plant in India. The Japanese company owns 56 per cent of Maruti, India’s biggest car maker.

The plant will initially produce up to 100,000 cars a year and will be located on the land Maruti purchased in 2012 to expand its own facilities. Maruti Suzuki will now lease the land to the Suzuki unit. Work on the plant was previously on hold because of a slowdown in the domestic auto market. The decision to change the plant ownership was approved by the boards of Suzuki Motors and Maruti Suzuki.

“Four-wheeler passenger vehicles and components will be manufactured at the Gujarat plant,” Suzuki Motor chairman and CEO Osamu Suzuki told reporters here.

The new plant will sell cars only to Maruti at a price that will include production costs plus enough cash to cover further capital expenditure requirements, Maruti said.

Maruti logic

The company sought to allay worries over the impact on its margins from the Suzuki deal.

“The fact is that when Suzuki puts money into the Gujarat project and sells the cars to us on the basis of the pricing which I have described, our profit on the sale of those cars would be exactly the same as it would have been if we had made the cars,” Bhargava said.

“In addition, my money, which I would have invested, remains available to me, and so I can use that money to earn additional money out of that.”

Investors, however, did not take the development positively. Maruti Suzuki shares tanked 8.12 per cent to Rs 1,563.20 at close on the BSE. On the NSE, the stock fell 9.33 per cent to settle at Rs 1,543.40. The scrip was the worst performer among the blue chips on both Sensex and Nifty.

“The new subsidiary will function as a contract manufacturer for Maruti. We would indicate what products should be manufactured and in what numbers. The subsidiary will sell products only to Maruti,” Bhargava said.

He said Suzuki was in a position to raise funds more cheaply. Maruti, on its part, would focus on marketing and sales activities as well as research and development.

“Suzuki wants to create a win-win situation for all shareholders. Suzuki’s low cost of capital is another reason for investment. Both companies will share the benefit of the Gujarat plant.”

According to Osamu Suzuki, “Maruti can invest surplus cash in expanding marketing network. The current network can do 1 million units, but it has to increase to 1.5 million or 2 million. It needs to be doubled.”

Suzuki can extend “co-operation in production” so that Maruti can focus on network, he added.

Frown factor

Analysts said the move was unusual for Maruti and expressed some concerns that sourcing vehicles through the Suzuki unit instead of making them itself would hurt Maruti’s margins.

“It’s positive in the near term for Maruti Suzuki because cash is getting conserved,” said Rohan Korde, an analyst with Anand Rathi Securities Private Limited.

“But in the longer term once the plant’s operations start, then EBITDA (earnings before interest, tax, depreciation and amortisation) margins may be hurt because this is contract manufacturing being done by Suzuki’s subsidiary.”

Report card

Meanwhile, Maruti today reported a 4.4 per cent drop in total vehicle sales in the third quarter of this year compared with a year ago.

Net income declined 3 per cent to Rs 10,619.68 crore from Rs 10,956.95 crore a year ago.

Net profit, however, rose to Rs 681.15 crore, a 35.9 per cent increase from Rs 501.29 crore in the corresponding previous quarter as favourable foreign exchange rates and cost reduction efforts offset a fall in sales.

The company’s market share in the country stood at 42.8 per cent, a gain of 2.5 per cent over the third quarter of 2012-13.

“Its results were in line with estimates on the topline and operating margins front but the bottomline came below our expectations,” said brokerage