The Telegraph
Saturday , June 7 , 2014
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Savings logic for Maruti Gujarat deal

Mumbai, June 6: Maruti Suzuki India Ltd, the country’s largest car maker, tried to quell minority shareholders’ resistance to its hugely contentious contract manufacturing deal with a fully-owned subsidiary of parent Suzuki Motor of Japan by insisting that it could end up with a financial saving of as much as Rs 10,500 crore in the initial period of 15 years.

In an investor presentation made today, Maruti Suzuki India Ltd (MSIL) said savings estimate had been predicated on a post-tax return of 8.5 per cent per annum during the initial 15-year period.

The contract manufacturing period with the Gujarat-based subsidiary will be automatically extended by another 15 years after the expiry of the first phase unless both parties agree to terminate it.

After the expiry of the 30-year period, the two parties — MSIL and Suzuki Motor Gujarat Private Ltd (SMG) — may agree to extend the contract manufacturing arrangement.

The investment in SMG has been estimated at Rs 18,500 crore, which will be financed out of equity investments by Suzuki Motor of Japan and accumulated depreciation.

Minority shareholders were horrified when Suzuki Motor of Japan floated the idea since they felt that it would turn MSIL into a mere marketer of cars and considerably devalue the car maker’s financials, thereby impacting the market value of the stock.

MSIL has an installed capacity to manufacture 1.5 million cars at Gurgaon and Manesar in Haryana where it isn’t possible to create additional capacities “due to various constraints”.

The Suzuki presentation attempted to quell those fears by insisting that the contract manufacturing would work on the principle that SMG would “not make any profits or losses”.

The no-profit, no-loss principle means that the price at which the various car models are supplied to MSIL will be adjusted annually.

The term sheet of the contract manufacturing agreement (CMA) that if SMG closes the year with any profits, the prices of the products it supplies to MSIL will be reduced in such a manner that the Gujarat entity complies with the no-profit and no-loss principle in the immediately following financial year. Alternatively, if it suffers a loss in any year, product prices will be accordingly revised upwards.

Land required for the car project will be leased out by MSIL to the Gujarat subsidiary of Suzuki Motor of Japan. The lease will be co-terminus with the contract manufacturing agreement.

The lease rent will be reviewed every three years. The hike in the lease rent will be capped at 15 per cent of the prevailing lease rent, the documents showed.