BackMaruti Suzuki to seek minority investors’ nod on Gujarat plant in October
In January, Suzuki announced that it would invest `3,000 crore in the plant and sell the cars it produces there to Maruti
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New Delhi: Maruti Suzuki India Ltd will seek the approval of minority shareholders in October to enter into a deal with Suzuki Motor Gujarat, a subsidiary of its Japanese parent Suzuki Motor Corp., that plans to build a plant in Gujarat, a senior executive at India’s largest car maker said.
Maruti will buy cars from the subsidiary, according to a plan announced in January that raised the hackles of investors and proxy advisory firms, prompting the vote.
“We have been doing road shows for investors for a while and we would go for a minority shareholders’ vote in October," chairman R.C. Bhargava said in an interview.
In January, Suzuki announced that it would invest ₹ 3,000 crore in a plant in Gujarat and sell the cars it produces there to Maruti Suzuki. That marked a significant change from an earlier plan under which the latter would have built the plant itself. The announcement raised concerns that Suzuki could sell the cars at a higher price to Maruti than it would have cost the latter to produce them itself.
Institutional shareholders such as Axis Mutual Fund, DSP BlackRock Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Reliance Mutual Fund, SBI Mutual Fund and UTI Mutual Fund opposed the plan.
In March, Maruti succumbed to pressure from investors, independent directors and market regulator Securities and Exchange Board of India, and agreed to seek minority shareholders’ approval for the contract manufacturing agreement.
On 6 June, the firm clarified to the BSE that it could earn about ₹ 10,500 crore—assuming a post-tax return of 8.5% per year during the initial 15-year period of the contract manufacturing agreement —from the total investment ( ₹ 18,500 crore) it would have otherwise had to make in the Gujarat plant. And in the event of termination of the agreement, the company added, the plant would be transferred to it at book value.
Amit Tandon, managing director at proxy advisory firm IIAS, said his firm does not have a reason to be “happy or unhappy" about the investor road shows.
“They have tried to allay fears of equity investors," he said, but added that it hadn’t addressed questions on the need for Maruti to enter the deal with Suzuki Motor Gujarat.
“If Maruti’s current return on capital employed is in the range of 13-14%, then it makes more sense to make productive use of Maruti’s cash by investing in Gujarat instead of Suzuki," Tandon, said referring to Maruti’s logic of earning ₹ 10,500 crore through post-tax return on money not invested in Gujarat.
Maruti also clarified through an investor presentation on its website that the Suzuki Gujarat subsidiary will operate on a “no-profit no-loss" basis.
Maruti owns the land on which the factory will come up, and will lease it to Suzuki Motor Gujarat. The total output of the Gujarat plant is expected to be 1.5 million cars a year.
Maruti started investor road shows in July and Bhargava said he had not come across a single “voice of dissent" so far.
“As of now, I haven’t come across any disagreement about what we have proposed," Bhargava said. “We will be able to close the deal as soon as we win the vote."
The investor protest has meant an extra six to nine months, but “I don’t think it has delayed the construction of the plant as we don’t think the market would be that big soon enough," he added.
“We are on track to meet the deadline, which is to get the plant operational by 2017."
Bhargava also said that company’s planned entry into light commercial vehicles (LCVs) will take up “a lot of Maruti’s attention" in the coming years as it plans to take Tata Motors Ltd head-on in the segment.
The company is expected to launch its first LCV in January.
The company’s LCVs will be goods carriers with a capacity of up to 2 tonnes. The company doesn’t plan to launch a passenger version of the vehicles, unlike Tata Motors, which has passenger versions of some of its commercial vehicles.
Maruti will use a separate sales network and sell 50,000 units during first year in the sub-1 tonne segment that sees sales of 250,000 units a year, Bhargava said.
“We will not be happy with anything less than 50,000 units in the first year of operation. If we manage to do that, this project will become viable."
The company will have a separate marketing model for LCVs, Bhargava said.
Maruti’s first product will be based on parent Suzuki Motor Corp.’s Carry that it sells in Indonesia, but the vehicle will be redesigned by Maruti engineers to suit the requirements of Indian roads.
The new vehicle will be available with two engines—an 800cc diesel engine and a 1,200cc compressed natural gas engine. The diesel engine will be Suzuki’s first ever and is being developed together by Maruti Suzuki and Suzuki Motor. Mint reported this first in August 2011.
According to Pradeep Saxena, executive director at consulting firm TNS Automotive, Maruti would be aiming for a 20% market share in the first year of manufacturing LCVs, assuming the market remains unchanged in terms of sales.
“Then the question is whose market share will they take away? The answer to this question, in my mind, is very difficult," he added. “As per my understanding, the way Tata, being a traditional commercial vehicle maker, has faced problems in selling cars, Maruti, which is known for making cars, will face the same problem in selling cargo trucks. Having said that, Maruti’s sales and service network will always be a plus point for them."
Bhargava said the company is targeting high single-digit growth in the current fiscal year even as key economic fundamentals continue to be weak.
“We aim to grow at 8-9% this fiscal...I think that should be realistic," he said.
Maruti sales grew 0.25% during the fiscal year ended 31 March; the overall passenger vehicle industry declined 6.05%.
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