BackMaruti cash surplus plans go beyond Suzuki’s Gujarat factory
Maruti also plans to buy real estate for dealers in India and build factories for parent Suzuki
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New Delhi: Maruti Suzuki India Ltd, the country’s largest car maker, plans to draw on its cash reserves to buy real estate for dealers in India and build factories for its Japanese parent Suzuki Motor Corp. in emerging markets like Latin America and Africa—moves that are likely to dismay its investors.
The company, in which the Japanese car maker owns a 56.2% stake, will also invest a part of the reserves, amounting to ₹ 7,500 crore, in mutual funds, debt funds and fixed maturity funds, said two people familiar with the development. Details of the planned investments are still being worked out and will be submitted to the board in April, they said on condition of anonymity.
Chairman R.C. Bhargava confirmed that the company was considering the plans, saying: “Yes, these are some of the options available. But the company board will have to take a final call."
Maruti is aiming to put idle cash to use and also strengthen it sales network to maintain leadership in the Indian market, in which it sells four out of 10 cars.
These plans come on top of an announcement in January by Suzuki Motor that it would invest ₹ 3,000 crore in a plant in Gujarat and sell the cars it produces 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.
Maruti owns the land on which the factory will come up, and will lease it to a wholly owned subsidiary of Suzuki’s, called Suzuki Gujarat. A group of fund managers then wrote to Bhargava, asking the company to reconsider the deal because it was unfair to the company’s shareholders.
Minority investors are now in the process of filing a complaint with India’s capital markets regulator, an official at the Securities and Exchange Board of India (Sebi) said on Wednesday, requesting anonymity.
While Sebi does not have the power to stop the deal, it will take action to protect the interest of minority shareholders, the official said, adding that one option available to Maruti is to compensate them.
On Monday, mutual funds, along with other minority shareholders, wrote a second letter to the company, saying they may lodge a complaint with the Company Law Board if Maruti does not alter its Gujarat plan.
“...the decision of the board of directors of MSIL to let Suzuki Motor Corp. implement the Gujarat project through a 100% subsidiary of Suzuki instead of MSIL undertaking the project will over time convert MSIL into a shell company. This clearly is not in the best interest of MSIL and its shareholders and is in fact significantly detrimental to them," the letter said. The Economic Times reported the letter in its Tuesday edition.
Investors have in the past also raised questions about Maruti’s cash reserve of ₹ 7,500 crore, which were originally meant to be invested in the Gujarat plant.
Suzuki Motor’s management then clarified that on account of cheap money being available in Japan and no major avenues existing for investment, it was prudent for the Japanese car maker to invest in the Gujarat plant via a 100% subsidiary.
The board of Maruti Suzuki will meet on 15 March to discuss its operational plans for the next fiscal year. The board has sought from the management details about the taxation structure of the contract manufacturing deal with Suzuki Motor, and legal opinions on it, which will be taken up at the meeting, a board member said on condition of anonymity.
Another board member, who also spoke on condition of anonymity, said he was of the view that Suzuki should not take any return on equity for the investment in Gujarat and Maruti should be handed over the depreciated assets after 15 years, when the contract expires.
The latest plans to invest in real estate for dealers and building factories overseas for the parent have not pleased analysts.
“The return on equity (RoE) will be far lower, in high single digits, if this money is spent on real estate and overseas operations," said Mitul Shah, an analyst at Karvy Stock Broking Pvt. Ltd, a Mumbai-based brokerage.
According to Shah, the RoE will be in the range of 15-16%, if Maruti invests the money in its core business.
“Even if we take into account the volumes that will come from the exports markets and enhancement of marketing and sales network in India, the return will not be very substantial," Shah said.
According to Amit Tandon, managing director of Institutional Investors Advisory Service, a corporate governance advisory, the move would mean that Maruti shareholders stand to lose out on the incremental returns that investing in core operations would generate.
“If Maruti invests its ₹ 7,500 crore in the business instead of investing it in securities, it would get a much higher return, because Maruti’s RoI from core operations is much higher than its investment yield," Tandon said.
Bhargava of Maruti Suzuki seemed to be firm about going ahead with the plans, subject to board approval.
“If some of the investors have certain kind of attitude, how does it impact us? I am here to do my business in a manner in which all of us are benefited," he said.
Investor concerns haven’t dented Maruti’s stock rating. Out of 65 brokers that track the stock, as many as 41 have a “buy" rating on it, 14 “hold" and only 10 a “sell". This is not strikingly different from 27 January, a day before the deal was announced, when as many as 46 brokers had a “buy" rating on the Maruti stock; nine recommended “hold" and only eight rated it “sell".
Since 28 January, Maruti shares have risen some 13% compared with a 5.53% gain for the BSE’s benchmark Sensex. On Wednesday, Maruti’s stock rose 1.54% to ₹ 1,782.95 at 12:20 p.m. while the BSE’s benchmark Sensex gained 0.45% to 21,924.24 points.
According to one of the two people cited above, Maruti Suzuki will tweak its business model for sales by buying land in different parts of the country and then leasing it out to its dealers.
“The vision is definitely to strengthen our leadership position in the market. With land prices appreciating, the management is of the view that buying land for a dealer on its own may become a costly proposition in future. So now the company will buy land and lease it out to prospective dealers," this person said.
Meanwhile, the Maruti Suzuki board is expected to give its final approval to the marketing tie-up with Suzuki Motor announced in January before 30 April. The Japanese auto maker’s chairman Osamu Suzuki has expressed a desire to start the new Gujarat subsidiary by the end of April.
The company would look to wrap up the deal before new regulations unveiled by the capital markets regulator Securities and Exchange Board of India take effect on 1 October, requiring the approval of minority shareholders for such transactions involving related parties.
Anirudh Laskar and Ragini Verma contributed to this story.
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