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Business News/ Industry / Manufacturing/  Maruti Suzuki’s Gujarat plans unchanged despite opposition
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Maruti Suzuki’s Gujarat plans unchanged despite opposition

New company to be formed early next month; Japanese parent to spend 50 billion yen on the project

Maruti Suzuki India chairman R.C. Bhargava says the plan will benefit Maruti Suzuki as the company will not have to spend on building the plant. Photo: Ramesh Pathania/MintPremium
Maruti Suzuki India chairman R.C. Bhargava says the plan will benefit Maruti Suzuki as the company will not have to spend on building the plant. Photo: Ramesh Pathania/Mint

Mumbai: Maruti Suzuki India Ltd and its Japanese parent Suzuki Motor Corp. will proceed with their plans to form a new company that will contract manufacture cars for the Indian unit even as some minority investors in the local subsidiary opposed the move and plan to ask the capital markets regulator to intervene.

“The new company will get formed early next month as per predetermined plans," R.C. Bhargava, chairman of Maruti Suzuki India, said in an interview on 8 March. The new unit, called Suzuki Motor Gujarat Pvt. Ltd, will make cars and engine components and Maruti Suzuki will sell the products in India and overseas.

Suzuki Motor said it will spend 50 billion yen (around 2,956 crore today) on the project. So far, there is no change in any of the timelines regarding the various stages of the project decided earlier, Bhargava said. The new unit will start production in 2017.

Seven asset management companies, including ICICI Prudential Mutual Funds, Reliance Mutual Fund and UTI Mutual Fund, plan to approach the Securities and Exchange Board of India (Sebi) over the proposed plan to transfer Maruti Suzuki’s Gujarat plant to its parent, PTI reported on 4 March. The seven fund houses together hold 3.93% in Maruti Suzuki, while state-run Life Insurance Corp. of India (LIC) owns 6.93%. LIC has also sought certain clarifications from the company regarding the transfer of the car factory.

Bhargava said the plan will benefit Maruti Suzuki as the company will not have to spend on building the plant.

“Increasing our profit is of bigger value," Bhargava said in response to the fund houses’ plans to approach the markets regulator.

“The whole arrangement will be of substantial financial benefit to Maruti Suzuki as we are not making any investment in the new manufacturing unit," he added.

Maruti Suzuki’s business complexity is likely to increase with the new arrangement, Aditya Makharia and Arun A. Bhatia, analysts at JP Morgan in India, wrote in a 4 March report. “Maruti will purchase these vehicles based on the contract manufacturing arrangement, so we await clarity on the following—the products that will be manufactured at the new facility; production planning once the new plant commences operations, given that Maruti has facilities in Manesar and Gurgaon; the pricing of the vehicles to Maruti, as units will gradually scale up over the years (management has highlighted that the new plant will not make any losses, though it also will not accumulate any cash surpluses); and lastly, profitability at Maruti in the initial years of plant ramp-up."

Bhargava said Maruti Suzuki will not cease to be a manufacturing company and become a trading firm unlike the perception most investors have.

The move to contract manufacture cars will be detrimental for Maruti Suzuki, said Joseph George, an analyst at brokerage IIFL Ltd.

“The agreement with Suzuki reveals that it is unfavourable to Maruti versus our previous understanding. It is now confirmed that Suzuki’s subsidiary will make profit and will use the surplus to fund future expansion. Maruti’s margins and earnings will be negatively impacted in years in which the subsidiary incurs high capex and vice-versa," George wrote in a 28 February report after Maruti issued a statement sharing more details on the agreement.

Maruti shares, which fell following the announcement of the plan, rose 5.21% to 1,735.90 on Friday.

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Published: 10 Mar 2014, 12:00 AM IST
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