Home / Market / Mark-to-market /  Suzuki’s direct investment in Gujarat plant punctures Maruti stock

Until now, shrinking demand for passenger cars was a matter of concern for shareholders of Maruti Suzuki India Ltd. But a far graver uncertainty for minority shareholders has now cropped up following the announcement that it will expand capacity through a wholly owned subsidiary of Japanese parent Suzuki Motor Corp.

Reflecting the concern, the stock plunged 8.12% to 1,563.2 on Tuesday. “Gujarat plant expansion is planned on Suzuki’s books via 100% subsidiary (which might benefit from higher margins supplying to Maruti)," Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, said in his note on the December-quarter results. “We believe there could be a derating of the stock."

The announcement has also doused hopes of the parent raising its stake in Maruti by buying back shares at a premium, which had led to a spurt in the stock price a few months ago.

The decision may seem positive in the short-term because it takes away the risk of capital being deployed in the Gujarat plant from Maruti. It may also bring in more focus on Indian operations by way of research and development support. Land is intended to be leased by Maruti to the subsidiary, which is another positive.

For the longer term, however, the negatives outweigh the positives and raise many doubts on the parent company’s intent. How will vehicles made in the subsidiary be priced when transferred to Maruti (in which Suzuki has a 56.2% stake) for marketing? Will exports, which comprise about a fourth of Maruti’s revenue and which improve realizations, be diverted through the Gujarat unit, which in turn could curtail benefits to the Manesar factory in Haryana and hence to Maruti’s profitability? Will this also hinder further localization as more auto components could be imported?

These uncertainties overshadowed Maruti’s 35.9% year-on-year jump in net profit to 681.1 crore, which surpassed street expectations. In fact, operating margin was ahead of Bloomberg’s consensus at 12.4%, driven by localization and cost reduction, which negated the impact of unfavourable foreign exchange movement. But export revenue disappointed, contracting by nearly 30% from the year-ago period, worse than domestic revenue, which was stable at year-ago levels.

A demand recovery in passenger cars is unlikely in the next six months at least. High discounts still prevail in the market. Product launches are the only way to sustain buyer interest.

While the Maruti stock had already factored in the economic factors that would impact on sales and profit in the next 12 months, the Gujarat expansion certainly puts its current 15 times price-to-earnings multiple for fiscal year 2015 earnings at stake.

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