Concerns over Gujarat plant put Maruti in reverse gear

Firm's shares down 7%, m-cap 11% since announcement of plan

The Maruti Suzuki stock fell about five per cent on BSE on Friday, as the company’s fresh attempts to assuage investor concerns over its Gujarat plant deal with Japanese parent, Suzuki Motor, failed to strike a chord with shareholders. Fund managers and analysts said the clarifications Maruti had made in a release on Wednesday, including on funding for the capacity expansion in the Gujarat plant, added to the confusion around the structure of the proposed transaction.

On Friday, Maruti shares ended at Rs 1,586 apiece, down 4.5 per cent from their previous close but off the day’s low of Rs 1,573. The stock has declined seven per cent since January 28, when the announcement of a wholly-owned Suzuki subsidiary for Gujarat was first made, bringing down shareholder wealth in the company by almost Rs 5,800 crore to Rs 47,918.96 crore on Friday.

Stakeholders, including leading mutual funds, have been irked by Maruti’s plans to source cars built at a new plant in Gujarat, to be constructed and operated by a 100 per cent subsidiary of Suzuki, which owns a 56 per cent stake in Maruti Suzuki. Leading fund managers, who have criticised the step, feel Maruti should have developed and operated this plant. They have questioned the logic of a new Suzuki arm doing so, even as Maruti has about Rs 8,000 crore in cash.

A senior fund manager at a leading mutual fund, which recently wrote to the Maruti management against the proposed deal, said local shareholders did not sell on Friday.

“There’s still no clarity on transfer pricing between the two entities. Also, there is no clear justification on why Maruti, with all its surplus cash, is not investing in the new plant in Gujarat,” said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance.

“The deal does not make sense for Maruti in the long term, as it will create a lot of earnings volatility for the company,” Srivastava added.

According to the latest release, the mark-up on cars sold by Suzuki Gujarat will be capped at the level of Maruti’s mark-up on cars sold by its facilities. Analysts said this could impact the company’s profitability.

“The higher the mark-up at the Gujarat facility level the lower will be operational profit at Maruti’s level. We hope to get more clarity on the potential mark-up range — it decides the gap in capital expenditure that Suzuki will fund from 2020-21,” said Morgan Stanley analysts Binay Singh and Yashesh Mukhi in a client note on the issue. The brokerage maintains an overweight on the company.

Further, Maruti said in its latest statement that Suzuki’s Gujarat subsidiary would operate in a way that it did not accumulate any cash surplus, even as it did not make any losses.

“If the contract-manufacturing agreement expires, and in case it is not extended by mutual consent, the assets of the Gujarat subsidiary would be transferred to Maruti at a fair value to be determined by independent valuation,” the company said in its statement.

“We feel this arrangement is not only worrying on the corporate governance front, but will substantially dilute Maruti’s long-term operating flexibility and competitiveness in India’s car market,” said CIMB analysts Pramod Amthe and Kunal Jhaveri in a client note.

Derivative analysts said many traders cut their bullish bets on Maruti after the share fall on Friday. “There seems to be some short-term disappointment among traders, who expected the stock to rise further. The stock had been rising for four months since October till the announcement was made,” said Amit Gupta, head of derivatives, ICICI Direct. “But there is not much downside left in the stock, as any significant dip could be seen as a buying opportunity in the short to medium term.”