Maruti Suzuki's fair value of cash reserves swells 20% to Rs 340 billion

Kenichi Ayukawa, managing director and chief executive officer of Maruti Suzuki, the country’s biggest carmaker, had an additional issue to address during his message to shareholders in the latest annual report. 

Besides summarising the year’s performance and shedding light on the outlook, Ayukawa tried to allay shareholder concerns on the mounting cash reserves of the company. 

“I know that shareholders are curious to know our plan on how the cash reserves will be utilised,” said Ayukawa. During his tenure, the firm saw an unprecedented growth in its market share to over 52 per cent, became the nation’s most-valued automobile business and also changed the perception of being a small carmaker. This was the first time that Ayukawa was taking up at length the issue of burgeoning cash reserves. 

The trigger: Fair value of cash reserves stood at a record high of almost Rs 340 billion (approximately $4.87 billion) as of June 30 about 20 per cent higher compared to the figure in the previous year. If one divides this cash by the number of shares, it gives a per share cash of Rs 1,125 on a stock price of Rs 9,249. No other auto company in India has so much cash. The company that comes closest to Maruti Suzuki is Bajaj Auto, with about Rs 155 billion on its books. 

Ayukawa went on to say that the company has been ‘sensitive’ to shareholders’ expectations and accordingly revised the dividend pay-out ratio to 40 per cent (of the annual profit) in FY17 from 30 per cent in the previous year. In FY18, Maruti Suzuki paid 38 per cent of the Rs 77 billion profit in dividends which worked out to a record Rs 80 per share. He elaborated the virtues of holding cash in a sector like automobiles. 

“I would like to draw your attention to the fact that the automobile business is capital-intensive and cyclical in nature. It is prudent to keep some cash, especially at a time when the technological landscape is changing very fast, making the business environment quite uncertain and unpredictable. A resourceful company has more freedom in dealing with unexpected challenges,” he added. However, going by the events in the last five years, it is amply clear that the responsibility to expand production in India as well as investment in emerging technologies is being steered by the parent company, Suzuki.

Suzuki sits on an even larger cash pile of about $8 billion (Rs 558 billion). This is after making investments of Rs 134 billion in setting up a unit in Gujarat which sells vehicles to Maruti. Suzuki, along with Toshiba and Denso, is also investing Rs 11.50 billion in Gujarat to set up a lithium ion battery unit, which will cater to Maruti Suzuki’s requirements for hybrid and electric cars. 

Maruti’s areas of investment have been limited to R&D, product development and network expansion. The company is investing in purchasing land parcels for use by future dealerships. An amount of Rs 10 billion could be invested in land during FY19. 

An analyst said it makes sense for Suzuki to do the lion’s share of the investment in India. “The cash that Maruti Suzuki holds can keep on generating higher returns compared to Suzuki’s cash in Japan. Moreover, Suzuki benefits from any growth in revenue and profitability of Maruti Suzuki in the form of royalty and dividend,” he said.  Maruti Suzuki, Suzuki's most profitable subsidiary, earned over Rs 20 billion in other income last year, mainly due to appreciation in value of investments.

Another Rs 50 billion capex will go towards product development, plant maintenance and network during the year. This capex, although significant, is less than the annual profit of Maruti Suzuki.

War chest

- Cash reserves swell 20% YoY to Rs 340 bn, in spite of a rise in dividend pay-out ratio in FY17

- Firm not keen to raise dividend pay-out ratio beyond 40% of profit 

- CFO Ajay Seth says there is no proposal for a share buyback

- Maruti and parent Suzuki together hold $13 billion in cash