With a pinch of salt

But the Maruti-Suzuki joint venture issues won't hit bullish earnings estimates for 2 years

Maruti and Suzuki's "amicable solution" has been taken with a pinch of salt by the markets, what with the Maruti stock dropping around 2 per cent despite getting a 70 per cent stake in the proposed car assembly JV. It's easy to understand this.

First, non-promoter shareholders will effectively have only a 19.25 per cent stake in the JV, instead of the 27.5 per cent exposure in case the new assembly unit was started under Maruti.

More importantly, because the new car assembly is structured as a JV, its books of accounts needn't be public. This is perceived as a big negative, as it would not be clear how much royalty the JV would pay Suzuki, or how much marketing margin Maruti would enjoy for distributing the cars produced in the JV. Transfer pricing would certainly be the key concern when the two JVs start functioning.

The excuse given that Maruti has cash worth Rs 2,000 crore, much less than the Rs 6,000 crore funds needed for all the investments planned also does not hold. The Rs 6,000 crore will be deployed over the next five years.

And Maruti, with an annual free cash flow in the region of Rs 1,000 crore, would certainly have been capable of making funds available from internal accruals itself.

The winner really is Suzuki Motor Corporation which will effectively have a 67.8 per cent stake in the car assembly JV and a 77.5 per cent in the diesel engine unit, much higher than the 54 per cent stake it currently holds in Maruti.

Things may not get much worse for the Maruti stock, however, as the JVs (expected to start around FY07) will not impact the bullish earnings estimates for the next two years.

Sebi ruling

The recent Sebi penalty order on DSQ has brought to light some interesting facts. First, it appears that DSQ acquired a foreign company and from what SEBI states, the whole acquisition was reportedly questionable, with inconsistent documents.

Since the acquisition was against issue of shares, these shares could very well have found their way into the markets. If the allegations are correct, one way to look at the whole thing is that shareholders bought shares which were originally issued for nothing - much like currency. The amount of acquisition - and therefore the value of shares issued in consideration - could run into hundreds of crores.

In another reported instance, the company made a preferential issue to a foreign entity. SEBI has held that the foreign company was allegedly a front for DSQ's promoter.

The problem reportedly is that one crore shares were issued and only a tenth of the value was actually paid to the company. However, these shares found their way into the market as fully paid up shares. Needless to say, investors who ended up buying these shares would have lost heavily.

Sebi has ordered the Dalmias to buy back 1.3 crore shares which came into the system in this manner. However, what needs to be kept in mind is that some investors have bought these shares at prices as high as Rs 2500 per share. It's no point paying them current prices.

Power equipment manufacturers

Shares of power equipment manufactures have risen sharply in recent times "" Cummins India has appreciated around 16.3 per cent over the last 3 weeks, while Alstom has moved up 11 per cent and BHEL has appreciated 6.5 per cent.

Why have these stocks moved up? Private companies have recently raised debt worth more than Rs 20,000 crore in a bid to set up projects with a generating capacity of around 6,000 MW. This will result in a substantial boost in sales of power equipment for these leading suppliers over the next 6-20 months.

The anticipated new orders would improve the existing healthy order books of power equipment manufacturers "" BHEL's outstanding order book amounted to approximately Rs 28,000 crore at the end of June 04, a 70 per cent year-on-year growth, while ABB's has grown 21 per cent to Rs 1299.4 crore and Alstom's has grown to Rs 1360.2 crore in June 2004, from Rs 809.3 crore at the end of March 31, 2003.

Moreover, the price of the key input, steel, has been recently reduced by major suppliers by between Rs 500 - Rs 2000 per tonne and this should certainly help the profitability of power equipment manufacturers.

Also, the UPA government has laid emphasising on rural power projects and once these projects start getting implemented, one can expect a further improvement in the order books of power equipment manufacturers.

With contributions byMobis Philipose, Nikhil LohadeandAmriteshwar Mathur