Maruti Suzuki India fell 2.84% to Rs 1,614.50 at 9:33 IST on BSE after the company clarified regarding its board decision on the proposed Gujarat project.
The company made the announcement after market hours on Wednesday, 26 February 2014.
Meanwhile, the BSE Sensex was up 42.04 points, or 0.20%, to 21,029.03.
On BSE, so far 26,000 shares were traded in the counter, compared with an average volume of 91,700 shares in the past one quarter.
The stock hit a high of Rs 1,665 and a low of Rs 1,609.25 so far during the day. The stock hit a record high of Rs 1,864 on 9 January 2014. The stock hit a 52-week low of Rs 1,217 on 28 August 2013.
The stock had underperformed the market over the past one month till 26 February 2014, sliding 6.25% compared with the Sensex's 0.69% fall. The scrip had also underperformed the market in past one quarter, falling 0.08% as against Sensex's 2.75% rise.
The large-cap company has an equity capital of Rs 151.04 crore. Face value per share is Rs 5.
On 28 January 2014, Maruti Suzuki India (MSIL) had announced that it was planning to implement the expansion project in Gujarat through a 100% subsidiary of Suzuki Motor Corporation (SMC).
Following the announcement, MSIL said it received several queries from investors and media related to pricing and funding of capacity expansion in the proposed contract manufacturing arrangement.
Based on the queries, MSIL clarified that the Suzuki Motor Corporation's subsidiary in Gujarat (Sub) would operate on the basis that while it would not make any losses, it would also not accumulate any cash surpluses.
The cost of production of vehicles, produced by the Sub, would be calculated in an identical manner to that followed by MSIL in Haryana, and as would have been done if the Gujarat project had been executed by a 100% subsidiary of MSIL. This cost may be called 'C', and would not include return on investment and profits, MSIL said in a statement.
In Haryana, MSIL marks up 'C', to generate profits, which includes the return on capital employed, to arrive at the ex-factory sale price to its dealers. The amount of the mark up is determined, at all times, by market conditions. The amount of this mark up may be called 'P'. The sale price to dealers is thus C+P, the company said.
The capital expenditure needs of the Gujarat Sub would be met by the depreciation amount available with the Sub, by an amount generated as net surplus from the car pricing and by SMC infusing fresh equity, to the extent necessary. The amount of surplus added to 'C' would be such as would ensure that the total ex-factory price of cars made available to MSIL remains less than C+P. MSIL would sell the cars to dealers at C+P, the company added.
The capital expenditure needs of the Sub would be determined jointly by MSIL and the Sub, consistent with the production needs of MSIL from the Gujarat project, MSIL said.
Further, if the contract manufacturing agreement expires, and in case is not extended by mutual consent, the assets of the Gujarat Sub would be transferred to MSIL at a fair value to be determined by independent valuation, the company said.
The board of directors of MSIL had, on 29 October 2011, approved the purchase of land in Mehsana district of Gujarat for further expansion of manufacturing facilities. Following this decision, MSIL acquired approximately 640 acres of land in Becharaji and approximately 550 acres in Vithalapur. The expansion of facilities was kept on hold due to market conditions.
On 28 January 2014, MSIL said the SMC subsidiary would always remain a 100% Suzuki owned company. The board approved implementing the expansion through a 100% SMC subsidiary because it would result in substantial financial benefits to MSIL, and its minority shareholders, the company said in a statement. MSIL would enter into a contract with this subsidiary company under which all production in the subsidiary company would be in accordance with the requirements of MSIL, and the vehicles would be sold to MSIL. The Suzuki subsidiary would not sell vehicles to anybody else.
The price of the vehicles to MSIL would include only the cost of production actually incurred by the subsidiary plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements. The return on this investment for SMC would be realized only through the growth and expansion of MSIL's business, the company said.
MSIL said that the company would financially benefit from the interest earnings resulting from not investing its money in this project directly. It would also benefit because the vehicles would be sold to MSIL by the Suzuki subsidiary without any return on capital employed. MSIL would be able to avoid all risk inherent in any investment. MSIL would also retain the option of investing its own funds for strengthening its marketing network, product development, R&D and any other opportunity of growth or building strength for market leadership.
MSIL would render all required assistance to the subsidiary company for implementing this project on an arms' length basis. The land for the project would be leased by MSIL to the subsidiary company to establish the production and related facilities. The rent would be determined on an arms' length basis, the company said.
MSIL's net profit rose 35.9% to Rs 681.10 crore on 3% fall in net sales (net of excise) to Rs 10619.70 crore in Q3 December 2013 over Q3 December 2012. Higher localization, favorable foreign exchange and cost reduction initiatives by the company contributed significantly to the growth in bottom line in Q3 December 2013, Maruti Suzuki India said.
Maruti said that the company's market share in domestic market stood 42.8% in Q3 December 2013, registering a gain of 2.5% from Q3 December 2012.
Japanese parent Suzuki Motor Corporation (SMC) holds 56.21% stake in Maruti Suzuki India (as per the shareholding pattern as on 31 December 2013).
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