Management Clarification Fails to Arrest Maruti Suzuki Share Price, Falls By 5%

Maruti Suzuki is a leading automobile manufacturer in India having more than 35% of the market share in the passenger car segment. The company on January 28, 2014 had announced to expand the production facility in Gujarat. However, there were some issues from the investors regarding the project. The company clarified that the Gujarat facility will be a 100% subsidiary of Suzuki Motor Corporation and it will sell the cars at a lower price than its ex-factory sales price. Suzuki will invest around Rs 3000 crore to set up the first phase of the capacity in Gujarat.

Maruti Suzuki, subsidiary of Suzuki Motor Corporation informed the exchange that it is going to enter into a contract with Suzuki's subsidiary of Gujarat. The subsidiary will produce vehicles according to the requirements of Maruti Suzuki and will sell only to them. The prices charged by the subsidiary will be the cost of production of the vehicle plus cash to cover incremental capital requirement. The return on this investment for the subsidiary will be dependent on the performance of Maruti Suzuki. The subsidiary will not be allowed to produce vehicles more than the requirement of Maruti Suzuki and also will not be allowed to accumulate any cash surplus.

This will somewhere reduce the capital expenditure of the company. Suzuki has reserves of Rs 25000 crore as per reports. The company will be able to invest this fund in product development, strengthening its marketing network, R&D and any other opportunity for market leadership. The company clarified that the Gujarat subsidiary will meet the capex requirement by the depreciation amount available with the company and also if necessary by issuing fresh equity. 

In the case of royalty, it will be paid by the Gujarat subsidiary similar to what Maruti is paying to Suzuki. The subsidiary will add the royalty in the cost of production and then will supply the vehicles to Maruti. Currently Maruti Suzuki has paid a royalty of around Rs 2450 crore which is around 5.5% of the total sales of the company in March 31, 2013.

The company also informed that if the contract expires and if not extended, then the assets of the subsidiary would be transferred to Maruti Suzuki at a fair value determined by an independent valuation. 

Suzuki will be funding the first phase of the Gujarat plant, but the second phase would be funded indirectly by Maruti through purchasing of cars and the Maruti shareholders will not have any stake in the Gujarat subsidiary. There are some uncertainty that whether the company would be thinking of plant merger or plant sales after the contract expires. Because of this, Maruti Suzuki today on BSE opened at Rs 1665 and closed at Rs 1586.30, down by around 5%.