Maruti stocks slide 4.5% as carmaker sticks to Gujarat plan

“Our job is to run the company in a competitive manner and this agreement with Suzuki will make us competitive enough in the market. We have… always protected the interest of our shareholders and we will continue to do so. There is no question of going back on this arrangement…,” said MSIL chairman R C Bhargava.

MSIL and leading fund houses are in a dispute over whether the plan will help the company. The seven funds, including Axis Mutual Fund and HDFC Mutual Fund, claim MSIL will become a trading company in a decade.

“MSIL will be sourcing 72 per cent of cars from outside transforming it to a distribution company… Trading concerns trade at significantly lower (valuations)… and this will lead to significant erosion of shareholder wealth,” the letter signed by them notes.

They have also said MSIL had more than enough cash to finance the venture and instead is paying out excessive amount as royalty to its parent Suzuki Motor Corp.

Bhargava claimed he would still have an existing capacity of 1.5 million cars “at our Gurgaon plant, which we will continue to make. There is no reason to believe that we will become only a distribution company.”

MSIL had announced last month that its proposed manufacturing plant in Gujarat would be built by parent SMC as a wholly-owned subsidiary.

The firm had earlier planned to build the facility on its own and had acquired land for the project. The markets, however, did not welcome the announcement and the company’s stock fell over 9 per cent on the day of the announcement. By Friday, the shares even after a mild recovery had shaved off 8.2 per cent from their prices.

To arrest the fall, MSIL sent a communication to the exchanges as to why the plan made sense for investors, buyers and the company. The communication was sent by MSIL on Wednesday. Thursday was a market holiday.

It had said the cost of production of vehicles at the Gujarat facility would be calcuated in an identical manner to the two Haryana plants.

But the fund houses say the arrangement would be expensive for MSIL, as the plant, going by MSIL’s projections, would be producing 1.5 million cars by 2021, needing an incremental capital expenditure of Rs 12,000 crore. This implies the initial investment of Rs 3,000 crore by Suzuki in Phase I will be valued at Rs 15,000 crore over the next six years (FY15-FY21) at cost itself.

“This implies an internal rate of return of nearly 30 per cent. Thus while Suzuki is not taking cash/dividends, and the cash flows are being utilised to increase capacity, the (returns) are very high and much higher than the cost of capital of both MSIL and Suzuki itself,” reads the letter. Bhargava has refuted the letter saying the investors’ figures are very high and that it will be much lower.