Maruti-Suzuki deal: Mutual fund houses plan to approach Sebi

The seven funds, including Axis Mutual Fund and HDFC Mutual Fund, claim MSIL will become a trading company in a decade. Fund houses are planning to approach Sebi in a day or two with regard to these concerns.
These seven fund houses together hold 3.93 per cent stake in MSIL, while 6.93 per cent stake is held by state-run LIC, which has also sought certain clarifications from the company on the Gujarat plant matter.

A letter the fund houses sent the company on Friday said, “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.”

MSIL had announced last month that its proposed manufacturing plant in Gujarat would be built by parent Suzuki Motor Company 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.

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,” the letter read.

MSIL chairman RC Bhargava has refuted the letter saying the investors’ figures are very high and that it will be much lower.