Maruti shares rally as board relents on Gujarat plant

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The Maruti Suzuki India (MSIL) board bowed to demands of institutional shareholders and decided that the entire capital expenditure for the Gujarat plant would be funded by parent firm Suzuki’s equity contribution and the plant’s depreciation.

It also decided that if the contract were to be terminated, the facility would be transferred back to MSIL at ‘book value’ as against the earlier stated ‘fair value’.

MSIL shares jumped 10 per cent in Mumbai trading as investors cheered the clarification that the parent firm would bring in funding for the project. Brokerages turned bullish on the stock after the board decided to seek minority shareholders’ approval as a measure of good corporate governance.

This means no mark-up will be added to MSIL’s cost as stated earlier, and hence, the company’s margins won’t reflect the plant’s future capex.

In a filing to the stock exchanges, MSIL said, “The board has decided, as a measure of good corporate governance, to seek minority shareholders’ approval as stipulated in Section 188 of the Companies Act 2013.”

The board meeting was held on March 15 to review the Gujarat project after several domestic institutional investors made representations with opposing views.

Mutual fund and insurance companies had written to the MSIL management and also knocked at door of market regulator Sebi, alleging that the company overlooked investor interest in allowing parent firm Suzuki Motor Corporation to take over the Gujarat project.

Surjit Arora, a research analyst for institutional equities at Prabhudas Lilladher, said, “This is a big win for the minority shareholders, as 75 per cent of them will need to approve the decision to set up the Gujarat facility as a separate unlisted entity.”

MSIL shares climbed to a 52-week high of Rs 1,909, up almost 10 per cent from their previous close on NSE, and to Rs 1,899.90 on BSE in intra-day trade. The shares later closed 7.58 per cent up at Rs 1,868.85 on BSE and 7.54 per cent up at Rs 1,869.50 on NSE.

“The entire capex for the Gujarat subsidiary will be funded by depreciation and equity brought in by Suzuki Motor Corporation (SMC),” MSIL said, adding that if both parties mutually agree to terminate the contract manufacturing agreement, the facilities of the Gujarat subsidiary would be transferred to Maruti Suzuki India at book value.

“The impact of any direct or indirect taxes on account of the contract manufacturing agreement would be assessed before finalising the agreement,” the company added.

Nishant Vass and Venil Shah, research analysts at ICICI Securities, said, “We feel the MSIL management has done well to take on board the concerns of the minority shareholders.”

“One of the major concerns was uncertainty on the ‘mark-up’ (funding from MSIL) and how it would be changed possibly to fund the capex. The removal of this mark-up leaves a significant funding gap to be brought in by the parent firm and not by MSIL,” Vass and Shah said.

Antique Stock Broking in a report said, “No mark-up will be added to MSIL’s cost (as stated earlier) and hence the company’s margins won’t reflect the plant’s future capex. This is a massive relief.”

The brokerage said the requirement of minority approval of three-fourth shareholders was a good step and it would help generate trust between the management and shareholders.

Some proxy shareholder advisory firms, however, said they might recommend to investors to vote against the revised proposal as well.

Proxy firm Institutional Investor Advisory Services (IiAS) said Maruti’s recent announcement didn’t change its fundamental objection to the deal. “The deal is unnecessary and needlessly adds to the complexity and ambiguity of the operating structure. Maruti has enough liquidity to fund the entire capital expenditure in Gujarat, and its excess liquidity will be better used if it is invested in operations,” IiAS said.

Arora of Prabhudas Lilladher said though MSIL has retained the idea of setting up the 100 per cent subsidiary of SMC, which will house the Gujarat plant, a point of debate, we believe majority of the concerns have been allayed by the board.”

Foreign institutional investors (who hold 21.5 per cent stake) would play a key role, as their stand was yet not clear, PTI said in a report.

Promoters Suzuki Motor Corporation holds 56.21 per cent stake while domestic institutions comprising mutual funds and insurance companies hold 13.98 per cent and retail investors the remaining 8.34 per cent.

On January 28, MSIL had announced the plan to implement the expansion project in Gujarat through a wholly-owned subsidiary of its parent Suzuki Motor Corporation (SMC). Following the announcement, MSIL faced the wrath of institutional and retail investors, who raised concerns over the pricing and funding of capacity expansion in the proposed contract manufacturing facility.


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