In this article we analyze Maruti Suzuki India’s Decision to Buy Production Facilities in Gujarat, held under Suzuki Motor Gujarat (its fellow subsidiary)
Maruti Suzuki has been the one brand almost everyone who grew up in India in the 1980s loves. And for good reason. Maruti made the dream of owning a car possible for millions of Indians.
And now when it is time for the next growth phase, there is a debate on how its proposed actions are placed vis-à-vis the interests of minority shareholders.
The debate is not on the consideration to be paid, the strategic reasons or the timeline. The issue being discussed by proxy firms and the analysts is the mode of consideration, that is, how should Maruti Suzuki India Limited pay for the plant.
Let us summarize the context quickly.
Maruti Suzuki India Limited (MSIL) entered into a related party transaction in 2014-15 with its Parent, Suzuki Motor Corporation Japan (SMC). The related party transaction outlined the investment by SMC into a production facility of upto 7,50,000 cars per annum. MSIL leased its land in Gujarat for the plant. SMC was to invest in the production facility from its own balance sheet, to manufacture and supply vehicles on an exclusive basis to MSIL, on no-profit, no-loss basis. MSIL signed up to market the entire production from the plant.
The Contract Manufacturing Agreement (CMA) was approved by majority of the minority shareholders of MSIL in 2015, after much discussion and debate.
Since then, a lot has changed in the market.
For starters, the entry level segment has degrown. This has been the traditional strength of MSIL. MSIL’s annual report for FY2022-23 outlines sub 2% year-on-year growth in this segment till 2030.
Alongside, the premium segments, including the SUV segment, have grown. MSIL’s annual report outlines 6% plus year-on-year growth in this segment till 2030.
Clearly, Indians are buying more premium cars, with this trend likely to continue.
Another clear trend is towards lower carbon emissions – ethanol blending in petrol engines, CNG, hybrid electric, and electric vehicles. This will mean multiple powertrains will coexist in the coming decade as the transition to electric vehicles plays out. MSIL has estimated that only 15-20% of its annual production will be electric vehicles in 2030.
In recent years, MSIL has lagged competition in the transition to EVs, impacting its overall market share. However, this may start reversing as MSIL readies to launch its EV in H1 FY25.
The changed market context has made the production facility under Suzuki Motor Gujarat (SMG) more relevant for MSIL. The SMG plant in Gujarat is focused on the more premium, and newly launched successful models under MSIL. Its relevance for MSIL has grown steadily as evident from the table below:
| Rs. Cr. | FY16-17 | FY17-18 | FY18-19 | FY19-20 | FY20-21 | FY21-22 | FY22-23 |
| Purchase of Goods from SMG by MSIL | 681 | 5,087 | 9,043 | 14,294 | 13,974 | 21,210 | 28,345 |
Source: Maruti Suzuki Annual Reports
View from a corporate finance perspective –
Suzuki Motor Corporation (SMC Japan) invested in the production facility at its 100% subsidiary Suzuki Motor Gujarat Pvt. Ltd. The table below outlines its investments:
| Rs. Cr. | FY14-15 | FY15-16 | FY16-17 | FY17-18 | FY18-19 | FY19-20 | FY20-21 | FY21-22 |
| Share Capital | 100 | 3,200 | 5,810 | 8,580 | 8,680 | 12,590 | 12,680 | 12,730 |
Source: RoC Filings of Suzuki Motor Gujarat Pvt. Ltd.
Had MSIL made these investments from its own cash flow, it would have lost out on the interest income from such cash on its balance sheet. By not investing in building the production plant at Gujarat, MSIL gained interest income at the treasury rate of investments. Not a small sum over these years.
At the same time, since the contract manufacturing agreement specifies the sale by SMG to MSIL will be on cost basis, there have been little, if any, profits booked at SMG. This is outlined in the table below:
| Summary Financials Suzuki Motor Gujarat Rs. Cr. | FY14-15 | FY15-16 | FY16-17 | FY17-18 | FY18-19 | FY19-20 | FY20-21 | FY21-22 |
| Net Worth | 102 | 3,210 | 5,986 | 8,687 | 8,791 | 12,688 | 12,733 | 12,757 |
| Net Fixed Assets | 0 | 3 | 2,334 | 2,941 | 6,211 | 7,111 | 7,355 | 11,218 |
| Cash Balances | 102 | 2,648 | 3,816 | 5,815 | 2,792 | 3,557 | 3,522 | 2,734 |
| Revenues | 0 | 0 | 719 | 6,617 | 11,399 | 16,969 | 15,850 | 24,440 |
| PAT | 2 | 8 | 178 | 104 | 104 | 101 | 46 | 23 |
Source: RoC Filings of Suzuki Motor Gujarat Pvt. Ltd.
View from a strategic perspective –
The decision by MSIL Board to buy out the production facility at SMG at Net Book Value is a long term positive for MSIL shareholders. This will ensure the important and future ready production facility comes directly under MSIL. MSIL be better prepared to respond to a changed market reality.
The negative still remains as another Battery Unit (under the name of TDS Lithium Ion Battery Gujarat Ltd., formerly known as Automotive Electronics Power Pvt. Ltd.) remains under the ownership of Suzuki Motor Corporation Japan.
MSIL has over Rs. 45,000 Cr. in cash available to directly pay for the SMG plant. That will be a simple transaction to execute.
If, however, the MSIL Board decides to pay the consideration as stock (thereby issuing equity on preferential basis to the Promoter SMC Japan), the short term market messaging will likely be negative. This will imply dilution for the minority shareholders, and enabling the Promoter SMC Japan to retain further upside from the growth in MSIL equity value in the future. In our calculations, if the consideration were paid as stock and not as cash, post the preferential allotment, SMC Japan’s stake will increase from the current 56.48% to about 58.32%.
For Minority Shareholders of MSIL, it is the long term picture that is more relevant. The production facility is ready, brings 750,000 units capacity directly under MSIL, at net book value.
The Minority Shareholders with a long term strategic view on MSIL should benefit from this transaction, irrespective of how the consideration payout is structured.
View of Gurvinder Juneja, Principal Officer, Fortuna Investment Advisors
A SEBI Registered Equity Focused PMS
DISCLAIMER: Invested in MSIL. This is not a recommendation to buy or sell. Please do independent analysis before taking any decision related to investments.
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