Maruti Suzuki has now decided that the cost of capex would be funded by the Gujarat plant’s depreciation and only by further equity infusion by Suzuki itself and it would seek approval from minority shareholders for the deal
After a hue and cry from several investors, including minority shareholders and fund houses, Maruti Suzuki India Ltd (MSIL) has agreed to seek stakeholders nod for its Gujarat plant deal with parent Suzuki Motor Corp (SMC).
After the issue was discussed at the board meeting that was attended by SMC chairman Osamu Suzuki, the Indian carmaker decided that it would not just tweak the most contentious points -- of funding incremental capex of the Gujarat plant and transferring the plant to MSIL in case of the deal’s expiry – but also, seek approval of minority shareholders as a measure of good corporate governance.
After the board meeting in Delhi, RC Bhargava, chairman of MSIL, told reporters that "Even though not required by law, the board decided, as a measure of good corporate governance, to seek minority shareholders' approval as stipulated in Section 188 of the Companies Act 2013".
Earlier in January, acting on a proposal sent by SMC, the board of Maruti Suzuki had agreed to an arrangement according to which expansion and production of the company branded cars will be undertaken by a 100% subsidiary of SMC on plots of land the carmaker had purchased in Gujarat in 2011. The subsidiary will produce vehicles in accordance with requirements of MSIL and will be sold only to the carmaker. The price of the vehicles to MSIL would include cost of production by the 100% subsidiary and adequate cash to cover incremental capital expenditure requirements. The return on this investment for SMC would be realised only through the growth and expansion of MSIL’s business. The subsidiary will always remain a 100% subsidiary of SMC.
Investors felt that the expansion of Gujarat Suzuki plant to 1.5 million by FY2021 implies an incremental capex requirement of additional Rs12,000 crore (assuming 20% lower capex compared with the first phase on a per car basis).
"If the cash flows of the Gujarat plant have to fund the incremental capex (as mentioned in the MSIL release), this implies that the initial investment of Rs3,000 crore by Suzuki in phase I will be valued at Rs15,000 over the next six years (FY15-FY21) at cost itself. This implies an internal rate of return (IRR) of nearly 30%."
"Thus, while Suzuki is not taking cash or dividends, and the cash flows are being utilised to increase capacity, the IRR on Suzuki's phase I investment is very high and much higher than the cost of capital of both MSIL and Suzuki itself," the investors had said.
Investors of MSIL were also worried about fresh investment requirement of the Gujarat Suzuki plant. They said, "It needs to be noted that the capex of Rs15,000 crore for 1.5 million cars is only for assembly. Fresh investment may be needed in engine and transmission capacity once the surplus capacity in Maruti's existing facility in Haryana is exhausted, which can further potentially increase the IRR."
Several shareholders of MSIL, including minority stakeholders and fund houses said they were concerned that the contract for the plant in Gujarat meant the Japanese carmaker rather than Maruti would reap the benefits of rising domestic sales, at a time when India is tipped to become the world's third largest auto market by 2020. Minority shareholders hold 43.79% stake in Maruti Suzuki.
Seven fund houses, including ICICI Prudential MF, Reliance MF and UTI MF, which hold 3.93% stake in Maruti Suzuki were planning to approach market regulator Securities and Exchange Board of India (SEBI) after the car maker failed to address their concerns.
Similarly, Bengaluru-based
InGovern Research Services also had advised shareholders of Maruti Suzuki, to vote against the country’s largest carmaker's proposal to enter into contractual arrangements for expansion with a 100% subsidiary of Suzuki, the dominant shareholder in the company.
"There is no compelling business logic for such an arrangement when MSIL has the necessary capital raising ability to make investments. It looks like the SMC subsidiary will enjoy the benefits of no business risk with assured vehicle offtake by MSIL and assured return on investments, while MSIL will bear the business risk of cyclical vehicle sales, competitive pressures, pricing and cost pressures. Inventory levels, car pricing and discounts, cost increases, dealer network management, post-sale servicing, brand management would all be risks that will continue to be borne by MSIL, while the 100% SMC subsidiary enjoys an assured vehicular offtake at pre-determined prices," InGovern had said in its advisory.
Maruti Suzuki has now decided that the cost of capex would be funded by the plant’s depreciation and only by further equity infusion by Suzuki itself, Bhargava said.
