MSIL’s net profit and free cashflow generation will get a boost due to lower capex requirements, points out Nomura in a research note
The entire capex of the Gujarat expansion plan (1.5mn unit capacity) would be funded by depreciation and equity brought in by Suzuki Motor Corporation – Suzuki Gujarat will make zero EBIT margins. Maruti (MSIL) will not forego its profit margins for expansion at the Gujarat plant.
MSIL’s net profit and free cashflow generation will get a boost due to lower capex requirements. For Suzuki, return on Gujarat investment would be only through MSIL, which is positive for MSIL shareholders. Further, the decision to seek approval of minority shareholders ensures high standards of corporate governance. These are the observations made by Nomura in a research note on the Maruti expansion plans.
Assuming 12% annual volume growth over the long term, Nomura’s calculations suggest that Suzuki will need to invest equity of around Rs130bn over FY16-22F while the remaining Rs50bn will be funded by depreciation charged to Maruti (Nomura has assumed capex of Rs30bn for every 250,000 units).
At 13% discount rate, this Gujarat plant expansion by Suzuki implies NPV of Rs50bn (Rs160/share) for Maruti. If it is assumed that the Gujarat plant will be merged once the contract expires after 15 years at book value, then, the net benefit for Maruti shareholders would be around Rs33bn (Rs110/share), as per Nomura’s calculations (see table below for details).
Overall, Nomura feels that this is significantly positive for MSIL shareholders and it expects strong positive stock reaction.
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