Maruti Suzuki India Ltd (MSIL) announced on Tuesday that its proposed manufacturing plant in Gujarat would be built by parent Suzuki Motor Corporation (SMC) as its wholly-owned subsidiary. The firm had earlier planned to build the facility on its own and acquired land for the project.
Suzuki Motor Corporation chairman Osamu Suzuki announced here that the company will be called Suzuki Motor Gujarat Private Ltd (SMGPL), which would be registered by April this year, and would exclusively manufacture and sell vehicles to MSIL. "The company will have a start-up capital of Rs 100 crore and will not be listed on the stock exchanges," Suzuki said. The decision was taken in a board meeting held today.
Both investors and analysts, however, questioned the rationale behind the move. The company's stock fell over 9 per cent. The board of Maruti Suzuki had, in October 2011, approved the purchase of land in Mehsana, Gujarat, for further expansion of manufacturing facilities. Around 1,190 acres of land were acquired the plant for around Rs 250 crore but the expansion of facilities were put on hold due to adverse market conditions.
"The original intention was that Maruti would do the expansion. The option that Suzuki gave us was a better one. The board has accepted the proposal. It is fundamentally a more attractive proposition than our own investment. As part of the arrangement, the land for the project would be leased by MSIL to the subsidiary company to establish the production and related facilities. Maruti Suzuki would enter into a contract with SMGPL under which all production in the subsidiary company would be in accordance with the requirements of MSIL. The price of vehicles sold to MSIL "would include only the cost of production actually incurred by the subsidiary plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements (that is depreciation costs)," MSIL said.
MSIL chairman RC Bhargava said that both the companies will benefit with the arrangement. "Suzuki's plan to invest in the facility would gives us the strength to invest our own funds for strengthening its marketing network, product development and R&D. In the meantime, we can also earn an interest of 8.5 per cent on our cash reserves," he said. "Suzuki has considerable cash reserves but the interest on capital in Japan is very low. By investing in the Gujarat facility, SMC would stand to gain from the profits realised through increased sales of vehicles made by the Indian subsidiary," Bhargava added.
MSIL Q3 net up 36% at Rs681 cr
New Delhi: Maruti Suzuki India has posted a 35.87 per cent increase in net profit to Rs 681.15 crore for the quarter ending December. The company had posted a profit of Rs 501.29 crore in the corresponding period of the previous financial year. ENS
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