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S. Muralidhar

THE imbroglio between the Government and Suzuki Motor Corporation (SMC) of Japan, joint promoters of Maruti Udyog (MUL), over the latter's investment plans in India may have been sorted out.

For the MUL shareholder, however, the long route to discerning Suzuki's game-plan has probably just begun.

All along it was assumed that the new investment would be routed through MUL, until SMC announced plans to set up a new subsidiary, for the new facilities. The news took the market and — judging by the reaction of the Heavy Industries Minister — even the Government by surprise.

Now that the air has been cleared about the equity stakes, and MUL is to hold a majority 70 per cent stake in the new car assembly unit, what prospects does it hold for the individual MUL shareholder?

The new investment plans envisage an equity capital of Rs 1,200 crore for the new car assembly unit (to be called Suzuki Maruti India Ltd) split between MUL and SMC in the ratio of 70:30.

For MUL it would mean investing Rs 840 crore for equity in the new company. The Rs 3,800 crore that the new venture will will need to set up the new car plant, and for research and development, may have to come from borrowings too.

In addition, MUL may have to invest about Rs 490 crore as its share in the proposed new diesel engine manufacturing unit to be set up under Suzuki Engineering (renamed from the earlier Suzuki Metal India).

The plant, with a capacity of three lakh engines per annum, will require a total investment of about Rs 1,000 crore.

The two partners — SMC and MUL — will hold equity in the company in the ratio of 51:49.

These investment plans could push up MUL's market share, as it can target customers in the diesel cars segment too.

The prospects for export of engines and the plans for launch of the new premium small car — Swift — could add strength to the company's overall performance in the next five years.

But that will depend largely on the demand for premium small cars, which is what is most likely to be produced at the new plant.

In the short term, the spurt in investments could affect the company's bottomline in two ways — through an increase in finance charges and a higher depreciation burden.

MUL's excellent performance during 2003-04 with a profit before tax (PBT) margin of 6.8 per cent was achieved partly due to the comparatively low fixed cost per vehicle manufactured and a nearly negligible finance cost, of Rs 45.7 crore. Total borrowings outstanding as at March 2004 were just Rs 311.9 crore.

However, since the company can generate over Rs 1,000 crore of free cash flows every year (going by last year's performance), these funds can easily be diverted towards the equity investments in new ventures.

Hence, the impact on MUL's profitability and on per share earnings may not be significant.

Also, MUL may not be required to go in for higher gearing, given the availability of such excess investible funds and given that the immediate requirement of funds will only be about Rs 1,300 crore.

Apart from the financial implications of the new arrangement between SMC and MUL, the issue to irk the shareholder will be the potential change in the ownership pattern of the country's largest car manufacturer.

Automobile companies seem to be extremely reluctant to part with equity in favour of local partners in their overseas ventures, except where it is inevitable.

Given that MUL is an exception in the industry, SMC may look at the option of shoring up its equity stake through open market purchases of the company's floating stock.

The shareholding pattern in MUL, as at June 2004, was 54.21 per cent by SMC, 18.28 per cent by the Government and, of the remaining 27.5 per cent, the shareholding by individual investors a mere 4.9 per cent.

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