MUL to have total capacity of 850,000 units

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Merger reasons

The Government

in 2004 held an 18 per cent stake in Maruti, of which it sold 8 per cent in the beginning of 2006, thereby, reducing its "influence on decision-making" in the company. Analysts state that Suzuki may have been wary of Government control in the company given the history of spats between the two.

New Delhi, April 15

The announcement of the proposed merger of Maruti Suzuki Automobile India (MSAIL) with Maruti Udyog has eased concerns about the roadmap for future product rollouts by the latter.

MSAIL's car plant, which is to be operational by the end of the year, would have an initial capacity of 100,000 units and 250,000 units by 2008.

This would provide Maruti a total capacity of 850,000 units by 2008, strengthening its position both in meeting market demand and offering a large product portfolio.

Market analysts point out that the earlier announcement of the joint venture in September 2004 was amid much speculation and even protest from the Indian Government.

Reasons

Maruti's decision now to buy out Suzuki Motor Corp's 30 per cent stake in MSAIL could be prompted by two reasons.

The Government in 2004 held an 18 per cent stake in Maruti, of which it sold 8 per cent in the beginning of 2006, thereby, reducing its "influence on decision-making" in the company.

Analysts state that Suzuki may have been wary of Government control in the company given the history of spats between the two.

Prior to 2004, Suzuki had differences with the Indian Government over the appointment of the Managing Director at Maruti in 1997. Meanwhile, when Suzuki announced its intention to set up a separate subsidiary in India in 2004, the matter had threatened to snowball into a political controversy.

Burden on Maruti

Analysts further point out that with MSAIL being merged into Maruti, the requisite investment of Rs 1,524 crore to set up the car plant will have to be borne entirely by Maruti.

MSAIL, which has an equity capital of Rs 40 crore, has already raised some debt for the new car plant project. However, so far Rs 200-300 crore have been spent on land and machinery.

Apart from equity capital, the balance has come from internal loans from Maruti, as well as syndicated loans organised by Japan Bank of International Co-operation. Further, post-merger, Maruti's debt-equity ratio would also change as MSAIL's debt will move to Maruti.

Maruti intends to use its surplus cash reserves to fund the purchase of Suzuki's stake in MSAIL.

Meanwhile, Maruti has formed a five-member committee to decide on the price at which it would purchase Suzuki's stake in the joint venture.

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(This article was published in the Business Line print edition dated April 16, 2006)
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