Shares of Maruti Suzuki India Ltd (MSIL) took a drubbing on Tuesday with investors frowning upon the proposal to implement its expansion plan in Mehsana district in Gujarat through a 100 per cent subsidiary of its parent company.
But what would have weighed with the investors was also the fact that the zoom in net profit that the company witnessed in the third quarter of the current fiscal had come due to external factors such as a favourable exchange rate and cost reduction, rather than due to higher sales volume.
In fact Maruti Suzuki India, in a press release, went to great lengths to explain the advantages of the route it had taken to implement the Gujarat project, for which it had acquired nearly 1,190 acres in Becharaji and Vithalapur. The expansion plans were deferred because of ‘market conditions’.
MSIL said it had recently received an ‘attractive proposal’ from its parent Suzuki Motor Corporation (SMC) for executing the project through a 100 per cent Suzuki subsidiary that would “always remain a 100 per cent Suzuki-owned company”, it said in a press release filed with the stock exchanges.
MSIL argued that the price of vehicles to MSIL would include only the production cost plus ‘just adequate cash’ (net of all tax) to cover incremental capital expenditure needs. SMC would realise return on its investments only through the growth and expansion of MSIL’s business. As MSIL would not invest its own money on this project, it would benefit financially from interest earnings and would also gain from SMC subsidiary selling to it without any return on capital employed.
The company would also be able to deploy its own funds in activities such as strengthening its marketing network and product development. MSIL would provide all assistance to the subsidiary to execute the project ‘on an arm’s length basis’. It would lease the land and charge rent for it on an ‘arm’s length basis’.
But this move did not appear to have impressed investors and the stock was under pressure even as Maruti’s top brass at a press meet explained the logic behind the move. The stock, which had opened at ₹1,715 on the NSE today and touched a high of ₹1,751.50, fell to a low of ₹1,540.40 before recovering marginally to ₹1,543.40 at the close, a loss of ₹158.90 or 9.33 per cent. In fact, the stock had lost about ₹208 from the high it had touched at the close. The trading volume was a high 65.98 lakh shares.
Apart from this decision to outsource manufacturing to a subsidiary of its parent, the Q3 sales numbers would also have weighed with investors. Maruti had reported a 4.4 per cent drop in total vehicle sales in the third quarter of this year compared to the corresponding quarter in the earlier year. It sold 2,88,151 vehicles (both in the domestic and export markets) in the third quarter of this year compared to 3,01,453 vehicles in the same quarter last year. Exports witnessed a sharper drop of 38.6 per cent to 19,966 units (32,496 units) and Maruti admitted that sales were ‘under stress’ in both the domestic and export markets during the third quarter of the year.
The net income of ₹10,619.68 crore for Q3 marked a 3 per cent decline over the corresponding quarter in the previous year (₹10,956.95 crore). The net profit, however, zoomed to ₹681.15 crore, a 35.9 per cent increase over the same period in the previous year (₹501.29 crore). Maruti attributed ‘higher localisation, favourable foreign exchange and cost reduction initiatives’ taken by it for the spike in net profit. Maruti benefited because of the falling value of the Japanese yen, but of late the yen has been gaining in value.
The company’s market share in the domestic market moved up by 2.5 per cent to 42.8 per cent in Q3 of the current financial year, the company said in its release.