Proxy advisories split over Suzuki’s Gujarat plant

Our Bureau Mumbai | Updated on January 22, 2018 Published on November 24, 2015


IiAS wants Maruti to invest directly for better returns; car major says full control with itself

Proxy advisory Institutional Investor Advisory Services (IiAS) has advised its institutional clients to vote against Maruti’s plans to set up a manufacturing plant in Gujarat which would be owned by Suzuki. Brokerages and other advisories are, however, in favour of the proposal.

Shareholders nod

Maruti currently has two facilities — in Gurgaon and in Manesar, which together manufacture 15.5 lakh cars. The third proposed plant in Gujarat will be capable of making 15 lakh cars annually. This will be set up by Japanese parent Suzuki. The plant will then sell the cars at cost price to Maruti (the Indian subsidiary) and the cars will be sold as part of the Maruti product portfolio.

To facilitate this arrangement, Maruti approached its shareholders to approve a contract manufacturing agreement between the new Suzuki Motor Gujarat Pvt Ltd (SMGPL, a wholly owned subsidiary of the Japanese Suzuki) and the domestically listed Maruti, and a lease deed that allows SMGPL to develop the plant on land owned by Maruti.

The voting through postal ballot would take place till December 15 and the results will be announced on December 17.

IiAS’ open letter to shareholders published on Tuesday says Maruti still has not clarified why such a complex structure is necessary in the first place and this only complicates the company’s business model.

Lower return vs RoCE

Suzuki’s reasoning is that it has lower cost of capital than Maruti, “implying that Maruti would generate better returns investing its cash surplus in India,” IiAS said. “Maintaining the excess liquidity in the form of an investment portfolio is detrimental to shareholder interest as Maruti’s investment portfolio has generated returns significantly lower than the company’s return on capital employed (RoCE),” it added.

According to the IiAS analysis, Maruti Suzuki estimates earnings from not investing in the Gujarat plant at ₹10,500 crore over a 15-year period, assuming a post-tax return of 8.5 per cent a year. “But, in the recent past, Maruti’s yield on its investment book has been around 8 per cent at pre-tax levels. Further, Maruti’s RoCE was between 15-16 per cent in 2014-15 compared with 10-11 per cent in 2011-12.

IiAS added that in 2014-15, Maruti outperformed its benchmark BSE Sensex which registered a median RoCE of between 8-10 per cent in the same period. The fact that Maruti holds an investible surplus of ₹12,640 crore and a formidable distribution network implies the company can afford to build the Gujarat plant, the advisory added.

Cost-cut move: Maruti

In response to a draft version of Tuesday’s note, Maruti Suzuki India replied that Maruti is a Suzuki subsidiary and the companies work in tandem to reduce Maruti’s overall costs. Additionally, the arrangement “will bring ₹8,000-10,000 crore of FDI into India at zero cost to Maruti.

“Maruti will have full control over what happens in Gujarat, and all the profits from the Gujarat production will come to Maruti,” the company responded.

Stakeholders Empowerment Services (SES), another proxy advisory, is, however, in favour of this related party transaction by Maruti Suzuki. In a note to shareholders, the firm said the special structure for the Gujarat plant effectively gives Maruti the same economic rights as building the new plant on its own. While SES has in the past questioned the royalty payments made by Maruti to its Japanese parent for the use of the latter’s research, it concludes that the new structure that Maruti is proposing does not adversely affect minority shareholders.

In addition, research by foreign brokerages — including CLSA, Credit Suisse, Goldman Sachs, Deutsche and UBS — have unanimously given the proposal a thumbs up. UBS believes the contract manufacturing structure for Gujarat is “akin to self production” by Maruti.

Published on November 24, 2015
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