Why investors shunned Maruti stock

Parvatha Vardhini C BL Research Bureau | Updated on March 12, 2018 Published on January 28, 2014

Despite a 36 per cent growth in net profit in the December 2013 quarter over the corresponding period last year, investor concerns on Maruti Suzuki India’s plans for its Gujarat plant saw the company’s stock lose 8 per cent on Tuesday.

Earlier, the company had said a wholly-owned subsidiary of Japan’s Suzuki Motor Corp would set up the proposed plant in Gujarat that would solely make vehicles for the Indian carmaker.

Maruti has also indicated that the price at which it will acquire cars from the Suzuki subsidiary will cover the direct cost of production.

But since the proposed company will be an unlisted entity, one may never get to know the actual cost of production or the cost efficiencies of such an entity.

Besides, Maruti will end up making only selling/distribution margins on these vehicles.

Since Maruti’s capital invested for the Gujarat plant would only be the cost of the land it acquired, it expects return on capital to be much higher than the 17 per cent it earns now.

But once the Gujarat capacity comes on stream, the utilisation ratio between its existing plants and the Gujarat facility would depend on its product plan, and market demand for different cars. This way, the company could end up with less than optimal utilisation of capacity at each of its plants.

Cash reserves

Third, the resulting jump in cash reserves in future years as a result of this plan, may not lead to investors getting handsome dividends.

The company, which currently has cash reserves of about ₹7,500 crore, is looking to invest more in research and development and building its marketing network.

With the Gujarat plant originally envisaged for exports, Suzuki may also make India its export hub through this move. Cash reserves could be used for furthering the company’s international footprint.

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Published on January 28, 2014
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