Maruti Suzuki - Gujarat Plant

Maruti Suzuki – Gujarat Plant

360 Degree Perspective

By SP Tulsian & Abhinandan Tulsian

Share of Maruti Suzuki has corrected to Rs. 1,543 on 28.01.2014, after company having announced plans to set up a new car manufacturing plant by Suzuki, Japan, being promoter of Maruti Suzuki.  We have analysed the entire move, after factoring in the Management commentary and found it to be in no way prejudicial to the interests of the company and are giving the gist and effect of this move:-

Let's have a look at  it.

1. Project -

Proposes to set up a car manufacturing plant, in Gujarat, with an annual installed capacity of 2.50 lakh cars, per annum.

2. Promoter -

This project will be set up by Suzuki Japan, as its 100% subsidiary.

3. Project Cost -

Estimated at Rs. 3,000 crores, excluding cost of land, which will be leased by Maruti Suzuki, of about 640 acres in Becharaji and 550 acres in Vithalpur, on rent to be determined on an arm’s length basis.

4. Completion -

Project is likely to be completed by March, 2017.

5. Cost over-run -

Cost over-run, if any, to be met by Suzuki, Japan, with no direct contribution to be made by Maruti Suzuki. Indian company Maruti Suzuki will not have any financial burden and commitment, of this project.

6. Estimated Financials -

1. Gujarat Plant will make 2.50 lakh car per annum, from FY 18 onwards, on 100% capacity utilisation.
2. Unit selling price is estimated at Rs.3 lakh per car. Unit realization of Maruti Suzuki for 9M ending 31-12-13 is at Rs. 3.70 lakh per car.
3. Annual Sales of Gujarat Plant (ex-factory) is estimated at Rs. 7,500 crores.

7. Tenure -

Initial agreement shall be for 15 years, between Suzuki Japan and Maruti Suzuki and can be mutually renewed thereafter.

8. Opertations -

1. Suzuki will make all the cars from this plant for Maruti Suzuki only.
2. Maruti may use this plant as export hub to western part of the World.
3. Suzuki will not be allowed to sell or be given marketing rights, from this plant, across the World.
4. Suzuki will charge cost of production actually incurred, plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements.
5. The cost of production and selling price of cars made from this plant, are assumed to remain the same, as that of Maruti.

9. Projected Financials – From FY 18 (onwards)

1. Annual Sales – Rs. 7,500 cr. (see point 6)
2. Estimated EBITDA @ 12% - Rs. 900 cr.
3. Estimated Depreciation @ 5% of sales  (as per present norms) – Rs. 375 cr.
4. Estimated Op. Profit (Being 17% of Capital Employed) – Rs. 525 cr.

10. Apportioning of EBITDA -

11. Assumptions -

1. Return to Suzuki is estimated at 5.5% (net of tax), which gives gross return at 7%, assuming tax rate of 20%.
2. Royalty payment will remain same, which is already factored in, while calculating EBITDA and OP of Gujarat Plant.
3. Maruti will continue to earn interest of 8.5% post tax per annum, on amount not deployed by them, for this plant capex.
4. PBT of Maruti will rise by about Rs. 315 crores, giving an OPM of 4.20% on sales, from Gujarat plant.
5. Financial performance of Maruti Suzuki for three quarters of FY14 is attached hereto.

12. Conclusion

• So, absolute EBITDA, OP, PBT, RoCE and EPS of Maruti Suzuki will rise, while EBITDA and OP margins will fall in percentage terms.

• We give a buy call on the stock at 1,540 per share. It may correct in the near term, due to Jan expiry reasons, but is likely to rise in Feb series and onwards.