Maruti Suzuki

The stock rose when the Q3FY14 numbers broke out but once the internals started emerging, the stock tanked despite the stable set of numbers. This was because the market was unhappy with the expansion of its Gujarat plant; this is to be funded through Suzuki’s subsidiary. The Mehsana unit will now become a wholly owned subsidiary of Suzuki.  And Suzuki is expected to invest Yen 50 billion in this expansion. The market was perturbed because this means more benefit to Suzuki, capping direct benefit to domestic plant. The perception is that royalty paid by Maruti to Suzuki as such is abnormally high and with Suzuki now funding this Gujarat expansion, with no room left to further hike royalty, Suzuki will stand to gain much more, capping the upside for the future for Maruti.

Why is Suzuki undertaking the expansion if it is not earning any profit? Suzuki will earn 17% ROCE on the Gujarat plant and this plant will have zero cash flow. Pricing of cars by Suzuki to Maruti will include cost of manufacture plus capex.  Maruti has explained that it will earn exactly the same money which it would have earned, had it invested in the plant.  Suzuki Japan has cash reserves of Rs.25,000 crore and given the lower than one percent interest rate and very few investment options in Japan, this investment in Gujarat, as per Maruti made more business sense. The fund houses are pretty unhappy about this development and all around seven of them have raised the red flag.

In the midst of all this, the Q3 numbers which came in pretty good, were completely sidelined. The market was expecting Suzuki to hike its stake in the company and instead, this arrangement unfolded, which was another dampener for the stock. 

In Q3FY14, despite selling 4% (YoY) lower number of vehicles, exports falling 39%, and net sales coming in at Rs.10620 crore, down 3%, the company posted a 36% jump in net profit at Rs.681 crore. The company has stated that higher localization, favourable forex earnings and cost reduction initiatives is what contributed to the profitability, more than operational efficiency. Its market share for the quarter was up 2.5% to 42.8% (YoY).  Company currently has cash reserves at Rs.7,300 crore.