Fund houses may ask Sebi to protect interest of Maruti investors
Top fund houses in India plan to approach Sebi, seeking capital market regulator’s intervention to protect the interests of minority shareholders.
In a letter to the stock exchanges on Thursday, Maruti clarified that it will have to share the net surplus generated by the sale of vehicles from Suzuki’s Gujarat plant to fund future capex needs. The fund houses and other investors believe that clarification issued by Maruti Suzuki, the de facto play on the Indian automobile industry, is more of platitudes and that in the long run Maruti has much to lose than to gain by transferring the Gujarat plant to Suzuki.
Fund house officials, who did not want to be named, said that they will now approach Sebi to address their concerns. Seven mutual funds including ICICI Asset Management Company, Reliance Asset Management Company UTI, HDFC and SBI Asset Management companies had recently written to the Maruti Suzuki’s management, saying that the proposed move was not fair and not in the interest of local shareholders. They said that it will lead to an erosion in the company’s value.
Reflecting the concerns of investors, the Maruti stock lost 4.5% to close at Rs 1,586, a share on the BSE on Friday, the lowest close in one month. The market cap of India’s biggest car maker has lost Rs 7,700 crore since January. The stock is likely to be under pressure as analysts continue to debate on the mark-up percentage that the manufacturing entity will keep to maintain a robust operational performance.
While an earlier notification said that Maruti was expected to bear only the cost of production and depreciation expenses of the Gujarat plant, the new clause which provides for deploying funds generated through the Gujarat plant to fund Suzuki’s capital expenditure has added another layer of invisible costs. The company’s clarification on Thursday has caused more dismay and confusion among investors than its original intention to explain and simplify the new structure, fund managers and analysts said. The most disruptive element from a Maruti shareholder's perspective would be the percentage of margins to be ploughed back to the Gujarat plant to fund incremental capital expenditure requirement for the car maker.
Among the three sources of financing, the capital expenditure of the Gujarat plant includes the mark-up levied on Maruti Suzuki. It is negative on two counts. Firstly, investors did not reckon any mark-up to be included in the transfer pricing earlier. Secondly, it only factored the cost of production and depreciation to be charged to Maruti Suzuki. The inclusion of mark-up now implies that vehicles made at Gujarat plant will have lower margin then the existing facility in Haryana. Thus, higher the amount beyond 33% of net surplus, it would lower margins for Maruti. The company’s statement did not elaborate on the how the markup would be calculated.
A CLSA note by analysts Abhijeet Naik & Nitij Mangal after the clarification was issued to the stock exchanges said that if incremental capital expenditure requirement in Gujarat over FY20-24 is split 50-50 between Suzuki an Maruti, it would imply that the Gujarat plant would need to charge 4% of revenue as mark-up on vehicles on Maruti over and above the depreciation charges. In this scenario, the margins accruing from vehicles produced in the Gujarat plant would be on an average 6% lower than the Haryana plant. Even the clarification on the transfer of assets in Gujarat at fair value to Maruti after 15 years, if the contract is not renewed, will add to investor concerns, given that it would be construed as an indirect route to increase the holding in the company. This instance could be quite similar to what eventually happened in Suzuki Powertrain in June 2012, which resulted in the Japanese parent’s shareholding going up by 2%.
The statement has also been silent on two critical issues. One, what would happen in case demand is lower than production. What would be critical in such a scenario is clarity on which of its subsidiaries will bear the burden of reducing production. Secondly, determining the precedence of capacity utilisation and the vehicle models to be manufactured from which plant will be another moot point to ponder over.
The basic question still remains unanswered: What merits the setting up of a new plant under the aegis of Suzuki considering that Maruti has strong cash surplus. Is there a real advantage, when it appears that most officials of the new entity are expected to be drawn from Maruti, especially when even the vendor sourcing would be done by the Indian entity.
Jefferies analyst Govindarajan Chellappa and Rajasa, in a note written on Friday, said that “investors worried about Maruti's independence today. This is hardly reassuring. We wonder why this structure is needed in the first place. If Suzuki has excess cash on its balance sheet which it wants to utilise to help Maruti, there are other cleaner ways to extend a loan or give one-year credit on royalty”.