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Maruti skids 8% on Gujarat plan; stock losing blue-chip status?

The subsidiary would be a manufacturing unit, and Maruti would be its only customer. Experts see this as an issue with parent firm.

ET Online|
Updated: Jan 28, 2014, 04.51 PM IST
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The subsidiary would be a manufacturing unit, and Maruti would be its only customer. Analysts see this creating issues with parent firm.
The subsidiary would be a manufacturing unit, and Maruti would be its only customer. Analysts see this creating issues with parent firm.
NEW DELHI: Maruti Suzuki India Ltd (MSIL) cracked 8.1 per cent on Tuesday to hit its lowest level since November 11, after the board approved a plan to set up a subsidiary in Gujarat which would be fully owned by Suzuki.

The subsidiary would be a manufacturing company with Maruti as its only customer, which most analysts think could create an issue of corporate governance and relationship with the Parent. Maruti Suzuki has decided to pursue Gujarat expansion through a 100% Suzuki subsidiary.

Brokerage firm UBS is of the view that this is again likely to create an issue of corporate governance and relationship with the parent firm. It is likely that most of the future exports could be pursued through this Gujarat plant and Maruti may make only the marketing margin.

However, MSIL clarified in the release that it would be able to avoid all inherent risks in any investment. Maruti would retain the option of investing its own funds for strengthening its marketing network, product development, R&D and any other opportunity of growth or building its market leadership.

“It is absurd to say the least because Maruti’s board and even Suzuki for that matter should not stoop down to that level. This is really very-very shortchanging minority shareholders in India and often we have seen these kinds of abuses being committed by MNCs and Suzuki should have realised more than anyone else,” said Anil Singhvi, Chairman, Ican Investment, in an interview with ET Now.

Talking about Maruti Suzuki being a blue-chip stock; Singhvi says, "how can we call Maruti now a blue-chip. I refuse to call Maruti a blue-chip stock because a blue-chip should have a parent who should realise that I have to really work in the larger interest of all stakeholders, that is blue-chip."

The stock fell as much as 9.4 per cent in trade even thought India's biggest carmaker reported a 36 per cent YoY growth in net profit to Rs 681 crore for the quarter ended December 31.

Maruti Suzuki recouped some of the losses and closed 8.1 per cent lower at Rs 1,563.20. It hit a low of Rs 1,541.25 and a high of Rs 1,750.10 in trade today. The stock trades below its 50-DMA.

MSIL, or Maruti Suzuki India Ltd, would enter into a contract with this subsidiary company under which all production in the subsidiary company would be in accordance with the requirements of MSIL and the vehicles would be sold to MSIL, Maruti Suzuki said in a filing to the BSE.

“Coming from somebody like a Maruti, it is definitely very disappointing. You do not expect these things from the bluest of blue companies and that is exactly why these stocks are also kind of taking it on the chin,” said Prakash Diwan, Altamount Capital, in an interview with ET Now.

Diwan is of the view that there is a strong possibility that it could lead to de-rating, because it cannot fetch that kind of a premium which a marquee global player would be assigned otherwise.

It is likely that most of the future exports of Maruti Suzuki, which is 56.2 per cent owned by Japan's Suzuki Motor, could be pursued through this Gujarat plant and Maruti may make only the marketing margin.
 
The parent, Suzuki, will do contract manufacturing for Maruti Suzuki at the Gujarat plant. This implies Maruti will not put any capex in the Gujarat plant and will give contract manufacturing income and cash to cover incremental capital expenditure to Suzuki.

“This means that contribution margin on the sale of vehicles from Gujarat will be significantly lower than current margins but return ratio will be higher given no capex by Maruti Suzuki,” Kotak Securities said in a report.

Q3 results in line with estimates:

The country's largest car-maker Maruti Suzuki India posted a 35.87 per cent increase in net profit to Rs 681.15 crore for the third quarter ended December 31.

The company had posted a profit of Rs 501.29 crore in the corresponding period of the previous financial year.

Net sales declined 3.07 per cent to Rs 10,619.68 crore from Rs 10,956.95 crore a year earlier, Maruti Suzuki said in a statement.

“We believe Maruti reported numbers in line with our expectations on account of favourable exchange rate and higher localisation, coupled with cost reduction measures of the company,” Dolat Capital said in a note.

The fall in the volumes YoY was partly compensated by better realisations. However, we believe that sluggish demand during the festive season, coupled with overall negative market scenario, won’t turn the domestic four-wheeler markets head-on for the time being, added the report.

The brokerage firm is of the view that at the current valuations of 17xFY15E, their ‘accumulate’ rating on the stock stays.

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