After the Suzuki plant issue was discussed at its board meeting, Maruti Suzuki has decided it would not just tweak the most contentious points -- of funding incremental capex of the plant and transfering the plant to Maruti in case of the deal's expiry -- but also seek approval of minority shareholders.
Under fire for its plan to have parent company Suzuki Motor set up a manufacturing plant in Gujarat, Indian automaker Maruti Suzuki has agreed to tweak key terms of the proposed deal that would likely make it tenable to opposing institutional investors.
After the issue was discussed at the board meeting that was attended by Suzuki chairman Osamu Suzuki, the carmaker has decided it would not just tweak the most contentious points -- of funding incremental capex of the Suzuki plant and transfering the plant to Maruti in case of the deal's expiry – but also, "as a measure of good corporate governance", seek approval of minority shareholders.
In January, Maruti had announced a deal in which a 100 percent subsidiary of Suzuki would set up a manufacturing plant on land owned by Maruti and which the latter intended to develop. The plant would manufacture cars for the Indian carmaker and as per its requirements.
But the terms of the deal said that Suzuki would infuse only the initially Rs 3,000 crore equity required while further expansion would be funded through an "incremental capex cost" Maruti would pay as an additional markup cost for vehicles produced -- over and above the cost of production.
The deal met with intense hostility from top mutual fund managers in the country, who together hold about 5.5 percent stake in the company and who said that the deal was "value erosive" for Maruti and was unnecessary since the company had the means to build the plant itself.
Maruti has now decided that the cost of capex would be funded by the plant's depreciation and only by further equity infusion by Suzuki itself, chairman RC Bhargava said.
The Indian carmaker would now essentially buy vehicles from the Gujarat plant only at manufacturing cost.
The backtracking in the company's stance -- which had earlier expressed its intention to go ahead even in the face of stringent opposition from investors -- would be seen as major win for institutional investors in the country, who went up in arms in a rare show of united strength on a corporate-governance issue.
Maruti also agreed to tweak the clause of the transfer of the plant in case the manufacturing agreement was not to be renewed at the end of its 15-year stint. Now, the plant would be transferred at a book value rather than "fair value" as was decided earlier.
The company will also seek approval from minority shareholders, three-fourth of whom will have to give their assent via a postal ballot, for the deal to go ahead.
The construction of the plan, which is slated to manufacture 1.5 million vehicles per year when complete in in 2017-2018, is expected to start this year itself, Bhargava said, who added that the plant will operate at a "no-profit-no-loss" basis and profits for Suzuki would be routed through its 56 percent stake in Maruti.
Maruti Suzuki stock price
On March 14, 2014, Maruti Suzuki India closed at Rs 1737.10, down Rs 9.6, or 0.55 percent. The 52-week high of the share was Rs 1864.00 and the 52-week low was Rs 1217.00.
The company's trailing 12-month (TTM) EPS was at Rs 106.68 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 16.28. The latest book value of the company is Rs 615.03 per share. At current value, the price-to-book value of the company is 2.82.
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