Gujarat Maruti plan Rejig: Appears better deal now

The entire negative publicity surrounding the Suzuki’s latest plan (to go ahead with its expansion plan at Gujarat) which gave sleepless nights to several minority and institutional investors seems to have forced the company management to come up with a rejig which may provide better prospects for one and all in the coming days – at least what the deal spells presently.

What appears from the latest plan recast of Maruti, company’s profitability may improve with this.

Going by what the country’s leading automobile maker states in its new statement, Suzuki, the parent company, has decided not to earn any kind of direct profit from the investment made in Maruti.

In the words of leading business daily Business Standards (in its story Maruti's profitability to improve after Gujarat recast) – “Suzuki investment is to be treated as endowment.”

Maruti won’t be partaking with its profits in order to fund Suzuki’s Gujarat plant. Zero earnings will be made by the Suzuki Gujarat before interest and taxes (EBIT) margins.

The management has clarified its plan saying:

• It would be Suzuki that will fund the expansion plan (setting up a new manufacturing plant in Gujarat which will supply cars to Maruti) through equity and depreciation route, and Maruti’s after-tax profits would not be used in the process.
• Again, the parent company will provide the source of funds to the Suzuki Gujarat plant’s future capital expenditure needs. This will be utilized in expanding power train and engine capacities at the site.

Most importantly, the new plant will seek investment for only 15 years and after the given period; the plant (subsidiary) will be shifted to Maruti.

All this would be done at book value of the plant. With this declaration, all the suspense about what happens to the supplementary unit after fifteen years has ended.

The news has brought cheers to the minority and institutional shareholders, and even the markets. All the uncertainties surrounding the new deal should cease to exist anymore and with the rise observed in the company’s shares, everything appears back on track once again.

Shareholders would not complain any more, as the new plan promises better return on equity now.

Maruti Suzuki should be congratulated for various reasons:

• Respecting concerns of minority shareholders
• Re-cementing its brand image in the market as a company which cares for its people
• Maintaining raised corporate governance standards

All’s well that ends well

With the latest plan coming in place, company’s share price has re-achieved its fair valuation once again; which was much needed in the volatile days of today.