Sucheta Dalal :Suzuki Kisses And Makes Up With Govt
Sucheta Dalal

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Suzuki Kisses And Makes Up With Govt  

Sep 27, 2004


For retail investors, it would be a mistake not to see the future in the Japanese major’s action


Maruti Udyog Limited (MUL), the Suzuki-owned car company and the government of India (GOI), its largest other shareholder, have kissed and made up. The issue: Maruti’s plan to set up a new company to assemble passenger cars. The solution: The new company will be a joint venture with MUL holding a 70% stake in the proposed venture. As additional carrots, Suzuki typically sweet-talked the government with the promise of a Rs 6,000 crore investment over the next five years, setting up a diesel engines project through Suzuki Metals, a joint venture in which it has a 51% stake and finally the promise to consider a gear box facility in India.


The provocation for industry minister Santosh Mohan Deb’s anger was that the Maruti scrip, a big market favourite, had plummeted from Rs 393.6 (on September 10) to Rs 378.8 after the announcement that Maruti planned a separate venture to make cars. The price had fallen further to Rs 354.8 the next day, but the stock recovered a little on Thursday and Friday to touch Rs 368.8 following hyped up reports about the ‘amicable’ solution.


But frankly, is the solution really so amicable? And in the long term, is it to the benefit of minority shareholders? Only true optimists would venture a positive answer to these questions.



• The so-called amicable solution includes a new company to assemble cars

• An additional carrot includes investments of Rs 6,000 crore over 5 years

• Suzuki’s enhancing its control and might follow other MNCs in delisting


Suzuki is smart enough not to upset the government. Not only would it want no controversy at the moment, but it surely cannot forget so quickly how much the government’s hugely hyped-up disinvestment of its 25% stake in MUL had given its image a much needed boost in a market crowded with the biggest automobile names in the world. So it rushed to pacify the government; but in real terms, Suzuki may not have budged at all from its original plan at all.


For Maruti’s retail investors, it would be a mistake not to see the future in Suzuki’s action. A much-fancied publicly listed company works well for the Japanese company at the moment; it has no choice as long as the government remains a dominant shareholder. But the government’s residual holding has to be shed sometime and the sooner it is done the better for both sides.


At well over Rs 390, the MUL share has trebled since the government divested a substantial chunk of shares at Rs 125. It has remained buoyant since listing and had traded significantly higher than present levels during the PSU disinvestment led rally. If government sells its shares now, it will collect a fat premium on the residual holding and that should be a major incentive.


Retail investors hold just under 5% of the MUL equity and institutional investors hold another 5%. Once the government gets out and its shareholding is scattered, it is doubtful if retail investors will have much of a say in what MUL does.


Maruti chairman, S Nakanishi has claimed that its existing manufacturing units will need around Rs 6,000 crore for expansion and modernisation in the next five to seven years while its cash reserves are only Rs 2,000 crore. Yes, Mr Nakanishi, but doesn’t Maruti generate around Rs 1,000 crore of free cash flow every year? Surely that is enough to meet all its funding needs. In any case, banks in India and abroad will happily queue up for a chance to lend it money at the best possible rates. The Japanese company should probably take some tips from the Reliance group, which is constantly picking up funds of varying maturities.


Mr Nakanishi also claims that in manufacturing larger cars through a separate joint venture, it is hedging its bets in the face of intense competition. With a 70% stake in the joint venture, MUL is hardly protected from market risks and competition. Moreover, retail investors will have less information available about the finances of the JV or precise information about royalty payment to Suzuki. The fact that the new venture will only be a production facility is not necessarily good news for MUL either. MUL will continue to market, distribute and service the news cars, but pricing details between the two companies for vendor arrangements, service facilities and marketing will not be open to full scrutiny. In fact, investors will not even know how much of the cost of the new venture will be borne by MUL in various ways.


MUL managing director Jagdish Khattar told the media that “it was necessary to set up a new venture for car assembly since Maruti’s three existing car manufacturing units were incapable of adding further capacity without becoming inefficient”. This argument holds no water. Without marketing and sales facilities, it is difficult to believe that efficiency can be enhanced through a JV, rather than by making the various production facilities compete internally with one another.


What the joint venture does, is to increase Suzuki’s share of the company and its hold on the Indian operations. The same goes for Suzuki Metals, the diesel engine joint venture that is to be renamed Suzuki Engineering. Here too, the 49:51 shareholding between Maruti and Suzuki is expected to change. And although the engines may find a good export market, and the capacity of the plant will treble to three lakh units, Suzuki will be the biggest beneficiary.


Fortunately for Maruti’s retail investors, they don’t have to start worrying right away. The company remains hugely profitable; it is set to launch a premium segment hatchback in 2005. As for the joint venture for higher end passenger cars, it will become operational only in 2007. But it is clear that Suzuki is slowly enhancing its control and it should be no surprise at all if it slowly follows a host of other multinationals such as Cadbury, Philips, Reckitt & Coleman etc in heading towards delisting from the Indian bourse. But this may not happen so long as the government remains a substantial shareholder.

-- Sucheta Dalal