India’s largest automaker by sales, has mounted a robust defence of a controversial $500m factory tie-up with parent Suzuki of Japan that has raised alarm over the motives of foreign investors in Asia’s third-largest economy, though crucial details remain unresolved.
Shares in Maruti fell as much as 9 per cent in a single day last month after the company announced that a Suzuki subsidiary would take over construction of its new flagship facility in western India.
Critics have attacked the deal as opaque and against the interests of minority shareholders, exacerbating worries that global companies often treat profitable Indian subsidiaries as cash cows.
But RC Bhargava, Maruti’s chairman, defended the arrangement as firmly in the interest of both the company and its investors, including parent Suzuki, though he conceded that crucial details were still being worked out.
Mr Bhargava said the arrangement saved Maruti Rs40,000 ($642) on each car it buys from Suzuki, while conserving capital that would earn interest of Rs2.5bn ($40m) annually.
However, he said important facets of the contract were still being hammered out – particularly how much of those savings would go to Maruti and its shareholders.
“Rs40,000 is the margin on each car. . . Part of this money has to go into capital expenditure,” he said. “What we have to work out is how much [will be kept by] Maruti to make an extra profit.”
Investors are concerned those profits for Maruti will go mainly to funding subsequent stages of the factory, after the $500m first phase, rather than being returned to shareholders – denting Maruti’s margins over the next five years.
Mr Bhargava also floated the prospect of lengthening the agreement, currently slated for 15 years, to reassure investors worried that Suzuki might in time seek to take complete control of its prized subsidiary in India's potentially vast auto market.
“If I said, ‘I want an agreement for 25 years’, I don’t think Suzuki would say ‘no, no, no, we want a shorter agreement’,” he said. “Originally they actually wanted a longer deal.”
Suzuki will make no direct profit from the tie-up, heightening suspicions it ultimately aims to take over Maruti, which provided more than half of the Japanese group’s net profits during the last financial year.
“People cannot believe that Suzuki would do this for Maruti’s good,” Mr Bhargava said of the deal. The plant opens in 2017 and will eventually double Maruti’s annual capacity to 3m cars.
“What does Suzuki get out of it? In Japan, this money is earning 0.6 per cent a year, and they have something like $4bn lying in the bank. . . If they bring it here the profit is made in Maruti, of which they own 56 per cent. That profit will be worth as much as 12 per cent. . .so 12 per cent is far better than making 0.6 per cent.”
Some analysts nonetheless remain sceptical of Suzuki’s intentions.
“As best as I can make it out, for Suzuki, this is all about survival,” says one automotive analyst at a global bank in Mumbai, who asked not to be named.
“If something happens to Maruti, then Suzuki globally is basically finished, so they are doing what they can to help their only growth asset.”
Shares in Maruti fell as much as 9 per cent in a single day last month after the company announced that a Suzuki subsidiary would take over construction of its new flagship facility in western India.
Critics have attacked the deal as opaque and against the interests of minority shareholders, exacerbating worries that global companies often treat profitable Indian subsidiaries as cash cows.
But RC Bhargava, Maruti’s chairman, defended the arrangement as firmly in the interest of both the company and its investors, including parent Suzuki, though he conceded that crucial details were still being worked out.
Mr Bhargava said the arrangement saved Maruti Rs40,000 ($642) on each car it buys from Suzuki, while conserving capital that would earn interest of Rs2.5bn ($40m) annually.
However, he said important facets of the contract were still being hammered out – particularly how much of those savings would go to Maruti and its shareholders.
“Rs40,000 is the margin on each car. . . Part of this money has to go into capital expenditure,” he said. “What we have to work out is how much [will be kept by] Maruti to make an extra profit.”
Investors are concerned those profits for Maruti will go mainly to funding subsequent stages of the factory, after the $500m first phase, rather than being returned to shareholders – denting Maruti’s margins over the next five years.
Mr Bhargava also floated the prospect of lengthening the agreement, currently slated for 15 years, to reassure investors worried that Suzuki might in time seek to take complete control of its prized subsidiary in India's potentially vast auto market.
“If I said, ‘I want an agreement for 25 years’, I don’t think Suzuki would say ‘no, no, no, we want a shorter agreement’,” he said. “Originally they actually wanted a longer deal.”
Suzuki will make no direct profit from the tie-up, heightening suspicions it ultimately aims to take over Maruti, which provided more than half of the Japanese group’s net profits during the last financial year.
“People cannot believe that Suzuki would do this for Maruti’s good,” Mr Bhargava said of the deal. The plant opens in 2017 and will eventually double Maruti’s annual capacity to 3m cars.
“What does Suzuki get out of it? In Japan, this money is earning 0.6 per cent a year, and they have something like $4bn lying in the bank. . . If they bring it here the profit is made in Maruti, of which they own 56 per cent. That profit will be worth as much as 12 per cent. . .so 12 per cent is far better than making 0.6 per cent.”
Some analysts nonetheless remain sceptical of Suzuki’s intentions.
“As best as I can make it out, for Suzuki, this is all about survival,” says one automotive analyst at a global bank in Mumbai, who asked not to be named.
“If something happens to Maruti, then Suzuki globally is basically finished, so they are doing what they can to help their only growth asset.”
Source: Automobile Industry News
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