Fund managers raise Gujarat unit issue with Maruti mgmt

Fund managers told Maruti officials that decision was not in interests of company's shareholders

A recent meeting between Maruti Suzuki India Ltd (MSIL) top officials and key domestic fund managers to iron out issues related to the Gujarat plant development turned out to be a stormy affair. Led by Chairman R C Bhargava, Maruti officials met institutional shareholders in Mumbai on Friday to clarify its parent company, Suzuki Motors’, recent move to get another arm to develop the Gujarat plant instead of the company.

Fund managers, in no mood to accept the management’s logic, told Maruti officials the decision was not in the interests of the company shareholders said people in the know.

“The management was clearly told the move will erode Maruti’s valuation premium and will also be a corporate-governance issue,” said a fund manager. The meeting, organised by broker JM Financial, was attended by some top fund managers, including HDFC Mutual’s Chief Investment Officer (CIO) Prashant Jain. Jain is said to have raised concerns about this decision with Bhargava. A HDFC Mutual spokesperson declined comment.

Sources say the key concern for fund managers was that the Gujarat plant was being developed by Suzuki Motor Gujarat, a 100 per cent subsidiary of Japan’s Suzuki Motor, for Rs 3,000 crore while Maruti was sitting on a cash pile of Rs 9,000 crore.

This includes Rs 1,500 crore of borrowings. Earlier, Maruti was to develop the Gujarat plant with its own cash. They also fear that the company’s cash would now be invested in liquid schemes of mutual funds instead of getting deployed in production. Institutional shareholders were also uncomfortable with Maruti being converted into a distribution company.

Brokers said some fund managers dumped Maruti shares immediately after the Gujarat plant announcement, while others were waiting for clarity from the management. A mutual fund’s CIO said his team was still debating whether to hold on to the stock or cut exposure.

On January 8, Maruti shares fell eight per cent to Rs 1,563 when the company made the announcement but recouped most of the losses to close at Rs 1,674 the next day. However, company stock has remained weak after the bounce. On Monday, it fell 0.9 per cent to close at Rs 1,620.70.

In another meeting on Friday, the Maruti management met analysts of brokerages. An analyst, who attended the meeting, said he ended up getting more confused about the impact of company’s plans on its future earnings.

“Every analyst has come back with his own set of numbers after the meeting. There are several things that need more clarity like the impact of this on ROCE (return on capital employed), cash flows, etc,” said an analyst with a domestic brokerage.