MSIL to issue shares worth Rs 12,841 cr to acquire Gujarat plant from SMC

Share issue will raise Suzuki Motor Corporation's ownership in Maruti Suzuki India to 58.19%

The board of Maruti Suzuki India (MSIL) on Tuesday approved a proposal to issue shares worth Rs 12,841 crore to parent company Suzuki Motor Corporation (SMC) for acquiring Suzuki Motor Gujarat (SMG).

A Gujarat manufacturing plant – with an annual capacity of 750,000 units – is owned by SMG, a wholly-owned subsidiary of SMC. The shares issued to SMC will raise its ownership in MSIL from 56.48 per cent to 58.19 per cent, India's largest carmaker stated in a notice to BSE.

The Gujarat plant produces cars for MSIL under a contract manufacturing agreement (CMA) signed with SMG in 2015. In July this year, MSIL announced the acquisition of SMG from SMC to enhance production efficiency and streamline its corporate structure, in line with its ambitious plan to nearly double production capacity by 2030-31.

The CMA has a clause mentioning that the Gujarat plant can be purchased by MSIL at the net book value of the last fiscal year. MSIL said on Tuesday it will issue 12.32 million equity shares of Rs 10,420.85 each to SMC to acquire SMG. "The turnover of SMG in the last financial year (2022-23) was Rs 31,852.5 crore," it added.

In a presentation to its shareholders and analysts earlier this month, MSIL elaborated on its rationale for avoiding a cash transaction and instead pursuing a share swap deal with SMC as the preferred approach for acquiring the Gujarat plant from its parent company.

"Funds would be needed for creating the sales, service and spare parts infrastructure to almost double domestic sales volumes (by FY31). The infrastructure for exporting the much larger volume of cars will also have to be strengthened. The conversion of production lines to have greater flexibility will need additional capex," MSIL said.

In FY23, MSIL had clocked domestic sales of 1.61 million units of passenger vehicles (PVs), marking a year-on-year (Y-o-Y) increase of 21.1 per cent. Additionally, its total exports for the same financial year reached 0.26 million units, reflecting a growth of 8.8 per cent Y-o-Y.

The company had cash reserves of more than Rs 45,000 crore as of April 1 this year. MSIL said that payout of over Rs 12,500 crore for SMC shares in Suzuki Motor Gujarat (SMG) would, besides reducing profits, earnings per share (EPS) and dividend payments, could also create a "shortage" of cash.

The company on Tuesday explained the rationale for purchasing SMG. "With the growth of the Indian car market and export potential, the company would need to increase its production capacity to about 4 million cars per annum by 2030-31, almost double from current levels," it mentioned. MSIL's current annual production capacity stands at about 2.25 million units.

"This would happen over several locations, some of which are known and some being studied. On the other hand, given the carbon neutrality requirements, several powertrain technologies like EVs (Electric Vehicles), Hybrids, CNG, Ethanol etc. will co-exist for a reasonably long period of time," it said.

Managing this scale and complexity of production with multiple powertrains, under different managements, would pose several challenges, it asserted.

"The Board considered this and decided that for the purpose of efficiency in production and supply chain, it is best to bring all production related activities under the company," it noted.