Maruti Suzuki's new deal structure allays market's fears

Suzuki not to use Maruti's post tax profits to fund part of capex, Suzuki to partly invest in Gujarat plant

In what is considered to be a victory for minority shareholders, Maruti Suzuki has agreed to make changes to its deal structure for the Gujarat plant. The first change in this deal would be that entire capital expenditure would be funded through depreciation and equity brought in by Suzuki (the parent) against the earlier plan of funding a part of the project through post-tax profits of Maruti Suzuki.

The second change that the company in this deal structure is that in case of a termination of the agreement, the Gujarat subsidiary would be tranferred to MSIL at book value. And finally this deal would go through only with the approval of minority shareholders.
 

 

Analysts say that the key concerns on use of Maruti's surplus cash and parallel capacity outside of the company have been addressed. Aashiesh Agarwaal and Siddhartha Bera of Edelweiss Securities believe the new arrangement, in contrast, implies EBIT margins for MSIL at pre-deal levels, other income at levels higher than before, zero RoCE for Suzuki (implying considerably higher RoE for MSIL).

Moreover, the market believes that the intial investment by Suzuki may be treated as endowment to MSIL and this would add another Rs 100/share to the existing stock price. This brings back the market's fair valuation of 15x for the stock.