Maruti Suzuki accepts proposal from Suzuki Motor Corp through new entity, Suzuki Motor Gujarat for the expansion of Gujarat plant

In a Board Meeting of leading car maker, Maruti Suzuki India Limited, the company has accepted the proposal of Suzuki Motor Corporation for the expansion of Gujarat plant would be accomplisghed through a wholly owned arm of SMC, instead of MSIL.
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The wholly owned subsidiary of SMC, Suzuki Motor Gujarat Private Limited would be established by April 2014, according to Osamu Suzuki, Chairman of SMC. He further added that the new entity would not be listed in Indian stock exchanges and would have a start up capital of Rs 100 crore. What is more, SMC is contemplating on commencing the operation of the plant by 2016 end or early the next year.
Arrangement
As part of the new arrangement, Suzuki Motor Gujarat Private Limited will have a contract manufacuring pact with Maruti Suzuki India and the latter till take care of the sales of the new vehicles produced from this factory.
Impact
As the fallout of the announement, MSI’ shares started tanking by 8.12 percent a share to Rs 1,563.20 at close on the Bombay Stock Exchange yesterday, besides the company’s robust financial results. MSI has logged a 35.87 percent increase in Q3 net profit at 681.15 crore, which ended December 31, 2013. The growth is attributed to the increase its localisation drive, along with volatility of rupee and a slew of cost cutting measures initiated by MSI. The auto maker has registered a profit of Rs 501.29 crore during the same period of 2012. The net sales of MSI, however, dipped by 3.07 perccent to Rs 10,619.68 crore from Rs 10,956.95 crore.
According to Osamu Suzuki, apprently, the move would pay off for both SMC and MSI, as it would have freedom for the Indian arm to focus on its sales and service network. MSI might as well pump in its surplus cash for the exmapnsion of the network. As of now, the network can do one million vehicles, but if it is to ramp up to 1.5 million or say, two milliion units, the network needs to be enhanced further, Suzuki pointed out. The plan is to form one group under which Suzuki Japan, Maruti Suzuki and Suzuki Gujarat will come under single roof. Eventually, the benefits would be shared between the three parters, Suzuki elaborated.
In a related development, RC Bhargava, Chairman of MSI said that the company’s capital would be avvailable for investing in other projects including strengthening the sales and marketing teams, besides enhancing the R&D. The vehicles manufactured by SMGPL would be sold to MSI by the Suzuki arm without any return on capital employed. According to the official, the price of the vehicles dold to MSi BY SMGPL will include only the cost of production, plus adequate cast, net of tax, to cover incremental CAPEX requirements.
Earlier plans
It may be recalled that back in 2013, Maruti Suzuki had announced its plant to invest an estimated Rs 4,000 croreto establish its third plant by 2015-16 with a capacity of producing 250,000 vehicles in the first phase. Apparently, the project got postponed, thanks to the market slowdon in the Indian automotive horizon. Nevertheless, MSI did invest a sum of Rs 250 crore on land acquisition at Sanand to set up a car manufacturing plant. The company would have possession of land once the agreement with the Government of Gujarat is frozen. The gameplan of MSI is to lease out this land to SGMPL. When inquiried if SMC had plans of increasing its holding in MSI, Suzuki said: “As of now, there is no such plans. We cannot comment on future plans at this stage”.

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