Maruti: Broken Promises

Maruti dropped a bombshell during its earnings announcement yesterday that sent investors fleeing. It was announced that the Japanese parent – Suzuki – will be directly setting up the plant in Gujarat and Maruti will “buy” cars from the new plant. This was completely unexpected and was 180-degrees from what investors wanted to hear.



Investors had ramped up the stock expecting that:

  1. Suzuki will announce that it will increase its stake in Maruti and launch an open-offer.
  2. Investors were expecting the open offer to be at a substantial premium to the market price, like what Unilever did with HUL.
  3. The fresh capital was supposed to help Maruti setup the manufacturing plant in Gujarat and become an export hub for Suzuki’s expansion across the region.

The announcement came as a shocker. The way it stands now:

  1. Suzuki will setup a separate wholly-owned subsidiary in India that will own and operate the manufacturing plant in Gujarat. Maruti will not put any capex in Gujarat plant.
  2. Maruti will lease the land needed for the plant to Suzuki unit.
  3. Pricing of cars by Suzuki to Maruti will be cost of manufacturing.
  4. Maruti will not benefit from Suzuki’s export into markets outside of India. (Or might get ‘marketing margins.’ There is not enough clarity on this point.)

Investors are understandably upset because now Maruti can only play in the domestic car market sandbox and whatever upside it may have had by pushing into export markets has been taken away by Suzuki.

The decision has been window-dressed as being beneficial for Maruti because of the low cost of capital for Suzuki (they do have negative interest rates in Japan.) But you know what they say about a sugarcoated turd: it may be sweet on the outside, but it is still poop at the core.



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