Maruti Suzuki India Limited (MSIL) will issue equity shares on a preferential basis to parent company Suzuki Motor Corporation (SMC) to acquire 100 per cent shares in the latter’s Gujarat plant.
This deal is expected to increase the share base of MSIL by about 4 per cent and consequently, increase SMC’s shareholding in India’s largest carmaker by approximately 1.8 per cent.
“Whether it is in terms of profit after tax (PAT) or earnings per share (EPS) or dividend per share (DPS) of MSIL, the share swap option would give the shareholders a better deal than any other option such as cash payment,” MSIL Chairman R C Bhargava told reporters during a press conference.
MSIL had on 31 July announced that it would acquire 100 per cent shares in Suzuki Motor Gujarat Private Limited, which owns the Gujarat plant, from SMC to enhance its production efficiency. The Gujarat plant has been manufacturing cars for MSIL under a contract manufacturing agreement (CMA) signed between SMC and MSIL.
“We will of course go and get minority shareholders’ approval for all the three transactions — the termination of the CMA, the decision to purchase (Gujarat plant’s) shares from SMC, and that this purchase should be done by preferential issue of equity in favour of SMC,” Bhargava noted.
According to MSIL’s calculations, the EPS and DPS until the financial year ending in 2030-31 (FY31) for its shareholders would be Rs 657 and Rs 263 under the share swap method. This is mainly due to interest income earned on higher cash reserves. If the Gujarat plant is purchased using MSIL’s cash, the EPS and DPS would be Rs 637 and Rs 255, respectively, it stated.
MSIL has a cash balance of about Rs 46,000 crore, so certain proxy advisory firms were expecting a cash deal instead of a share swap deal.
According to the CMA, the Gujarat plant can be purchased by MSIL at the net book value of the last financial year. At the end of FY23, the plant’s book value stood at Rs 12,755 crore.
MSIL’s Chief Financial Officer Ajay Seth said: “We have considered the share price as of 30 June, 2023, for the estimation of the number of MSIL shares to be given to SMC for this transaction. Accordingly, the total share base of the company will increase by over 4 per cent and SMC’s shareholding in Maruti Suzuki will go up by around 1.8 per cent.”
He stated that according to the current calculations, SMC’s shareholding in MSIL will go up from 56.48 per cent to 58.28 per cent once the deal is done.
Bhargava clarified that these are not the final figures for the share swap, as that would be decided on the basis of the net book value of the Gujarat plant and MSIL’s share price on the date when the board decides to call the extraordinary general meeting (EGM). The board is expected to hold its meeting by October to call the EGM to get minority shareholders’ approval for the deal.
The depreciation, as well as capital expenditure — for the period between 1 April and the date when the board meets for EGM — will be subtracted and added to the aforementioned Rs 12,755 crore, and this will give the net book value of the Gujarat plant.
Bhargava justified MSIL’s decision not to use its cash reserves to buy the Gujarat plant. “We have invested a huge amount of money in building sales and service infrastructure, research and development facility, etc. If we could do all of this, and if we could tide over the crisis that came in 2008 during the recession, in 2011 due to diesel and petrol issues, in the COVID-19 pandemic, etc, without any problem, this was because we had cash. Many companies were facing problems in this period because they did not have cash,” he explained.
A lot of companies have not grown in a stable manner because they have grown on the basis of debt, he noted.
“Indian companies have developed this practice, on a pretty wide scale, of siphoning money out of the companies. Very few companies have any substantial cash reserves, and that is one of the reasons why the companies don’t invest in technology development, engineering development, modernisation, etc.… Why have all your small and medium-sized enterprises (SMEs) not grown? Because none of them have cash. We have cash because we follow very frugal manufacturing practices,” he added.
Bhargava said MSIL has realised something between Rs 5,000-6,000 crore of extra profit because it didn’t invest in the Gujarat plant and allowed SMC to do so. This allowed MSIL to develop cash reserves.
“Now, we have reached a stage where we are a very different company. We already have an
annual capacity of about 2 million cars. We are moving towards having an annual capacity of 4 million cars by FY31. We have multiple technologies such as electric vehicles (EVs), hybrids, ethanol, compressed natural gas (CNG), possibly biogas to handle today due to concerns over carbon emissions. We have different types of models,” he mentioned.
“There is no single company in the world, under a single management, which handles 4 million cars annual capacity. We have to reorganise MSIL to deal with the requirements of the management and the technologies that have to be faced in the next 10 years,” he added.
MSIL will start gradually replacing SMC’s Japanese staff at the Gujarat plant with MSIL’s Indian staff once the deal is done, he mentioned.