Maruti Suzuki India Limited (MSIL) on Tuesday approved a 100 per cent Suzuki subsidiary to manufacture vehicles in Gujarat. MSIL would enter into a contract to procure vehicles from this subsidiary, the company said in a statement. The Suzuki subsidiary would not sell vehicles to anybody else, MSIL said, adding Maruti will pay the cost price for units manufactured in this plant.
Shares in Maruti Suzuki India Limited (MSIL) fell as much as 9.5 per cent on Tuesday before closing down 8 per cent at Rs. 1,541.25.
Here's what MSIL chairman RC Bhargava told analysts about the deal:
The intention behind Suzuki's decision is to create a win-win situation for Maruti Suzuki India (MSIL) here in Haryana, for the new project in Gujarat and for Suzuki Japan.
The way this project has been structured, there would be a significant financial gain to MSIL out of the way the pricing of the contract cars is structured in the agreement.
The total investment will be brought in by Suzuki, which means for the initial period of 3-4 years, by the time production starts from the first unit, Maruti would not lose the earnings on investment, which it would otherwise have to make in the project and overall that investment could be Rs. 3,000 crore or so.
The pricing of the cars will be done so that it covers the direct cost of production plus that much of profit as to enable the cash to be available for the capex, which is done net of tax.
There is otherwise no return on capital which has been invested there.
Normally, we earn 17 per cent return on our capital and to finance the capex (of the Gujarat plant), the return on capital would be far lower than that. The balance of money that would normally have been charged would be available to Maruti for realization as additional profit when we sell these cars to our dealers.
We should be getting much higher return on our capital than we would have got if the investment was an MSIL investment.
Shares in Maruti Suzuki India Limited (MSIL) fell as much as 9.5 per cent on Tuesday before closing down 8 per cent at Rs. 1,541.25.
Here's what MSIL chairman RC Bhargava told analysts about the deal:
The intention behind Suzuki's decision is to create a win-win situation for Maruti Suzuki India (MSIL) here in Haryana, for the new project in Gujarat and for Suzuki Japan.
The way this project has been structured, there would be a significant financial gain to MSIL out of the way the pricing of the contract cars is structured in the agreement.
The total investment will be brought in by Suzuki, which means for the initial period of 3-4 years, by the time production starts from the first unit, Maruti would not lose the earnings on investment, which it would otherwise have to make in the project and overall that investment could be Rs. 3,000 crore or so.
The pricing of the cars will be done so that it covers the direct cost of production plus that much of profit as to enable the cash to be available for the capex, which is done net of tax.
There is otherwise no return on capital which has been invested there.
Normally, we earn 17 per cent return on our capital and to finance the capex (of the Gujarat plant), the return on capital would be far lower than that. The balance of money that would normally have been charged would be available to Maruti for realization as additional profit when we sell these cars to our dealers.
We should be getting much higher return on our capital than we would have got if the investment was an MSIL investment.
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