Gujarat pact to add Rs 1500cr to Maruti bottomline:Bhargava

In an exclusive interview to CNBC-TV18’s Ronojoy Banerjee, Bhargava said the arrangement will add about Rs 1,500 crore to Maruti Suzuki’s bottomline.

He said that discussions are going on the royalty rates, adding that Maruti also expects royalty rates to come down since more products are being engineered by MSIL and going forward the individual model’s royalty rates will be modified.

Bhargava said that parent Suzuki has no plans to sell the Gujarat assets to Maruti in future and the clause was added only to allay investor concern. He further added that Maruti will clarify to the Securities and Exchange Board of India (Sebi), if the regulator raises concerns.

Below is the verbatim transcript of RC Bhargava's interview with Ronojoy Banerjee on CNBC-TV18.Q: January 28 you made this announcement and even post the announcement you sought to clarify. Couple of days back you again issued a clarification. You have maintained that it is good for the minority shareholders. Despite that it has not managed to allay concerns. In fact since you made the announcement your share price has fallen over 8 percent. Is there a feeling now that the investors are over reacting or let me put it bluntly has Maruti not done a good enough job of explaining why it is good for everybody?A: Obviously some investors are not convinced with what we said. Not all investors have the same view because a lot of the foreign financial institutions were investors in Maruti have not expressed any concerns to us on this matter. After the first clarifications and explanations which we gave I met these investors in Mumbai also and had talked to them and explained to them. Q: Including LIC, which is your largest shareholder.A: LIC is not a signatory to this. They have only asked that they should be explained. LIC does not participate in any investor meet and they don't take part in any telephonic or other conversations. If anything has to be explained to LIC you have to go to LIC and explain it to them. We have written to LIC asking for a suitable date when that can be explained to them. They have not expressed any specific concerns on this.Q: Coming to the specific concerns which your other investors have raised. This is the letter they had written to you. The specific concerns they have raised is in terms of the capex plans for Gujarat. So, in the first phase Suzuki is going to invest about Rs 3000 crore for a capacity of 250,000 units. Going forward they have estimated based on some calculations that by 2021 the overall capacity would be to the tune of 1.5 million which will then be equal to what you have in Haryana and the additional investment that you will require for this is about Rs 12000 crore which again will be met through the cash surplus that this plant is going to generate which translates into an internal rate of return of 30 percent. So, clearly this is a very profitable plant and people are wondering why couldn't Maruti do this on their own? Why take such a convoluted approach to this?              A: If these assumptions on which these calculations are made were anything like realistic I would agree but 2021 - this plant starts production in 2017. So, we are talking about five years. In five years if the demand can go up by 1.5 million it means we are talking about doubling of the car demand in five years. They have calculated 15 percent CAGR. I would hate to make an investment assuming of 15 percent CAGR when all we are experiencing in the last three years is negative growth. I haven't yet met a single analyst who has told me that suddenly there will be a pickup in demand and then going forward it will be a continuous 15 percent CAGR going forward. That is the first point that 15 percent CAGR growth is just unrealistic in the Indian circumstances. We did have a period of 15 percent CAGR but at that time the base was much lower. The economy was growing at 9 percent plus. At that time the industry did grow by 15 percent CAGR. The same rate of growth on a much higher base of the industry and where nobody is predicting a 9-9.5 percent growth rate coming back to India for a long time is not realistic. Second part of this assumption which is not true also is that they are assuming that the total capex requirements will come out of a mark up on the car sales. What is the mark up of the car sales depends on the duration during which capex has to be invested. For example as Suzuki clarified the first unit which we are putting up the capacity which will be created in the first instance would be only 100,000 cars because 100,000 cars still means a growth of about 7 percent. 7 percent growth today to any car manufacturer looks like the kind of dream in the future. So, he is projecting 100,000 because by that time Gurgaon will be doing 1.5 million. So, a 100,000 of that is 7 percent.Q: While me might quibble over the numbers and the assumptions that they have made the larger concern really is the fact that in the future all incremental capacity build-up will be done by Suzuki.  A: No that is not correct. We just clarified two days ago that the incremental capacity will a) come out of depreciation, as more and more units get commissioned there will be more and more depreciation funds available, which have nothing to do with the profit margins of the cars which will be given to us. It will be partly met from equity brought in my Suzuki in each case.Q: Even on that point it says that equity will only be brought in if necessary.A: It does not say if necessary. The wording is to the extent necessary. That is different from if necessary. To the extent necessary means the balance. The point which people don't understand is that when Suzuki promises that this will be a win-win situation for all parties, how will it be a win-win situation if what is being projected in this letter is true.Are they saying that Suzuki was telling lies, giving false assurances? Has Maruti ever in the past 30 years ever said anything which it has not fulfilled? Why this complete distrust today in what he has said? Clearly the idea of Suzuki bringing in equity is to make sure that the markups don't go to any level which is not beneficial to Maruti.Q: On the point on markup then because there is also a fear that Maruti might also end up funding part of the incremental capacity buildup because of markup in transfer pricing?A: It can't happen. It is an absolutely incorrect assumption. We have said again in this clarification that the price at which the car will be made available to us will always be less than C+P.  So, where is Maruti's contribution then? Then this whole calculation never assumes that would happen when the capex is completed, whether it takes 5 years or 15 years that depends on how the market grows. I don't think any analyst today can tell me that the market will double in five years. What happens when the capex is completed at what price do I get the car? At cost. Then I get the full benefit of that "P" part and I get the interest on the total investment which I have saved by not putting it into Gujarat. So, my profitability actually becomes free plus the interest element. Q: You would have done the calculations, can you give us a sense of the kind of uptick in profitability that we are talking about let us say in the coming 4-5 years because of this arrangement?A: Once the capital requirements of expansion are over or in any year when it is not invested the total capex in Gujarat or 1.5 million taking some escalation all could be around Rs 18000 crore. On Rs 18000 crore the interest will be something around Rs 1500 crore a year. Tax free Rs 1500 crore per year. So, that is an extra Rs 1500 crore. The equity of Maruti is not going up because Gujarat is not part of our capital investment. The capital invested by Maruti is not going up because we have not invested capital. So, that Rs 1500 extra profit plus the normal PE which we would have got anyway is all extra return on equity and capital.