Maruti shares rebound; proxy advisory firms wary

Moneycontrol Bureau

Maruti shares are up 6 percent to Rs 1658 in heavy trade Wednesday morning, recouping much of the losses suffered yesterday after the company said it was handing over its proposed production unit at Gujarat to parent Suzuki’s subsidiary. The initial plan was the Maruti would own and operate the plant, and had already acquired land from the Gujarat government. Under the new deal, Maruti will now buy cars from the Suzuki plant once it becomes operational.Proxy advisory firms InGovern Research and Institutional Investors Advisory Services (IIAS) have slammed the move, saying Maruti’s minority shareholders would be short changed."The move increases the level of complexity and reduces the level of transparency," said IIAS head Amit Tandon, adding that this was another case of egregious behaviour by an MNC looking to repatriate money from the India in a dubious manner. Tandon was participating in a panel discussion on CNBC-TV18.According to Tandon, this arrangement would drive up costs for Maruti because there would be an element of shared resources as well. Also it was not clear what the purchase agreement between the Suzuki arm and Maruti would be."If a particular model that the Suzuki plant has produced in bulk is not seeing demand, will Maruti still have to buy a certain number of cars from there?," said Tandon.JN Gupta of Stakeholders Empowerment Services said the deal with Suzuki did not appear anti-minority shareholder, but there were niggling issues.According to him, costing would be a bone of contention, since the Suzuki subsidiary was unlisted, and so not subject to the scrutiny that listed companies are."The ideal thing would be for Suzuki to present its costing structure to Maruti shareholders, but then no company would want its costing to be made public," Gupta said during the panel discussion on CNBC-TV18.Then there was also the issue of capacity utilization, which would influence Suzuki’s pricing of the car.Gupta said if the Suzuki plant’s capacity utilization fell, the production cost per car would rise because of the fixed overheads. Would these costs be passed on to Maruti, Gupta wondered.But the most scathing criticism of the deal has come from InGovern Research, which rejects the Maruti management's claim that the new arrangement will help save on costs and also put the funds to more productive uses like strengthening dealer network.Excerpts from the InGovern report:"The positives stated by the company that MSIL benefits from the interest expense of not investing is not tenable as MSIL is a net cashflow positive company, and incremental cash generated would be better utilized for capital investment for this expansion. It looks like the SMC subsidiary will enjoy the benefits of no business risk with assured vehicle offtake by MSIL and assured return on investments, while MSIL will bear the business risk of cyclical vehicle sales, competitive pressures, pricing and cost pressures. Inventory levels, car pricing and discounts, cost increases, dealer network management, post-sale servicing, brand management would all be risks that will continue to be borne by MSIL, while the 100% SMC subsidiary enjoys an assured vehicular offtake at pre-determined prices."

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