Maruti Suzuki gains marginally on subsidiary buyout plan, Nomura maintains ‘Neutral’ call

Maruti Suzuki India will pay for the shares held by SMC by making preferential issue of MSIL equity shares.

Nomura maintained its 'Neutral' rating on Maruti Suzuki India (MSIL), after the auto major shared a presentation detailing how it plans to proceed with its proposed acquisition of Suzuki Motor Gujarat (SMG). Suzuki Motor Gujarat (SMG) is a 100-percent subsidiary of Suzuki Motor Corporation, which financed and implemented the creation of new production capacity in Gujarat.

Maruti Suzuki India will pay for the shares held by SMC by making preferential issue of MSIL equity shares. The company believes this will be beneficial to the shareholders and will soon seek their approval.

Nomura maintained its call, with a target price of Rs 10,422, on Maruti Suzuki India as the brokerage already factored in a dilution of around 4 percent in its valuation. "We do not expect any significant change to our valuation if the share issue route is ultimately approved by shareholders," said Nomura.

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Shares of Maruti Suzuki India were trading 0.86 percent higher at Rs 10,333.05 apiece on the NSE, as of 9.20 a.m.

SMG had entered into a contract manufacturing agreement with MSIL to supply the entire production for sale to Maruti Suzuki India. However, Maruti Suzuki India now plans to end its contract manufacturing agreement with Suzuki Motor Gujarat by acquiring 100 percent of shares held by Suzuki Motor Corporation (SMC).

Nomura said, “SMG is a zero-EBIT company, the transaction will not have an impact on its EBIT, but we see some negative impact on ROE (~1.5 percent) from this transaction as the equity base will rise without any change in EBIT.”

Among the reasons the shareholders might benefit from the move, MSIL said that if the firm's PAT grows by 150 - 200 percent in the next eight years, the profit and EPS as well as dividend payout will be higher. This could potentially lead to a dividend payout ratio of 40 percent assumed in the next eight years.

Maruti stock technical indicators

Compared to Nifty 50's one-year run of 12.7 percent, Maruti Suzuki India clocked a growth of 16.7 percent during the same time period. The counter's RSI of 48.9 indicated that the shares are trading in neither the overbought territory nor the oversold territory. Shares of the firm are trading under their 5-, 10-, and 20-day moving averages, but above their 50-, 100- and 200-day moving averages.