Maruti Suzuki skids over 5% as doubts over the impact of its Gujarat plant linger

New Delhi – Maruti Suzuki India Ltd slipped as much as 5.3 per cent in trade on Friday as doubts persisted about the impact of the automaker’s plan to source cars from a plant to be built by its parent Suzuki Motor.

At 12:20 p.m.; Maruti Suzuki was trading 5 per cent lower at Rs 1579.25. It hit a low of Rs 1573.00 and a high of Rs 1665 in trade today.

Maruti Suzuki issued a statement specifying financial details in a filing to exchanges on Wednesday. The plan has sparked opposition from large Indian investors who believe Maruti Suzuki would be better off if it made the cars itself.

According to analysts, there are some uncertainties and challenges still remain with regards to the Gujarat plan despite management clarrification. Most of the investors are still not clear on conpany’s arrangement for Gujarat plant.

There is some uncertainty revolving merger ratio or plant sale once the contract expires and higher earnings volatility for MSIL is expected by analysts. Maruti’s profit may main flat despite higher volumes, revenues, they say.

The earlier release stated that Suzuki Gujarat (SG) will always remain a Suzuki subsidiary, but the latest release states that if the contract manufacturing agreement expires, and if it is not extended by mutual consent, SG’s assets would be transferred to MSIL at a fair value to be determined by independent valuation

“Investors have also raised concern that the deal may lead to a share swap whereby Suzuki raises its stake in MSIL. However, based on our interactions with the company, there is no such share swap planned,” Morgan Stanley said in a note.

“This option is kept to assure an exit option in case either party opts to terminate the contract. We maintain our view that over the next five years, the deal will have no impact on MSIL’s financials,” added the report.

“Beyond that, the level of mark-ups at Suzuki Gujarat’s end will determine MSIL’s operating performance, thus we will continue to monitor progress on this deal,” said the global investment bank who has placed an ‘overweight’ rating on the stock.

According to Nomura, fair value’ of SMG remains the key uncertainty for minority shareholders, as this would lead to stake increase for Suzuki. More clarity on this will be helpful.

“Maruti’s earnings could become more volatile as a result of the Gujarat plant. In years of high capex, Maruti’s profit may main flat despite higher volumes and higher revenues, said the investment bank.

Nomura has a ‘BUY’ rating on the stock with a target price of Rs 2135, which represents a little over 28 per cent upside from Wednesday’s closing price of Rs 1661.70.