Maruti Udyog in reverse gear; to buy-out Suzuki Motor's stake in subsidiary

Chennai: The country's largest car manufacturer Maruti Udyog Limited has hit the reverse gear. The company has decided to buy out Suzuki Motor Corporation's 30-per cent in Maruti Suzuki Automobile India Limited. The latter will be merged with Maruti Udyog.

It may be recalled the Suzuki Motor Corporation had announced the setting-up of a diesel engine plant and a car assembly unit in partnership with Maruti Udyog. At the time the decision created a big controversy as Maruti Udyog was found to be the loser with its aging portfolio.

The central government, holding sizeable stake in the company, had expressed its strong disapproval.

However, Suzuki Motor Corporation maintained that the new car company would manufacture the cars, while other functions like marketing, sales, procurement and research and development would always be with Maruti Udyog. The markets didn't buy that statement and Maruti Udyog's market cap went down by Rs300 crore in two days.

Subsequently, Suzuki Motor Corporation and the government reached an agreement under which Maruti Suzuki Automobile was floated as a 70:30 joint venture company between Maruti Udyog and Suzuki Motor Corporation. The JV would roll out new models at a new plant to be built at Manesar.

The reason for the sudden reversal of plan is not known. According to Maruti Udyog chairman S Nakanishi, the merger of Maruti Suzuki Automobile with Maruti Udyog would create value for all stakeholders. It would retain all the benefits of the earlier arrangement and enable the management to focus on critical issues of business operation.

The new Manesar plant involves an investment of Rs1,524.2 crore to roll out 1 lakh cars per year. The plant is expected to start functioning by the end of 2006. There are plans to increase the capacity to 2.5 lakh per year by 2008-09 taking the Maruti Udyog's total capacity to 8.5 lakh units.

What would be interesting to note is the enterprise valuation. A committee is in the process of valuing Suzuki Motor Corporation's 30 per cent stake in the Rs40 crore equity Maruti Suzuki Automobile. The company has raised some loans and has spent around Rs300 crore in towards the Manesar plant.