Maruti’s Bold U-Turn: Reversing Course to Acquire Suzuki’s Gujarat Powerhouse.

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On July 31, 2023, the board of directors of Maruti Suzuki India Ltd (MSIL) made a significant decision. They greenlit the termination of the contract-manufacturing agreement with Suzuki Motor Gujarat (SMG) and embraced a proposal to purchase SMG from its parent company, Suzuki Motor Corporation (SMC).

In a surprising twist last week, the board concluded that acquiring SMG’s shares through the issuance of MSIL’s equity shares on a preferential basis to the Japanese parent would be more advantageous for the company’s minority shareholders than a simple cash payment.

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“We’re unique in handling 4 million cars under a single management globally. To accommodate future needs and technologies for the next decade, we need to reorganize Maruti,” explained Maruti Suzuki Chairman RC Bhargava after the board meeting.

The company’s aim is to nearly double its annual production capacity by 2030-31, reaching four million units from the current 2.2 million (with SMG contributing 750,000 units). However, this decision carries an element of surprise, considering Maruti has essentially reversed a choice it had made about nine years ago. Approximately 90% of SMG’s capacity has been utilized so far, primarily manufacturing models like Baleno, Fronx, Dzire, and Swift in Gujarat.

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It’s crucial to recall that the Gujarat plant was initially established to manufacture vehicles on contract for both MSIL and SMC, destined for domestic and export markets respectively. Over time, the plant played a pivotal role in expanding MSIL’s volume. This move could lead to significant amortization of equipment and machinery, according to Avik Chattopadhyay, co-founder of branding and marketing strategy consultancy firm Expereal India.

“It will be intriguing to see how much MSIL pays SMC for acquiring the plant,” Chattopadhyay remarks, highlighting that its book value could range between INR 12,000 and INR 15,000 crore.

“That valuation seems high for the plant given its depreciation. This could be considered the 40th-anniversary return gift from MSIL to its parent,” Chattopadhyay adds humorously.

Presently, the Gujarat plant’s book value is estimated at around INR 12,700 crore. However, additional depreciation will be factored in when the board seeks minority shareholders’ approval for the share-swap deal in the upcoming months.

Most industry experts unanimously agree that Maruti’s decision to acquire the Gujarat facility from its Japanese parent is a wise move. It’s a testament to the adage: better late than never! This strategic shift is anticipated to steer Maruti toward future growth and sustainability.

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