Maruti Drops as Suzuki Gujarat Factory Raises Investor Concerns

Maruti Suzuki India Ltd. (MSIL), India’s biggest carmaker by sales volume, had the biggest intraday drop in a month as investors raised concerns about parent Suzuki Motor Corp. (7269) building a factory in the state of Gujarat.

Shares of the New Delhi-based automaker fell as much as 5.5 percent to 1,573 rupees, the biggest intraday decline since Jan. 28, and changed hands at 1,579.50 rupees at 11:34 a.m. in Mumbai. The company said on Feb. 26 the plant Suzuki is building would supply cars to Maruti at cost. Mumbai trading was halted for a holiday yesterday.

“For investors worried about Maruti’s independence today, this is hardly reassuring,” Jefferies analysts Govindarajan Chellappa and Rajasa Kakulavarapu wrote in note today. “We wonder why this structure is needed in the first place. If Suzuki has excess cash on its balance sheet which it wants to utilize to help Maruti, there are other cleaner ways -- extend a loan or give one-year credit on royalty.”

In January, Suzuki Motor said it will spend 50 billion yen ($491 million) on the wholly owned factory in western India. The facility, to start production in 2017, will have an initial capacity of 100,000 cars a year and will supply all its output to Maruti, the Hamamatsu, Japan-based automaker said.

The production of cars by a Suzuki-owned subsidiary would lead to lower earnings than from cars manufactured by Maruti directly, Ashvin Shetty and Ritu Modi, analysts at Ambit Capital, wrote in a research note today.

The cost of production of vehicles at the Suzuki Gujarat factory would be calculated in an identical manner to those made by Maruti’s existing plants, Maruti said in a statement on Feb. 26. Suzuki Gujarat would not make any losses nor accumulate any cash surpluses, the statement said.

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net Frank Longid, Terje Langeland

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