Maruti Suzuki sinks 8pc on Gujarat plant announcement

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Maruti-SuzukiShares in Maruti Suzuki India Limited (MSIL) fell as much as 9.5 per cent on Tuesday after the company’s board approved a 100 per cent Suzuki subsidiary to manufacture vehicles in Gujarat. Maruti Suzuki would enter into a contract to procure vehicles from this subsidiary, the company said in a statement.

The Suzuki subsidiary would not sell vehicles to anybody else, MSIL said, adding Maruti will pay the cost price for units manufactured in this plant.

MSIL chairman RC Bhargava told analysts that the intention behind Suzuki’s decision is to create a win-win situation for Maruti Suzuki India (MSIL) here in Haryana, for the new project in Gujarat and for Suzuki Japan.

“The way this project has been structured, there would be a significant financial gain to MSIL out of the way the pricing of the contract cars is structured in the agreement,” he added.

Traders, however, said the arrangement will hit Maruti’s margins. Auto analyst Mahantesh Sabarad told that Suzuki’s subsidiary will have its own manufacturing margins and Maruti will only get marketing margins.

“Suzuki wants to control more and more of the company and this will be detrimental to existing shareholders to India,” Mr. Sabarad added.

TP Ostwal of TP Ostwal and Associates said the new plant raises corporate governance issues.

“When you are in the same segment, why should you set up a separate company?” he asked.