maruti open letter letter 24nov2015
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Maruti Open Letter Letter 24Nov2015TRANSCRIPT
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Institutional Investor Advisory Services India Limited15th Floor, West Wing, Dalal Street, Fort, Mumbai – 400 001
Phone +91 22 22721570 - 3 Fax: +91 22 2272 1574 www.iias.in CIN: U74990MH2010PLC204788
An open letter to the shareholders of Maruti Suzuki Indi
Limited
Al lowin g Suzuki to own th e Gujarat plant and i ts manufactur ing h as impl icat ions thextend beyond commercial arrangements. Suzuki is cu rrent ly dependent on Marut i , b
al lowing Suzuki to own the Gujarat plant wi l l shi f t the balance of pow er in favour of Su zuk
If the transaction is approved, Maruti will lose all control over its own destiny, and Maruti
shareholders will always remain subservient to the interest of Suzuki’s shareholder
Equal ly important are the impl icat ions of suc h transact ions on other fami ly-run and MNC
in India – they too may begin manufactur ing in un l isted com panies and al low the l iste
com pany to merely trade.
24 November 20
Dear Shareholder:
For a company with as strong a manufacturing track record as Maruti has, to willingly cede groun
to another manufacturer should be anathema - yet this is just what your company is proposing,
allowing Suzuki to own the Gujarat plant. Make no mistake, this vote is about the shifting pow
equation and whether shareholders will allow a manufacturer to continue to ‘manufacture and se
or let it shift gears, and ‘buy to sell.’ To put it simply, you - the shareholders of Maruti - need
decide whether Maruti will continue to remain a manufacturer of cars or will it become a glorifie
distributor.
Equally important are the implications of this vote on family run firms and on other MNC’s. shareholders agree to Suzuki doing owning the Gujarat plant, why should they not agree to th
Tata’s, Munjal’s, Mahindra’s or the Bajaj families proposing the same? Will Glaxo or Nestlé
Holcim now set up fully owned subsidiaries and have their Indian arm only market the products
If so, it will spell doom for the Indian equity markets.
About Maruti and this vote
Your company, Maruti currently has two facilities - in Gurgaon and in Manesar - which have
combined capacity to manufacture 1.55 mn cars. Your company planned to expand its capacitie
by setting up a third plant in Gujarat (1,500,000 cars annually – to be set up in a phased manne
However, in early 2014, Maruti took us all by surprise when it announced that, Suzuki (and n
Maruti) will set up and own the Gujarat plant. Suzuki will manufacture the cars in Gujarat that w
be purchased by Maruti at cost and be sold under the Maruti product portfolio.
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An open letter to the shareholders of Maruti
Suzuki India Limited
Page 2 of
In order to execute this arrangement, your company now proposes to enter into two related par
transaction contracts with Suzuki Motor Gujarat Private Limited (SMGPL), a wholly-owne
subsidiary of Suzuki Motor Corporation (Suzuki), and as required by the Companies Act, 2013,
seeking your approval for the following transactions:
i. Contract Manufacturing Agreement for manufacture and supply of vehicles for an init
period of 15 years. All goods will be sold at cost by SMGPL to Maruti with no profit or loss f
SMGPL.
ii.Lease Deed for developing the plant on land owned by Maruti. As per the deed, SMGPL w
pay Maruti an annual aggregate rental of Rs.49.9 mn for the land an initial period of 15 years
IiAS recommends that you vote AGAINST the resolution. Voting AGAINST this resolutio
means that Maruti will own the Gujarat plant and not Suzuki – it will not result in any stoppage
capacity creation at the Gujarat plant.
IiAS has had reservations about this deal since it was first announced in January 2014 an
continues to believe that the deal is not in Maruti’s long term interest. Our main contentions are
Suzuki is squarely dependent upon Maruti for sales volumes and profits; owning th
Gujarat plant will limit Maruti’s growing criticality to the group
Suzuki is largely an automobile maker 1; automobiles contributed to 89.5% of consolidate
revenues and 95.5% of (segment) profits in 2014-15. Suzuki’s automobile growth, and effective
the company’s entire growth, over the past 15 years has emanated largely from Maruti’s growt
Japan volumes have been almost flat and volumes in ex-India ex-Japan markets have als
reported limited growth. Maruti’s sales (including exports) accounted for 45% of Suzuki’s glob
volumes and Maruti’s production accounted for 43% of Suzuki’s total automobile productio
volumes in 2014-15. India, which is catered to solely by Maruti, has grown almost three time
faster than Suzuki’s sales volumes in Japan and the rest of the world (ex -India ex-Japan).
1 Other products include motorcycles, and marine and power products
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An open letter to the shareholders of Maruti
Suzuki India Limited
Page 3 of
Chart 1: Volume growth in Indian markets (and Maruti) drive Suzuki’s automobile sale
growth
Source: Company Annual Reports, IiAS Research
Chart 2: India is Suzuki’s single largest market, larger than Japan
Maruti’s profit level was over 50% of Suzuki’s (pre-minority interest) in 2014-15 (See Table
below). Moreover, Maruti’s margins have been consistently higher than those reported by Suzuk
On a consolidated basis, in 2014-15, Suzuki reported net margins (after minority interest) of 3.2
against Maruti’s 7.7%.
India41%
Japan26%
OtherMarkets
33%
based on 2014-15 automobile sales volumes
Maruti domestic sales volumes
Suzuki's automobile sales in Japan
Suzuki's automobile sales in ex-India ex-Japan markets
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An open letter to the shareholders of Maruti
Suzuki India Limited
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Chart 3: Maruti's EBITDA margins are higher than those of Suzuki
Source: Company Annual Reports, IiAS Research
Table 1: Maruti’s profit levels drives Suzuki’s global size
2010-11 2011-12 2012-13 2013-14 2014-15
Suzuki Motor Company, Japan (Consolidated) Net sales $ Bn 31.37 16.83 27.41 28.55 25.09Net income before minority interest(A) $ Bn
0.78 0.78 0.97 1.24 1.06
Net income before minority interestmargin %
2.5% 4.6% 3.5% 4.3% 4.2%
Maruti Suzuki India Limited, India (Consolidated) Net sales Rs. Bn. 366.11 351.97 432.16 432.72 492.95Profit after tax, but before minorityinterest (B) Rs. Bn.
23.07 16.34 24.49 28.32 37.91
Profit after tax, but before minorityinterest margin %
6.3% 4.6% 5.7% 6.5% 7.7%
Exchange Rate on 31-Mar ( Source: RBI ) 44.65 51.16 54.39 60.10 62.59Profit after tax (C) $ Bn 0.52 0.32 0.45 0.47 0.61
Maruti's profit level compared to Suzuki's(C/A)
65.9% 40.9% 46.5% 38.0% 57.0%
Source: Company Annual Reports, IiAS Research
Your company, Maruti has had an enviable track record, from when the government took contr
of a moribund company that Sanjay Gandhi was tinkering with. It has been a trailblazer in i
partner selection, the unique ownership structure while remaining a PSU giving it the desire
flexibility, in completing the factory within cost and on time, in launching a high quality car at a
affordable price, in building the dealer network, to setting up ancillaries, and much more. R
Bhargava’s book, The Maruti Story, captures how management responded to the variou
obstacles and challenges, as it journeyed to become an iconic company. While the Suzu
10.0%8.9% 9.3%
10.9% 11.2%11.5%9.6%
11.8%
13.9%15.5%
2010-11 2011-12 2012-13 2013-14 2014-15
Suzuki's EBITDA margin Maruti's EBITDA margin
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An open letter to the shareholders of Maruti
Suzuki India Limited
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management was supportive, as was the government, it was the Indian management that ensure
that Maruti became the company it did, and in the process put India on the global auto map.
Suzuki has not seen this degree of success in any other market, not even in Japan, its hom
market. With Maruti’s phenomenal success, it became critical to the group. Therefore, establishingreater control over Maruti became equally critical. Suzuki first attempted to control Maruti b
wanting to own the Manesar plant. This decision was opposed by many Maruti executive
including Mr. R C Bhargava – it was, in fact, Mr. R C Bhargava who convinced Osama Suzuki
revise this decision. The decision to set up the Gujarat plant under Suzuki rather than Maru
continues to reflect Suzuki’s need to establish greater ownership over Maruti. IiAS continues
ask – what has changed now?
Going forward, Maruti’s one-sided dependence on Suzuki’s technical support will reduce
Maruti has benefited from Suzuki’s technical support in the past, but this will no longer be a on
sided relationship. Over the past three years, your company has invested an average of ov
Rs.3000 per car (produced) in R&D efforts: capital expenditure aggregating Rs.10.14 bn an
another Rs.8.14bn in revenue expenditure. Maruti’s R&D efforts have supported the launch of ne
models and variants, new feature developments and fuel efficiency improvement efforts in th
recent past.
Table 2: Maruti’s R&D spends have increased over the past five years
Year Production
Volumes
R&D Revenue
expenses
R&D Capex R&D Capex
Amortization
R&D spend per
car producedNos Rs. Mn. Rs. Mn. Rs. Mn. Rs. A B C D E=(B+D)/A
2005-06 572,127 396 692.22006-07 667,048 536 803.52007-08 777,017 379 259 24 518.12008-09 774,738 666 244 46 918.72009-10 1,027,879 1,110 623 102 1,179.52010.11 1,273,361 1,847 2,316 313 1,696.22011-12 1,134,607 2,226 1,491 448 2,357.22012-13 1,168,917 2,533 2,613 686 2,753.82013-14 1,153,645 2,265 4,311 1,078 2,897.72014-15 1,308,446 3,340 3,220 1,371 3,600.2
Note: R&D capex amortization has been assumed at 11-year straight line method. Maruti depreciates its plant andmachinery on a straight line basis using an estimated life of 8-11 years.Source: Company Annual Reports
The Rohtak R&D facility (Suzuki Group’s first R&D centre outside Japan) is expected to be ful
functional by the end of the current fiscal. Among other facilities, the Rohtak R&D facility
expected to aid in testing and validating products to meet new regulations regarding safety an
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An open letter to the shareholders of Maruti
Suzuki India Limited
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environment. Most of Suzuki’s incremental investment in R&D facilities is largely being made
India through Maruti. This is also why the company has publicly stated that royalty payouts f
newer models will be lower than the average 6% of sales that is being paid out currently .
IiAS believes that going forward, Suzuki will require Maruti’s R&D facilities and talent as much aMaruti will require Suzuki’s product technology. With the relationship on product developme
becoming less dependent and more co-dependent, Maruti must stand its ground and own th
Gujarat plant, rather than let Suzuki dictate terms.
It’s not about the money – debunking the savings argument
Maruti contends that Suzuki is making the investment in the Gujarat plant because it has a low
cost of capital than Maruti, implying that Maruti would generate better returns investing its cas
surplus in India. Maintaining the excess liquidity in the form of an investment portfolio is detriment
to shareholder interest as Maruti’s investment portfolio has generated returns significantly lowthan the company’s return on capital employed (RoCE).
Maruti estimates earnings from not investing in the Gujarat plant at Rs.105 bn over a 15-ye
period, assuming a post-tax return of 8.5% p.a. But, in the recent past, Marut i’s yield on
investment book has been around 8% at pre-tax levels. Further, Maruti’s RoCE has increase
since 2012 – ROCE was between 15-16% in 2014-15 compared to 10-11% in 2011-12. It is wor
mentioning that in 2014-15, Maruti outperformed its benchmark, BSE Sensex, which registered
median ROCE2 between 8-10% in 2014-15.
Chart 4: Maruti RoCE is higher than the median RoCE of BSE Sensex companies
Source: CMIE Prowess, Company Annual Reports, IiAS Research
2 Source: CMIE
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2010-11 2011-12 2012-13 2013-14 2014-15
Maruti RoCE (Consolidated) BSE Sensex Median RoCE (Consolidated)
Maruti's average yeild on investments
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An open letter to the shareholders of Maruti
Suzuki India Limited
Page 7 of
Maruti argues that the return on capital employed will increase as the profits from the cars sold
Gujarat will be recorded in Maruti’s books, while there will not be any incremental capit
investment. Further, the savings from the surplus funds will further boost revenues and profit
That is a truism. Our contention relates to whether the money is more efficiently utilized in investin
in the business, or in parking the money in surplus funds, or in beginning a real-estate businessThe excess liquidity is pushing Maruti in all directions and it may well lose focus of its co
business. Since Maruti has the money, and can easily invest in setting up the Gujarat plant, it mu
– and remain focused on what it does best.
Maruti’s investment portfolio of surplus funds increased from Rs. 71.2 bn in 2010-11 to Rs. 126
bn in 2014-15. It is clear that Maruti has more than enough funds to meet the initial capit
investment.
In 2014-15, Maruti increased dividend payouts in an effort to please investors. Their contentio
was that because it was not investing in the Gujarat plant, it could pay larger dividends. This is
smokescreen, for two reasons. First, even after the increased dividend payout Maruti is still sittin
on a large cash pool. Second, releasing the cash will increase the company’s ROCE; but, Marut
ROCE is higher than BSE Sensex ROCE, therefore, investors are better placed in letting Maru
invest in the Gujarat plant rather than distributing it or keeping it invested in safe securities.
Chart 5: Despite the increase in dividends, Maruti continues to hold a large investib
surplus
Source: Maruti’s Annual Reports
71.2
79.7
84.4
105.1
126.4
2.5
2.5
2.8
4.2
9.1
2010-11
2011-12
2012-13
2013-14
2014-15
Dividend paid (including dividend tax; Rs. Bn) Surplus funds (Rs. Bn)
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An open letter to the shareholders of Maruti
Suzuki India Limited
Page 8 of
New dealerships and service network expansion is a weak rationale to not invest in Gujar
Maruti already has one of the largest and strongest dealership and service centre network in th
country (more than 1,600 outlets across over 950 cities, and more than 3,000 service outlets
more than 1,470 cities), which not only imparts high visibility to the brand but also helps
garnering new clients. Maruti proposes to significantly expand its dealership network (to abo5,000 dealer workshops) to accommodate increased capacities. While this expansion will requi
some investment, it is unlikely that the entire investment will be made in one year. Maruti ha
taken over 30 years to set up its current level of dealership and service network – and wh
incremental expansion may be significantly faster, it is unlikely to occur in just a span of one
two years. Therefore, as the dealership network expands, Maruti will have also generate
incremental cash flows to accommodate the increasing investment.
Further, Maruti’s volume growth in recent times has emanated from its increasing rural mark
focus. In 2014-15, Maruti’s domestic sales volumes (total) grew by 11%, but rural market volum
grew by 23%. Maruti expanded its reach to nearly 125,000 villages in 2014-15, against 93,00
villages in 2013-14 by increasing its smaller format outlets. It has created a fleet of 1,250 vehicle
that provide mobile service in rural India (Maruti Mobile Service; MMS) to improve servic
penetration.
Chart 6: Maruti has grown its rural sales and service network over the past 5 years
Source: Maruti’s annual reports
Maruti plans to invest in expanding its dealership network especially in the premium car segme
where it has negligible presence – it plans to set up 150 Nexa outlets by 31 March 2016. Th
comes on the back of Maruti trying to establish a name for itself in the premium segment aft
weak response from customers for their premium luxury cars in the past couple of years.
483 509 541 564 568 574
319424
559640 742
1,045
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Full Sales Outlets Smaller Format Outlets
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An open letter to the shareholders of Maruti
Suzuki India Limited
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Given this, how much investment does the Maruti expect to make in increasing its sales an
service outlets? IiAS believes that Maruti has sufficient funds to meet the requirements
expanding and upscaling its sales and service network, and continue to invest in the Gujarat plan
Suzuki has been taking Maruti and its shareholder for granted
Maruti has been operating on its own in the past. Suzuki’s poor attendance of board meetings
prior to 2013 – is testimony to that. In 2012-13, Maruti signed an agreement with the Gujarat Sta
Government (GoG) to acquire 700 acres of land. Following this, Suzuki’s interest in Maruti seem
to have spiked - and in early 2014, Maruti announced that Suzuki would own and set up the Gujar
plant.
Table 3: Attendance of Suzuki’s non-executive directors on Maruti’s board
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Osamu Suzuki 0 0 0 2 5 6
Kenichi Ayukawa + 1 0 1 2 6 5
Kinji Saito N.A. N.A. N.A. 1 5 5
Toshihiro Suzuki N.A. N.A. N.A. N.A. 3/3 4
Number of board meetings held 5 6 5 6 6 6
N.A.: Not applicable + held an executive position from 2013-14
Even when Maruti made the announcement in 2014, it seemed hurried – the company did n
have enough answers to your questions and eventually modified the original deal structu
following the strong push back you gave them. For Japanese companies that think through th
minutest of details, having come out with this announcement was clearly rushed, and perhaptimed to avoid a shareholder vote under the soon-to-be implemented Companies Act 2013.
Having been accused of timing the announcement, the company promised to take your approv
for the offer . It then waited for another 18 months, possibly for the Act to the amended, and th
threshold for related party transactions to be watered down, before approaching you. To say th
the company needed this time to ensure that the agreement met with the feedback from investo
is naïve: a parent is unlikely to have spent 20 months after the announcement, negotiating with
56% subsidiary.
Suzuki’s actions betray its true intention: it is only looking out for itself.
Maruti must not cower, but push for a role reversal
In simply pr esenting the resolution, Maruti’s board has agreed to cower to Suzuki. Suzuk
shareholding can only give it that much power. Maruti must have the integrity to accept that it ha
built its own business, which grows faster and is far more profitable than Suzuki’s. Therefore, yo
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An open letter to the shareholders of Maruti
Suzuki India Limited
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must insist that Suzuki have representation from Maruti on its board as well. In fact, given th
Maruti has demonstrated a stronger manufacturing capability that Suzuki, it must begin to own a
new plants that Suzuki sets up, rather than the other way around.
Shareholders must see through the razzle dazzle and ask – why do all of this at all?
The discussion on the Gujarat plant has been focused squarely towards the details of th
arrangement, including pricing structures and royalty payment. But the larger question remain
unanswered: why have this structure in the first place? IiAS believes that you, as Maruti’s minor
shareholders, must cut through the noise, and focus on the more material decision: Why shou
you allow Maruti cede more control to Suzuki? Will Maruti generate better shareholder returns b
investing in the Gujarat plant, or by earning ‘higher -than-Japanese’ returns by leaving the mone
in bank deposits or even in rolling out a dealership network? The answer is obvious.
On the Gujarat plant vote, our reservations stem from the fact that the proposal unnecessari
complicates Maruti’s business model. Following the Gujarat transaction, the control over a larg
part of its operations and cash flows would move significantly to Suzuki Japan. The balance
power, already in favor of Suzuki, will tilt completely towards them. Over time, Suzuki cou
undermine the criticality of Maruti and significantly increase the importance of SMGPL, bringing
newer technologies, and expanding capacities: Maruti will, over time, cease to have any contr
over its own destiny.
The Indian operation is the jewel in Suzuki’s portfolio. However, given that it is held as a 56.2
subsidiary, implies Suzuki’s own share price does not reflect the full value of its Indian businesBy setting up a facility in Gujarat and manufacturing cars and then selling these to Maruti t
distribute, Suzuki hopes to directly capture a greater portion of the Indian businesses valuation
its share price rather. We believe what Suzuki shareholders will gain – and make no mistake
they will, you will lose.
Your vote is twice as valuable, exercise it
The dates of Maruti’s postal ballot are given below:
Outcome Date: 17 December 2015Receipt Deadline: 15 December 2015, 5:00 PM
Notice Date: 27 October 2015
E-Voting Site: www.evoting.karvy.com
E-voting Period: 16 November 2015, 9:00 AM to 15 December 2015, 5:00 PM
Postal Ballot Notice Available on the BSE website
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An open letter to the shareholders of Maruti
Suzuki India Limited
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Your company has given its rationale for this structure in its explanatory note and details on
website. Our perspective, of course, is different.
You should be aware that e-voting is possible, so unlike the traditional show of hands, each vo
will count. So, it is important that you vote. But that’s not all. This is a related party transactioWhat it means is that Suzuki does not get to vote, but you do. Given Suzuki’s ~56.2% ownersh
only the remaining ~43.8% votes can be cast implying your one share equals 2.2 votes. In othe
words as a shareholder , you can now punc h wel l above your weight.
We hope you will take the above into account the above and exercise your vote.
Yours sincerely,
Please also read IiAS’ previous research on Maruti Royalty flows in Suzuki’s blood 19-Oct-2015
Why should it be any different now? 11-Sep-2014
Maruti launches the razzmatazz 09-Jun-2014
Minority shareholders get their say 15-Mar-2014
Legal Recourse for Maruti Investors 14-Mar-2014
Has Maruti timed its announcement? 07-Mar-2014Maruti must invest in the Gujarat plant, not Suzuki 04-Mar-2014
Has Suzuki short-changed Maruti? 04-Feb-2014
Gujarat announcement weighs against Maruti's minority shareholders 28-Jan-2014
Royalty Payments and minority shareholders 24-Sep-2013
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services to the subject company in the ordinary course, none of IiAS, the research analyst(s) responsible for this report,
and their associates or relatives, has received any compensation from the subject company or any third party for this
report.
None of IiAS, the research analyst(s) responsible for this report, and their associates or relatives, has received any
compensation from the subject company or any third party in the past 12 months in connection with the provision of
services of products (including investment banking or merchant banking or brokerage services or any other products and
services), or managed or co-managed public offering of securities of the subject company.
The research analyst(s) responsible for this report has not served as an officer, director or employee of the subject
company.
None of IiAS or the research analyst(s) responsible for this report has been engaged in market making activity for the
subject company.
7/21/2019 Maruti Open Letter Letter 24Nov2015
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About IiAS
Institutional Investor Advisory Services India Limited (IIAS) is a proxyadvisory firm, dedicated to providing participants in the Indian market withindependent opinion, research and data on corporate governance issuesas well as voting recommendations on shareholder resolutions for over600 companies.
To know more about IIAS visit www.iias.in
OfficeInstitutional Investor Advisory Services15th Floor, West Wing,P J Tower, Dalal Street,Fort, Mumbai - 400 001India
[email protected]: +91 22 2272 1570-3
F: +91 22 2272 1574