Institutional Investor Advisory Services India Limited 15th 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 India
Limited
Allowing Suzuki to own the Gujarat plant and its manufacturing has implications that
extend beyond commercial arrangements. Suzuki is currently dependent on Maruti, but
allowing Suzuki to own the Gujarat plant will shift the balance of power in favour of Suzuki.
If the transaction is approved, Maruti will lose all control over its own destiny, and Maruti’s
shareholders will always remain subservient to the interest of Suzuki’s shareholders.
Equally important are the implications of such transactions on other family-run and MNCs
in India – they too may begin manufacturing in unlisted companies and allow the listed
company to merely trade.
24 November 2015
Dear Shareholder:
For a company with as strong a manufacturing track record as Maruti has, to willingly cede ground
to another manufacturer should be anathema - yet this is just what your company is proposing, by
allowing Suzuki to own the Gujarat plant. Make no mistake, this vote is about the shifting power
equation and whether shareholders will allow a manufacturer to continue to ‘manufacture and sell’
or let it shift gears, and ‘buy to sell.’ To put it simply, you - the shareholders of Maruti - need to
decide whether Maruti will continue to remain a manufacturer of cars or will it become a glorified
distributor.
Equally important are the implications of this vote on family run firms and on other MNC’s. If
shareholders agree to Suzuki doing owning the Gujarat plant, why should they not agree to the
Tata’s, Munjal’s, Mahindra’s or the Bajaj families proposing the same? Will Glaxo or Nestlé or
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 a
combined capacity to manufacture 1.55 mn cars. Your company planned to expand its capacities
by setting up a third plant in Gujarat (1,500,000 cars annually – to be set up in a phased manner).
However, in early 2014, Maruti took us all by surprise when it announced that, Suzuki (and not
Maruti) will set up and own the Gujarat plant. Suzuki will manufacture the cars in Gujarat that will
be purchased by Maruti at cost and be sold under the Maruti product portfolio.
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 2 of 14
In order to execute this arrangement, your company now proposes to enter into two related party
transaction contracts with Suzuki Motor Gujarat Private Limited (SMGPL), a wholly-owned
subsidiary of Suzuki Motor Corporation (Suzuki), and as required by the Companies Act, 2013, is
seeking your approval for the following transactions:
i. Contract Manufacturing Agreement for manufacture and supply of vehicles for an initial
period of 15 years. All goods will be sold at cost by SMGPL to Maruti with no profit or loss for
SMGPL.
ii. Lease Deed for developing the plant on land owned by Maruti. As per the deed, SMGPL will
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 resolution
means that Maruti will own the Gujarat plant and not Suzuki – it will not result in any stoppage of
capacity creation at the Gujarat plant.
IiAS has had reservations about this deal since it was first announced in January 2014 and
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 the
Gujarat plant will limit Maruti’s growing criticality to the group
Suzuki is largely an automobile maker1; automobiles contributed to 89.5% of consolidated
revenues and 95.5% of (segment) profits in 2014-15. Suzuki’s automobile growth, and effectively
the company’s entire growth, over the past 15 years has emanated largely from Maruti’s growth.
Japan volumes have been almost flat and volumes in ex-India ex-Japan markets have also
reported limited growth. Maruti’s sales (including exports) accounted for 45% of Suzuki’s global
volumes and Maruti’s production accounted for 43% of Suzuki’s total automobile production
volumes in 2014-15. India, which is catered to solely by Maruti, has grown almost three times
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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 3 of 14
Chart 1: Volume growth in Indian markets (and Maruti) drive Suzuki’s automobile sales
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 1
below). Moreover, Maruti’s margins have been consistently higher than those reported by Suzuki.
On a consolidated basis, in 2014-15, Suzuki reported net margins (after minority interest) of 3.2%
against Maruti’s 7.7%.
India41%
Japan26%
Other Markets
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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 4 of 14
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 25.09 Net income before minority interest (A) $ Bn
0.78 0.78 0.97 1.24 1.06
Net income before minority interest margin %
2.5% 4.6% 3.5% 4.3% 4.2%
Maruti Suzuki India Limited, India (Consolidated) Net sales Rs. Bn. 366.11 351.97 432.16 432.72 492.95 Profit after tax, but before minority interest (B) Rs. Bn.
23.07 16.34 24.49 28.32 37.91
Profit after tax, but before minority interest 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 62.59 Profit 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 control
of a moribund company that Sanjay Gandhi was tinkering with. It has been a trailblazer in its
partner selection, the unique ownership structure while remaining a PSU giving it the desired
flexibility, in completing the factory within cost and on time, in launching a high quality car at an
affordable price, in building the dealer network, to setting up ancillaries, and much more. RC
Bhargava’s book, The Maruti Story, captures how management responded to the various
obstacles and challenges, as it journeyed to become an iconic company. While the Suzuki
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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 5 of 14
management was supportive, as was the government, it was the Indian management that ensured
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 home
market. With Maruti’s phenomenal success, it became critical to the group. Therefore, establishing
greater control over Maruti became equally critical. Suzuki first attempted to control Maruti by
wanting to own the Manesar plant. This decision was opposed by many Maruti executives,
including Mr. R C Bhargava – it was, in fact, Mr. R C Bhargava who convinced Osama Suzuki to
revise this decision. The decision to set up the Gujarat plant under Suzuki rather than Maruti
continues to reflect Suzuki’s need to establish greater ownership over Maruti. IiAS continues to
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 one-
sided relationship. Over the past three years, your company has invested an average of over
Rs.3000 per car (produced) in R&D efforts: capital expenditure aggregating Rs.10.14 bn and
another Rs.8.14bn in revenue expenditure. Maruti’s R&D efforts have supported the launch of new
models and variants, new feature developments and fuel efficiency improvement efforts in the
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 produced
Nos Rs. Mn. Rs. Mn. Rs. Mn. Rs. A B C D E=(B+D)/A
2005-06 572,127 396 692.2
2006-07 667,048 536 803.5
2007-08 777,017 379 259 24 518.1
2008-09 774,738 666 244 46 918.7
2009-10 1,027,879 1,110 623 102 1,179.5
2010.11 1,273,361 1,847 2,316 313 1,696.2
2011-12 1,134,607 2,226 1,491 448 2,357.2
2012-13 1,168,917 2,533 2,613 686 2,753.8
2013-14 1,153,645 2,265 4,311 1,078 2,897.7
2014-15 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 and machinery 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 fully
functional by the end of the current fiscal. Among other facilities, the Rohtak R&D facility is
expected to aid in testing and validating products to meet new regulations regarding safety and
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 6 of 14
environment. Most of Suzuki’s incremental investment in R&D facilities is largely being made in
India through Maruti. This is also why the company has publicly stated that royalty payouts for
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 as
Maruti will require Suzuki’s product technology. With the relationship on product development
becoming less dependent and more co-dependent, Maruti must stand its ground and own the
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 lower
cost of capital than Maruti, implying that Maruti would generate better returns investing its cash
surplus in India. Maintaining the excess liquidity in the form of an investment portfolio is detrimental
to shareholder interest as Maruti’s investment portfolio has generated returns significantly lower
than 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-year
period, assuming a post-tax return of 8.5% p.a. But, in the recent past, Maruti’s yield on its
investment book has been around 8% at pre-tax levels. Further, Maruti’s RoCE has increased
since 2012 – ROCE was between 15-16% in 2014-15 compared to 10-11% in 2011-12. It is worth
mentioning that in 2014-15, Maruti outperformed its benchmark, BSE Sensex, which registered a
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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 7 of 14
Maruti argues that the return on capital employed will increase as the profits from the cars sold in
Gujarat will be recorded in Maruti’s books, while there will not be any incremental capital
investment. Further, the savings from the surplus funds will further boost revenues and profits.
That is a truism. Our contention relates to whether the money is more efficiently utilized in investing
in the business, or in parking the money in surplus funds, or in beginning a real-estate business?
The excess liquidity is pushing Maruti in all directions and it may well lose focus of its core
business. Since Maruti has the money, and can easily invest in setting up the Gujarat plant, it must
– 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. 126.4
bn in 2014-15. It is clear that Maruti has more than enough funds to meet the initial capital
investment.
In 2014-15, Maruti increased dividend payouts in an effort to please investors. Their contention
was that because it was not investing in the Gujarat plant, it could pay larger dividends. This is a
smokescreen, for two reasons. First, even after the increased dividend payout Maruti is still sitting
on a large cash pool. Second, releasing the cash will increase the company’s ROCE; but, Maruti’s
ROCE is higher than BSE Sensex ROCE, therefore, investors are better placed in letting Maruti
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 investible
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)
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 8 of 14
New dealerships and service network expansion is a weak rationale to not invest in Gujarat
Maruti already has one of the largest and strongest dealership and service centre network in the
country (more than 1,600 outlets across over 950 cities, and more than 3,000 service outlets in
more than 1,470 cities), which not only imparts high visibility to the brand but also helps in
garnering new clients. Maruti proposes to significantly expand its dealership network (to about
5,000 dealer workshops) to accommodate increased capacities. While this expansion will require
some investment, it is unlikely that the entire investment will be made in one year. Maruti has
taken over 30 years to set up its current level of dealership and service network – and while
incremental expansion may be significantly faster, it is unlikely to occur in just a span of one or
two years. Therefore, as the dealership network expands, Maruti will have also generated
incremental cash flows to accommodate the increasing investment.
Further, Maruti’s volume growth in recent times has emanated from its increasing rural market
focus. In 2014-15, Maruti’s domestic sales volumes (total) grew by 11%, but rural market volumes
grew by 23%. Maruti expanded its reach to nearly 125,000 villages in 2014-15, against 93,000
villages in 2013-14 by increasing its smaller format outlets. It has created a fleet of 1,250 vehicles
that provide mobile service in rural India (Maruti Mobile Service; MMS) to improve service
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 segment
where it has negligible presence – it plans to set up 150 Nexa outlets by 31 March 2016. This
comes on the back of Maruti trying to establish a name for itself in the premium segment after
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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 9 of 14
Given this, how much investment does the Maruti expect to make in increasing its sales and
service outlets? IiAS believes that Maruti has sufficient funds to meet the requirements of
expanding and upscaling its sales and service network, and continue to invest in the Gujarat plant.
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 State
Government (GoG) to acquire 700 acres of land. Following this, Suzuki’s interest in Maruti seems
to have spiked - and in early 2014, Maruti announced that Suzuki would own and set up the Gujarat
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 not
have enough answers to your questions and eventually modified the original deal structure
following the strong push back you gave them. For Japanese companies that think through the
minutest of details, having come out with this announcement was clearly rushed, and perhaps
timed 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 approval
for the offer. It then waited for another 18 months, possibly for the Act to the amended, and the
threshold for related party transactions to be watered down, before approaching you. To say that
the company needed this time to ensure that the agreement met with the feedback from investors
is naïve: a parent is unlikely to have spent 20 months after the announcement, negotiating with its
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 presenting the resolution, Maruti’s board has agreed to cower to Suzuki. Suzuki’s
shareholding can only give it that much power. Maruti must have the integrity to accept that it has
built its own business, which grows faster and is far more profitable than Suzuki’s. Therefore, you
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 10 of 14
must insist that Suzuki have representation from Maruti on its board as well. In fact, given that
Maruti has demonstrated a stronger manufacturing capability that Suzuki, it must begin to own all
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 the
arrangement, including pricing structures and royalty payment. But the larger question remains
unanswered: why have this structure in the first place? IiAS believes that you, as Maruti’s minority
shareholders, must cut through the noise, and focus on the more material decision: Why should
you allow Maruti cede more control to Suzuki? Will Maruti generate better shareholder returns by
investing in the Gujarat plant, or by earning ‘higher-than-Japanese’ returns by leaving the money
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 unnecessarily
complicates Maruti’s business model. Following the Gujarat transaction, the control over a large
part of its operations and cash flows would move significantly to Suzuki Japan. The balance of
power, already in favor of Suzuki, will tilt completely towards them. Over time, Suzuki could
undermine the criticality of Maruti and significantly increase the importance of SMGPL, bringing in
newer technologies, and expanding capacities: Maruti will, over time, cease to have any control
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 business.
By setting up a facility in Gujarat and manufacturing cars and then selling these to Maruti to
distribute, Suzuki hopes to directly capture a greater portion of the Indian businesses valuation in
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 2015
Receipt 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
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 11 of 14
Your company has given its rationale for this structure in its explanatory note and details on its
website. Our perspective, of course, is different.
You should be aware that e-voting is possible, so unlike the traditional show of hands, each vote
will count. So, it is important that you vote. But that’s not all. This is a related party transaction.
What it means is that Suzuki does not get to vote, but you do. Given Suzuki’s ~56.2% ownership,
only the remaining ~43.8% votes can be cast implying your one share equals 2.2 votes. In other
words as a shareholder, you can now punch well 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-2014
Maruti 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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Institutional Investor Advisory Services India Limited (IIAS) is a proxy advisory firm, dedicated to providing participants in the Indian market with independent opinion, research and data on corporate governance issues as well as voting recommendations on shareholder resolutions for over 600 companies. To know more about IIAS visit www.iias.in Office Institutional Investor Advisory Services 15th Floor, West Wing, P J Tower, Dalal Street, Fort, Mumbai - 400 001 India Contact [email protected] T: +91 22 2272 1570-3 F: +91 22 2272 1574