Maruti up on Gujarat plant clarity; brokerages overweight

Shares of Maruti Suzuki India rallied 1 percent intraday on Monday. The car manufacturer which agreed to let parent Suzuki Motor Corporation own an upcoming plant in Gujarat, expects to save about Rs 10,500 crore in the first 15 years by not investing in the facility.

In a presentation filed to the BSE related to the contentious Gujarat plant, the company said it proposes to enter into a contract manufacturing agreement (CMA) with Suzuki Motor Gujarat (SMG), a fully owned subsidiary of Suzuki Motor Corporation (SMC).

"The CMA would initially be for a period of 15 years and shall be automatically extended for a further period of 15 years, unless the parties mutually agree to terminate it; and after the expiry of 30 years, MSIL and SMG may mutually agree to extend the period of the CMA," it said.

Maruti Suzuki India Ltd (MSIL) said it "could earn about Rs 10,500 crore, assuming a post-tax return of 8.5 percent per annum during the initial 15 year period of the CMA, from the savings of investments not made in Gujarat."

Brokerages are bullish on the stock as clarity on Gujarat plant is likely to boost investor confidence.

Barclays is overweight on the stock. According to Barclays, the announcement provides necessary safeguards and transparency to shareholders. “The deal is accretive for Maruti cash flows. There is also a possibility of higher dividend payout at Maruti as a way for Suzuki to recover investment at Gujarat plant,” it said.

Morgan Stanley is also overweight on the stock and feels the announcement is ‘neutral to slightly positive’.

Maruti Suzuki India Limited