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Sunday, May 19, 2002

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Maruti disinvestment -- Releasing the clutch

S. Muralidharan


A Maruti assembly line... But for the Government's dilly-dallying and the unnecessary resistance from Opposition parties, the disinvestment deal could have been finalised much earlier.

WITH the finalisation of the disinvestment programme in Maruti Udyog Ltd (MUL), the Government has taken a big step towards finally exiting businesses it has no business to be in.

However, while the Government is probably patting itself on the back after clinching what seems like a decent deal with Suzuki Motor Corporation (SMC), it is still a fact that had the deal been struck two years back, the valuation of MUL could have been higher than now.

But for the Government's dilly-dallying and the unnecessary resistance from Opposition parties to allow disinvestments in MUL, the deal could have been finalised much earlier. The `first right refusal' clause in the agreement between the Government and SMC would have made the completion of the disinvestment in the company far easier, since the Government had to contend with only one bidding, or negotiating party.

Now that the first tranche of the disinvestment in MUL is over, the Government will, hopefully, learn from the past and at least launch the second tranch, in the form of a public issue of shares, at a propitious time in the stock market. The public issue, to be made in two instalments of 36 lakh shares and 29 lakh shares respectively, would aggregate to Rs 1,424 crore. But, first, the Government is expected to receive about Rs 1,000 crore as control, or renunciation, premium from Suzuki for renouncing (in favour of the latter) its share of the proposed Rs 400-crore rights issue in MUL.

What does it mean for the company?

The whole exercise could also benefit the company, as the proposed rights issue will infuse the much needed and long overdue infusion of fresh capital. While MUL is not particularly highly leveraged, the new capital and the additional premium amount to be received from SMC — the equal equity partner with the government in the company — will help it invest productively in new models, fund research into such areas as new engines and also modernise the aging Plant 1 in Gurgaon, near Delhi.

After progressively reducing its debt portfolio and remaining a zero-debt company for nearly three years, MUL had to raise long-term funds through a Rs 300-crore non-convertible debenture issue in 2000-01. The amount so raised was used to fund the company's product portfolio expansion. Now, the funds obtained from the rights issue at a premium of Rs 3,180, aggregating to about Rs 400 crore may also be used to return the outstanding debt, which was raised in two tranches at high interest rates of 11.2 per cent and 12 per cent.

Further, despite a string of new launches in the past three years and despite providing customers with the highest number of choices, MUL's product mix is losing its ability to excite and wean away customers from the new clutch of competitors. This is particularly evident in the mid-size and premium segment of the car market. The company needs to infuse new blood into its product mix in these areas. This is where the Suzuki Aerio and the Suzuki Grand Vitara step in. These two models are slated to be launched in the country within the next two years. The ageing Esteem has not been able to stand up to competition from the likes of the Hyundai Accent, the Ford Ikon and the Opel Corsa.

Further, though MUL is the undisputed leader in the small car segment, the future could witness a shift in market share in favour of Ford, Honda and Hyundai, all of whom are planning to launch new B-segment cars. However, Suzuki could, in partnership with GM — which holds about 20 per cent in the Japanese company — face up to this competition and maintain its leadership position in India. Models from Suzuki and GM in the B-segment that may find their way to India include the Chevrolet Cruze, the Suzuki Ignis, the Kei, MR Wagon and the Suzuki Lapin.

Multinational companies in most sectors in India have traditionally been loathe to bringing in their best in technology. This has been partly due to cost considerations and partly due to a perceived risk of losing proprietary technology to Indian partners.

Suzuki has been no exception and the whole gear-box localisation controversy revolved around this point. However, post-rights issue, with the Japanese partner gaining a majority 54 per cent stake, it could be much easier for SMC to begin manufacturing gear-boxes locally.

The funds from the rights issue will help MUL invest in upgraded production facilities for the proposed new products.

The product development cycle is also expected to reduce as the Japanese partner takes more active interest in the company and decision-making is speeded up post-disinvestment. With Maruti becoming a subsidiary of SMC, the last relics of the domestic passenger car industry would only be Tata Engineering and Mahindra & Mahindra.

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