Maruti Suzuki India Ltd share price rallies, announces a $500-million factory construction deal

The share price of Maruti Suzuki India Ltd, which is the largest car manufacturer by sales in India, increased by more than 7% on Tuesday morning in Mumbai trading as the company announced it is planning to invest about 500 million dollars in a factory construction deal and asked for the opinion of its minority shareholders.

The factory, which is to be located in Guajarat, will be property of Marutis parent Suzuki Motor Corp. and is considered to be responsible for providing all output to Maruti. The plant is scheduled to start production in 2017.

Maruti Suzuki India Ltd made an official statement on March 15th, revealing that it is expecting to hear the minority investors opinion on a plant, which is to be taken over by the Japanese parent of the company and is estimated to 50 billion yen (492 million dollars).

As explained by the Chairman of the company R.C. Bhargava, the exact date of the shareholders vote has not been set yet. Mr. R.C. Bhargava also said that there is a meeting between the companys management and its investors planned before the vote.

As reported by Bloomberg, Chairman Bhargava said: “Legally its not binding but how we take is another matter.”

One of the analysts working for Angel Broking Pvt – Yaresh Kothari – commented for Bloomberg that the information provided by Maruti Suzuki India “addressed some of the major concerns investors had over the Suzuki plant”.

The management of Maruti Suziki, however, faced a lot of criticism coming from global companies, analysts and minority shareholders, who consider the deal in question as a part of Suzuki Motor Corp. to devour its Indian subsidiary, which has recently proved out to be quite profitable.

Saksham Kaushal, who is an analyst working for Antique Stock Broking Ltd wrote in a note on Tuesday, which was cited by Bloomberg: “Scrapping the idea altogether remains the ideal scenario. How minority shareholders vote on the matter could be a critical catalyst for the stock.”

As reported by the Financial Times, an automotive analyst, who specifically asked not to be identified, commented: “The big concern earlier was that Maruti would end up bearing a lot of capital expenditure costs, cutting their margins to zero for years. Now that isn’t going to happen, which is why the stock jumped. Suzuki don’t get much out of this now, so the deal now seems unquestionably good for Maruti, and I’d expect the shareholders to vote it through.”

Maruti Suzuki India Ltd rose by 7.57% by 8:17 GMT in Mumbai to 1 870 rupees, marking a one-year change of +37.22%. According to the Financial Times, the 52 analysts offering 12-month price targets for Maruti Suzuki India Ltd have a median target of INR 1 800, with a high estimate of INR 2 379 and a low estimate of INR 1 350. The median estimate represents a 3.54% increase from the previous close of 1 738.45 rupees.