IGI Logo

MSIL Board recently approved termination of contract manufacturing agreement with Suzuki Motor Gujarat (SMG) and consolidates entire manufacturing under one-roof by acquiring SMG from Suzuki Motor Corporation (SMC), Japan. The company plans to make this acquisition via issuance of shares to SMC and will seek approval from its minority shareholders. In hindsight, MSIL’s shareholders benefitted from favourable terms of the agreement and conserved cash outflow on capacity expansion. Acquiring SMG at net book value is expected to result in c.4% dilution in EPS. We believe the timing for this announcement couldn’t have been better given the strong product cycle and expansion of volumes & margins (absorbing the above mentioned impact). We maintain BUY with Jun’24 TP of INR 11,500.

* Background to Suzuki Motor Gujarat (SMG): In 2015, MSIL-SMG entered into a contract manufacturing agreement, whereby, a) SMG will manufacture the products and supply the same exclusively to MSIL; b) Capex for the plant over the years will be funded by the parent company SMC (Suzuki Motor Corporation); c) All decisions relating to royalty and intellectual property will be in accordance with contractual agreement / term sheet between MSIL and SMC; and d) with respect to sourcing of parts and components, prior approval of MSIL will be required. Terms of the agreement ensured that SMG would remain no-profit or no-loss entity (profit/loss would be passed on to MSIL through adjustment via vehicle pricing). Basis the term sheet, upon termination of the agreement, MSIL shall at its option purchase all (but not part) of the outstanding shares of SMG and the purchase consideration for the sale shall be equal to the net book value of the shares of SMG.

* MSIL plans to double its production capacity by FY31: The Company indicated that with the growth of the Indian car market and export potential, it would need to increase its production capacity to about 4mn cars per annum by FY31. Its current production capacity stands at 2.25mn units per annum (1.5mn units in Haryana + 0.75mn units in Gujarat through SMG). Over the years, SMG Gujarat plant has been ramped-up and SMG’s revenue has grown by c.29% CAGR to INR 318bn over FY19-23. Given SMG is a no-profit entity, PAT margin is not material.

* MSIL plans to bring entire manufacturing under one-roof by acquiring SMG: In view of managing scale and drive efficiency in production and supply chain, MSIL plans to bring all production related activities under one-roof, terminate contract manufacturing agreement and exercise the option to acquire SMG from SMC in a share swap deal. Our calculation suggests this would result in EPS dilution of c.4% (refer exhibit-1). Choosing to pay via share swap, and not cash, will also help MSIL maintain a cash buffer for future investments towards capacity, new technology, EVs, etc. The company will be taking all statutory and regulatory approvals. And, like in the past, this transaction will also have to be approved by minority shareholders. Share swap details will be shared subsequently.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer