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Maruti privatisation to give Suzuki freer hand

Maruti Udyog Ltd's impending privatisation looks set to give founding company Suzuki Motor Corp a somewhat freer hand while trying to steer the Indian automaker back to profitability.

It will be a key, although not momentous, gain for Japan's leading minivehicle maker, which already effectively runs the show at the 50-50 joint venture with the Indian government.

"They are the show," said a Maruti official who declined to be identified, referring to Suzuki.

Some analysts also argue the move will make Suzuki more attractive to investors by paving the way to consolidate Maruti -- India's dominant carmaker with a massive 60 per cent market share -- on its books.

This would boost Suzuki's sales and operating profits and make its valuations cheaper, they argue.

But while the wheels of privatisation seem to have been set inexorably in motion, it is not clear how much more control Suzuki will gain from Maruti, with which it first entered into an alliance in 1982, a year after the Indian automaker was formed.

The two-stage privatisation will begin with a Rs 4.0 billion rights issue, taken up equally by Suzuki and the Indian government.

The government will then sell some of the shares to financial institutions and some to Suzuki, charging the Japanese automaker a premium for gaining control.

The rights issue was set to be completed by the end of March but Indian newspapers have said this could take longer as the two are still haggling over the control premium.

According to calculations by Merrill Lynch, Suzuki's stake is likely to range from around 50 per cent to 54 per cent after the rights issue while the government's holding would fall.

Recent industry expectations, however, are that financial institutions are unlikely to subscribe and that Suzuki may take the entire Rs 4.0 billion issue.

In the second stage, the Indian government plans to sell off its 6.61 million shares to a wide-range of investors.

Although there was once speculation that General Motors Corp, which owns 20 per cent of Suzuki, might be interested in a stake, the US auto giant has so far stayed out of the picture.

QUICKER DECISIONS

Analysts say the rights issue will bring in money to fund expansions in production capacity and new products but the real advantage of more control will lie in speedier decision making.

"The Indian government is not an automotive professional and lot of time that was wasted in meetings with the government won't be wasted any longer," says Hideaki Aonuma, auto analyst at Tokyo-Mitsubishi Securities.

More control will also lessen the risk of the Indian government playing backseat driver as it did in a bitter feud in 1997 when it and Suzuki clashed over who to appoint as Maruti's managing director.

The case even went as far as the International Court of Arbitration in Paris before the two reconciled.

In the second stage of the Indian government's divestment, they argue there is the risk that Suzuki could be landed with some rather vocal minority shareholders compared to the relatively silent government at present.

The ability to implement speedy decisions will be critical as Suzuki works to reshape Maruti, a former virtual monopoly that in its glory days in 1996 and 1997 raked in profits and commanded as much as 80 per cent of the market.

Badly bruised by the onslaught of new competition, especially from South Korean automaker Hyundai Motor Co, Maruti slumped to a net loss of Rs 2.694 billion in the last business year ended March 31, 2001.

SHRINKING MARKET SHARE

Suzuki officials have described Maruti's performance this business year as "not loss-making" but declined further comment.

Over the long-term, analysts expect Maruti's 60 per cent market share to decline to a more realistic 35-40 per cent as competition intensifies.

But rather than market share, analysts say Suzuki, whose chairman Osamu Suzuki is known for his obsession with cost-cutting, will be focusing on increasing profit per vehicle.

And while Maruti's market share will probably decline, the overall pie is expected to get bigger.

"Eight to 10 per cent growth in car volumes in India is likely and I expect Maruti to grow as much as the overall market," said Taher Badshah, an analyst at Kolkata-based Kotak Securities.

In particular Maruti, which dominates the entry-level vehicle market, will need to ensure that consumers who move away from cheaper small cars remain within the Maruti family of products.

Merrill Lynch's Takaki Nakanishi also argues that Suzuki's assumption of greater control at Maruti will lead to a reassessment of the parent company by investors.

If Suzuki were to boost its stake to 52 per cent and consolidate Maruti on its profit and loss statements by the year starting April 2002, he estimates its sales and operating profit would rise by 13 per cent and valuations would improve by 15 per cent.

"Suzuki's sales will reach yen two trillion ($15.1 billion), dispelling its image as a small and medium enterprise and risk will be more diversified in its sales breakdown, freeing it from over-emphasis on Japan," he said.

But the contribution from Maruti to Suzuki's net income which is now incorporated as contributions from minority interests will only rise a little, reflecting the estimated change from 50 per cent to 52 per cent.

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