Maruti plans $21 bn funding to boost production

Maruti Suzuki, India’s biggest carmaker, plans to invest about $21 billion (₹1.25 trillion) over the next eight years as it steps up plans to double production and churn out as many as 4 million vehicles every year by the end of the decade.

The maker of top-selling models Swift, Ertiga, and Brezza said it made a capital expenditure (capex) of about ₹7,500 crore in fiscal 2023.

“Regular capex in the existing plants at Gurgaon, Manesar, and Gujarat will continue. Total capex till 2030-31 could be as much as ₹1.25 lakh crore (or ₹1.25 trillion),” the company said in a presentation to investors and analysts.

The company currently has a production capacity of 2.25 million units a year. This includes 1.5 million units from its factories in Gurugram and Manesar in Haryana and 750,000 from Suzuki Motor Gujarat Pvt. Ltd’s (SMG’s) plant in Hansalpur, Gujarat.

SMG is a subsidiary of Maruti’s parent, Suzuki Motor Corp. (SMC), and was set up in 2017 to cater to accelerating demand. Maruti’s board said in June that it has approved the acquisition of the Gujarat arm from SMC in a bid to streamline management as it gears up to boost capacity.

Maruti Suzuki will need around ₹45,000 crore to create a capacity of 2 million units, the auto maker said, adding that the estimate is based on current costs and a small amount for cost escalation.

The company said it will need money to improve its sales and service centers as it aims to almost double domestic sales volumes.  Funds will also be needed to upgrade the systems and facilities used for exporting cars, while also bolstering its factories to produce different types of cars more easily.

Elaborating on its production plans, Maruti Suzuki said it is setting aside more funds for research to make cars that run on traditional fuels in-house.

The company also plans to launch about 11 models with a variety of fuel options during this period. Ramping up the production of electric vehicles and sport-utility vehicles, or SUVs, will also require larger capital investments, it added.

Maruti said it is weighing two methods to finance its plans: either paying in cash, or giving out special equity shares of the company (also called the swap option).

The company told investors that it conducted financial simulations and found that choosing the swap option would lead to higher profits, better earnings per share, and greater dividend payouts for shareholders, making it the preferred choice for fusing their ambition.

Maruti said it plans to grow to 4 million units with no debt and a very small paid-up capital of ₹150 crore that would increase marginally after the share swap.

The high valuation of Maruti’s equity, with a price-earnings ratio far higher than of all large global manufacturers of cars “other than an electric car manufacturer, shows that the market appreciates our management policies including attitude towards cash reserves,” the company said.

Cash has enabled Maruti to make all required capital expenditures whenever required, the company said, adding that cash has enabled it to deal with unexpected crisis situations.

“Cash has not been accumulated by avoiding investments that would benefit the company. It is hard to see why earning interest is not favored in such circumstances, since it gives the company greater resilience and sustainability,” it added.

The period from 2014 showed not spending cash on the Gujarat plant enabled Maruti to become much stronger and its P-E ratio increased from 21 to 33, the company said. “Having cash reserves, and maximizing profits, has benefited everyone, including shareholders. There is no evidence to show that reducing cash would be of greater benefit to the company or shareholders, when a better option is available, which is proven by the projections of EPS and dividends, it said, while pushing for the swap option to fund the acquisition of the Gujarat arm from parent SMC.