Maruti Suzuki India (MSIL) plans to spend about Rs 1.25 trillion on capital expenditure (capex) between FY24 and FY31, the company said on Monday. This is significantly higher than its capex spend of Rs 27,538 crore in the last eight years from FY16 to FY23, a Business Standard analysis showed.
India’s biggest carmaker said it will spend around Rs 45,000 crore to expand production capacity by 2 million units in this eight-year period.
A range of strategic endeavours such as expanding sales channels, building service and spare parts infrastructure, enhancing export capabilities, and financing research and development (R&D) efforts for new vehicle models will roughly get a Rs 80,000 crore allocation.
Currently, MSIL can produce 2.25 million units annually, with the Gujarat plant contributing about 750,000 units per annum.
“The regular capex in the existing plants at Gurgaon, Manesar, and Gujarat will continue,” the automaker said, adding that the capex in FY23 was around Rs 7,500 crore.
The company said additional investments will be required for R&D, particularly to support the majority of development efforts related to internal combustion engine (ICE) cars. “Capex will be needed to develop 10-11 new models, with different fuel options in this period. Production of EVs (electric vehicles) and SUVs (sport utility vehicles) will also need larger capex,” it added.
In a presentation to its shareholders and analysts, MSIL elaborated on its rationale for avoiding a cash transaction and instead pursuing a share swap deal with Suzuki Motor Corporation (SMC) as the preferred approach for acquiring the Gujarat plant from its parent company.
“Funds would be needed for creating the sales, service and spare parts infrastructure to almost double domestic sales volumes. The infrastructure for exporting the much larger volume of cars will also have to be strengthened. The conversion of production lines to have greater flexibility will need additional capex,” MSIL said.
In FY23, MSIL had clocked domestic sales of 1.61 million units of passenger vehicles (PVs), marking a year-on-year (Y-o-Y) increase of 21.1 per cent. Additionally, its total exports for the same financial year reached 0.26 million units, reflecting a growth of 8.8 per cent Y-o-Y.
The company had cash reserves of more than Rs 45,000 crore as of April 1 this year. MSIL said that payout of over Rs 12,500 crore for SMC shares in Suzuki Motor Gujarat (SMG) would, besides reducing profits, earnings per share (EPS) and dividend payments, could also create a “shortage” of cash.
SMG, a wholly-owned subsidiary of SMC, operates the Gujarat plant. In 2015, SMG entered into a contract manufacturing agreement (CMA) with MSIL.
It added: “MSIL has from its inception followed a policy of accumulating cash reserves by being frugal in all its expenditures. The company now plans to grow to 4 million units with no debt and a very small paid-up capital of Rs 150 crore that would increase marginally after the share swap.”
The high valuation of MSIL equity, with a price to earnings (P/E) ratio far higher than all large global manufacturers of cars other than an electric car manufacturer, shows that the market appreciates its management policies including attitude towards cash reserves, it noted. In the last six months, MSIL’s share price has increased by about 20 per cent to Rs 10,226.
MSIL added that cash plays a crucial role in facilitating necessary capital expenditure and managing unforeseen crises effectively. “Cash has not been accumulated by avoiding investments that would benefit the company. It is hard to see why earning interest is not favoured in such circumstances, since it gives the company greater resilience and sustainability. It enables future opportunities to be seized easily,” it said.
