MARUTI SUZUKI INDIA SPIL acquisition: A right move: Edelweiss,

Maruti Suzuki (MSIL) has bought Suzuki Motor Corp.’s (SMC) stake in
Suzuki Power Train (SPIL), a diesel manufacturing associate company, in a
share swap deal. With this, MSIL will have better control over diesel
engine sourcing. The move also indicates that management has accepted
increasing dieselization in India as an irreversible trend. MSIL will fund
this buy-out through fresh issuance of share to SMC (4.5% dilution). Since
SPIL is profitable, it is unlikely to be EPS dilutive. Maintain ‘BUY’

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Raises stake in Suzuki Power Train to 100%
MSIL has bought 70% stake of Suzuki (SMC) in SPIL, a diesel engine making associate
company. In a share swap deal, for every 70 shares held in SPIL, SMC has been given 1
share in MSIL, resulting in fresh issuance of 13.1m shares (4.5% dilution). This increases
SMC’s stake in MSIL by 2.0% to 56.2%. This deal values SPIL at ~INR21.5bn (INR71/share
of MSIL, post dilution).
Move driven by operational restructuring
SPIL was supplying diesel engine to MSIL, while MSIL itself was setting up capacity for
diesel engine. This acquisition brings complete engine sourcing under one management
and reduces duplication of overheads. It also indicates management’s confidence on
the sustainability of diesel vehicle demand in India. SPIL is a profitable venture and
reported 12% EBITDA margin, 2.5% PAT margin and ROCE of 6% in FY12. Lower ROCE
and PAT margin are owing to high depreciation.
Outlook and valuations: Favourable; maintain ‘BUY’
Lower interest rates, fall in crude prices and subsequent cut in petrol prices are likely to
revive car demand, of which, MSIL could be a key beneficiary. Thus, we maintain ‘BUY’
with TP of INR1530. Key risks include adverse forex movement and steep increase in
excise duty on diesel vehicles.