Interest on Rs 3,000 cr to overweigh depreciation benefit: RC Bhargava

Written by fe Bureau | New Delhi | Updated: Mar 13 2014, 19:10pm hrs
Maruti Suzuki India chairman says the gains from the interest earned on cash of Rs 3,000 crore, over a period of 15 years would far outweigh the benefits of depreciation that it would have got by setting up the plant. RC Bhargava told FE on Wednesday that since Suzuki Motor Corporation (SMC)s subsidiary would supply vehicles to MSIL without retaining a profit for itself, the cost to MSIL would be lower to the extent of the return on equity. He said that the proposal has not been rushed through and Sebi had asked for some information last month, which the company has provided. Excerpts:

How do you assess the costs of the vehicles at the SMC subsidiary if the models being made there are different from those in MSIL

We will be in charge of sourcing from the vendors and we know the cost of components. What they make is what we tell them to make.

How do shareholders know that the pricing will be arms length and transparent

Whatever profit made in Gujarat, will be made by us, we will get the car at a cost without the RoE. So the price will be lower to the extent of the return on equity. If SMC is putting in R3,000 crore, and theyre not taking back any profit, where does that profit go It has to go somewhere. The subsidiary will not accumulate a surplus, it will run as a no-profit, no loss entity and therefore they will not remit anything. The royalty will be paid by us and the licence for any product is with us, not with them. They are only a manufacturer.

Why is SMC making the investment if is not going to earn a return

SMC will realise its profits through MSIL. They are investing here because they earn a zero return in Japan. Had they brought in the money through preference capital they would not have made the same return. And a yen loan would have hurt MSIL.

The clarification issued by MSIL in February envisages that SMCs Gujarat subsidiary will be merged with MSIL after 15 years...

We have said 15 years but people have suggested that we lengthen the contract manufacturing period. So we need to see what happens when we lengthen that period of the contract to say 25 years. With the new Companies Act, a merger would require minority shareholders to vote on the proposal.

Has this proposal been pushed through to avoid the new clauses in the Companies Act

No, the proposal has been in the works for a long time. Sebi had written to us last month asking for some information and we have provided that.

There will be a mark-up to take of the capex, how much will that be

Yes, there will be a mark-up to the fund the capex, how much this will be is still to be discussed. Also how additional equity SMC will bring in is also to be decided. Over a 15-year period the additional capex required will be close to Rs 3,000-4,000 crore. The total investment envisaged over the long term is approximately Rs 18,000 crore. The initial 2.5 lakh units will cost Rs 3,000 crore while each addition of a similar capacity will cost Rs 2,500 crore approximately. The depreciation over a 15 year period will be roughly Rs 13, 000 crore or so.