Thought for the day
“Life is pretty simple: You do some stuff. Most fails. Some
works. You do more of what works. If it works big, others quickly copy it. Then
you do something else. The trick is the doing something else.”
-
Leonardo DI Vinci (Italian, 1452-1519)
Word for the day
Riposte (n)
A quick and effective reply by word or act.
(Source: Dictionary.com)
Teaser for the day
A UNESCO report reveals that in India 90% of poor children
remain illiterate even after 4yrs of education.
AK and AY propose to reward the teachers responsible for
achieving this amazing feat by making their jobs permanent!
For a few Yen more
India’s largest car manufacturer, Maruti Suzuki Limited (MSL)
announced some significant changes to its India strategy on Tuesday. The
company stated that the plans to set up a new manufacturing plant in the state
of Gujarat are being shelved in favor of its parent company Suzuki Motors. The
Gujarat manufacturing facility will now be set under a 100% subsidiary of
Suzuki Motors.
It has been projected to the investors that this plant will
manufacture vehicles exclusively for MSL. Accordingly, the entire capex,
besides land cost, will be done by the parent company. MSL will only lease the
land to the new 100% subsidiary.
The traders in a knee jerk reaction heavily shorted MSL stock.
However, post clarification by the MSL management there was a scramble to cover
the shorts. Traders perhaps realized that it was 3year too early to short the
stock.
To me however the management’s explanation and logic behind such
move does not appear convincing enough. In my view there could be much more
behind this deal than what is being told to investors.
I find it important to highlight because this instance
reinforces the trend seen in case of ACC-Ambuja deal last year (see
here).
The following probabilities make the MSL unsuitable for my model
portfolio:
(a)
The change in strategy could be an effect of
labor unrest seen in recent years at MSL Gurgaon manufacturing facilities. Through
this deal, the company will be able to offer better deal to the employees at
new plant, while the struggle with older employees continues.
(b)
It is not clear whether all further expansions
will happen under the new arrangement? If so, what will happen if MSL decides
to shut down Haryana facilities in long term due to continued labor unrest and
logistic issues? Moreover, it is not clear whether the new 100% subsidiary will
honor the commitments made to various component ancillaries, vendors and suppliers.
If not, how will it affect their relationship with MSL?
(c)
The process of indigenization of technology
could abruptly halt, as most new models could be manufactured at new plant post
2017. R&D activities of MSL may also be hampered.
(d)
There will be almost no transparency about
payments for royalty and technology transfer, as account of the new 100%
subsidiary will not be open to public scrutiny.
(e)
The Gujarat plant, being closer to port, will
certainly be a better source for exports. I would like to see what the
arrangement between MSL and the parent says about this. From the details
available so far, it appears that the new 100% subsidiary will not engage in
marketing and distribution activities which will be exclusively carried on by
MSL only. However, assumption that this arrangement will apply or continue to
apply to export activities in long term also does not seem logical.
(f)
In any case, going forward the company shall
face increased competition in its core small and midsized car constituency, as
most competitors are now focusing on that.
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