Maruti Suzuki shares slip 1% after announcing Gujarat plant acquisition; street expects EPS, RoCE impact

• The board of Maruti Suzuki India Limited(MSIL) plans to acquire Suzuki Motor Gujarat (SMG) from Suzuki Motor Corporation.
  
• The acquisition of the SMG plant will be done at its net book value, which was ₹12,755 crore. as of March 2023.
  
• Based on calculations, analysts estimate a cut in earnings per share (EPS) estimates.
  

The Maruti Suzuki board has approved the termination of a contract manufacturing agreement with Suzuki Motor Gujarat (SMG) and plans to acquire SMG from Suzuki Motor Corporation. MSIL had announced the first quarter results on Monday where it posted a 145% jump in net profit to ₹2,485 crore.

Despite the positive quarterly reading, the Maruti Suzuki shares ended Tuesday trade a percent in the red dragging the Nifty Auto which closed 0.2% in the negative. In the last six months, the stock is up over 10%.

Market watchers expect that the acquisition of the Gujarat plant will lead to a reduction in EPS estimates

The acquisition of the SMG plant will be done at its net book value, which was ₹12,755 crore as of March 2023. This deal is expected to improve production efficiency and decision-making agility. The specific deal consideration and payment mode will be determined in the subsequent board meeting. Maruti expects to finalise the transaction by the end of the fiscal year 2023-2024.

Market watchers agree that the acquisition will lead to a reduction in projected EPS, though they vary on the quantum of reduction. As per analysts at Jefferies Equity Research, the acquisition might lead to a slight 3-4% reduction in the projected EPS for the fiscal years 2025-2026, assuming no efficiency benefits are realised.

Analysts at Motilal Oswal financial services agree, saying that the move will result in an estimated 4-5% cut in earnings EPS and a reduction of 90 basis points in return on capital employed (RoCE) with a cash payout or 310 basis points with an equity swap in FY2025. The analysts have taken the SMG acquisition into account while formulating our FY25 estimates, assuming a cash consideration of ₹13,000 crore for the transaction.

In the worst-case scenario, there could be a potential impact of 2-3% on EPS due to reduced treasury income as per analysts at HSBC Equity Research. In the short term, the market sentiment towards MSIL's stock might be influenced by the performance and acceptance of their new models, as well as their market share.

Analysts at both Jefferies Equity Research, and Motilal Oswal Financial Services have maintained a BUY rating for the stock with a target price of ₹11,500.