Total capital expenditure to be Rs 1.25 trillion till FY31

Currently, MSIL operates with a total production capacity of 2.25 million units annually, with the Gujarat plant contributing about 750,000 units per annum to this figure. Over the past eight years, from FY16 to FY23, MSIL’s total capital expenditure amounted to Rs 27,538 crore.

In a presentation to its shareholders and analysts on Monday, 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 mentioned.

In FY23, MSIL achieved domestic sales of 1.61 million units of passenger vehicles (PVs), marking a significant 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 rate of 8.8 per cent Y-o-Y.

MSIL stated that additional investments will be required for research and development, particularly to support the majority of development efforts related to Internal Combustion Engine (ICE) cars being undertaken by the company. “Capex will be needed to develop 10-11 new models, with different fuel options in this period. Production of electric vehicles (EVs) and sport utility vehicles (SUVs) will also need larger capex,” it added.

The company had cash reserves of more than Rs 45,000 crore as of April 1 this year. MSIL said that a 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, 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. “The value at which SMG would be acquired is defined in the CMA, namely the net book value as per the last audited statements of accounts. It is proposed that the accounts of SMG be audited as on August 31, 2023,” MSIL stated. The net book value was around Rs 12,700 crore as of March 2023.

“The regular capex in the existing plants at Gurgaon, Manesar and Gujarat will continue. The amount in 2022-23 was around Rs 7,500 crore. Total capex until 2030-31 could be as much as Rs 1.25 lakh crore,” MSIL stated.

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 that of all large global manufacturers of cars other than an electric car manufacturer, shows that the market appreciates its management policies, including its 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 emphasised that cash plays a crucial role in facilitating necessary capital expenditures 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 mentioned.