UPDATE 1-Suzuki plans $488 mln plant to make cars for Maruti unit

Tue Jan 28, 2014 9:00am EST

* Plant to start production from 2017

* Suzuki plant to sell cars only to Maruti

* Maruti posts 36 pct rise in net profit

* Maruti shares end down 8 pct (Adds details on Gujarat plant, analyst, management comments, share price movement)

By Devidutta Tripathy and Abhishek Vishnoi

NEW DELHI/MUMBAI, Jan 28 (Reuters) - Suzuki Motor Co announced plans to invest $488 million to build a car plant in India that will supply Maruti Suzuki India Ltd and allow Maruti to focus more on product development and marketing.

The project will create Suzuki's first wholly owned car plant in India. The Japanese company owns 56 percent of Maruti, India's biggest carmaker.

The plant will initially produce up to 100,000 cars a year starting in 2017 and will be located in western Gujarat state, where Maruti purchased land in 2012 to expand its own facilities. Work on the plant was previously on hold due to a slowdown in the domestic auto market.

Maruti will benefit from not having to make the investment itself and thus avoiding "all risk inherent in any investment", it said.

Analysts said the move was unusual for Maruti and expressed some concerns that sourcing vehicles through the Suzuki unit instead of making them itself would hurt Maruti's margins.

The stock ended down 8 percent, its biggest fall in a year and a half, while the main Mumbai market fell 0.1 percent.

"It's positive in the near term for Maruti Suzuki because cash is getting conserved," said Rohan Korde, an analyst with Anand Rathi Securities Private Limited.

"But in the longer term once the plant's operations start, then EBITDA (earnings before interest, tax, depreciation and amortisation) margins may be hurt because this is contract manufacturing being done by Suzuki's subsidiary."

The new plant will sell cars only to Maruti under the deal at a price that will include production costs plus enough cash to cover further capital expenditure requirements, Maruti said.

The company sought to allay worries over the impact on its margins from the Suzuki deal.

"The fact is that when Suzuki puts money into the Gujarat project and sells the cars to us on the basis of the pricing which I have described, our profit on the sale of those cars would be exactly the same as it would have been if we had made the cars," Maruti Chairman R.C. Bhargava said.

"In addition to which my money, which I would have invested, remains available to me, and so I can use that money to earn additional money out of that."

PROFIT MEETS ESTIMATES

Separately, Maruti posted a 36 percent rise in net profit in October-December, its fiscal third quarter, to 6.81 billion rupees ($108 million), as favourable foreign exchange rates and cost reduction efforts offset a fall in sales.

The results were roughly in line with analysts' expectations for a profit of 6.84 billion rupees, according to Thomson Reuters I/B/E/S.

Sales fell about 3 percent to 106.2 billion rupees, with the number of cars sold down 4.4 percent.

Bhargava said the company saw no indications of a near-term recovery in demand.

Car sales in Asia's third-largest economy are likely to fall in the current financial year that ends in March, down a second year, as high interest rates and a slowing economy force consumers to delay purchases. ($1 = 102.4350 Japanese yen) (Writing by Aradhana Aravindan and Sumeet Chatterjee; editing by Jane Baird)

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