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Maruti to borrow Rs 3 billion, profitability may be hit

Maruti Udyog Limited, or MUL, is raising Rs 3 billion from the market as short-term and long-term borrowings to fund its ambitious expansion programme, new car launches and increased working capital requirement.

Credit rating agency ICRA Limited, in a media statement, said, that this increased capital investment through borrowings is likely to impact MUL's profitability. ''However, the company's coverage indicators would remain strong in future primarily due to low leveraging.''

ICRA has assigned LAAA rating to the Rs two billion long-term non-convertible debenture programme and A1 plus rating to the Rs 1 billion commercial paper programme of MUL, indicating highest safety. The rating takes into account MUL's dominant market position in the domestic car market, an established vendor base, diverse product portfolio and geographically widespread sales and service network.

Meanwhile, company sources pointed out that Maruti is planning to infuse Rs 6 billion fresh capital over the next two to three months to set up production lines for its next-in-line small car Alto, and for expanding and modernising existing capacities.

The Alto, scheduled to be launched by September this year, would be available in two versions -- 800cc and 1000cc. This would be followed by the roll-out of the station wagon version of Baleno in September, the sources added.

''The fresh Rs 6-billion investment would be made for setting up new production lines for the Alto and also for expanding and modernising the existing capacities.''

The ICRA statement further said the ratings also took into account MUL's large production base, efficient capacity utilisation and capital cost advantage arising out of depreciated plants. The ratings also factor increased competition in the domestic car market, which led to a decline in MUL's marketshare and profits over the last two years.

ICRA expects competition to intensify further in future, which could lead to further decline in MUL's marketshare and keep its margins under pressure. In response, MUL has taken steps that include a series of new car launches, increased emphasis on spare parts sales, increased service network and continuous indigenisation effort.

Though the borrowings are likely to impact Maruti's profitability, its coverage indicators would remain very strong in future primarily due to low leveraging.

Post 1997-98, increased competition has led to pressure on realisations forcing MUL to introduce stripped down versions of its existing models at lower prices and new models with high import content, adversely affecting the margins. The negative impact has been mitigated to some extent by reducing costs through continuous indigensation.

The advances from customers have been declining over the years, reflective of faster delivery of vehicles by MUL in response to increased competition. This has forced Maruti to borrow partially to fund its working capital requirement during 1999-2000.

However, MUL continues to have large level of unutilised working capital limits from multiple banks.

MUL was incorporated in February 1981 as a Government of India, or GoI, owned company, and had entered into a license and joint venture agreement with Suzuki Motor Corporation of Japan in October 1982 to manufacture fuel efficient cars at low cost.

Following the JVA, SMC increased its stake in stages to 50 per cent by 1992. MUL's equity capital of Rs 1.32 billion and its shareholding has remained unchanged since then with SMC holding 50 per cent, GoI 49.74 per cent and MUL Employees Mutual benefit Fund 0.26 per cent.

UNI

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