Going Into Overdrive

Consider the sequence of events. In total disregard of MUL's board of directors, Industries Minister K. Karunakaran dashes off to Japan for consultations with the Suzuki top brass. Where, among other things, he floats the proposal for a green-field Maruti plant, over and above the Rs 1,900-crore expansion plan for which the Maruti management is currently preparing a detailed project report. In fact, Karunakaran says the Suzuki Motor Corporation has received this proposal well and agreed to consider the possibility of a greenfield project (though, as any businessman who has negotiated with the Japanese would tell you, a "we'll think about it" from a Japanese businessman is a euphemism for "no"). The exercise seems to have taken Maruti's Managing Director R.C. Bhargava completely by surprise. Says he: "I have received no communication on this matter from anybody. I can go only by press reports quoting the minister."

Well, Karunakaran has never said so in public, but sources close to him insist that he has home state Kerala in mind for setting up Maruti's fourth plant. The reasons are not far to seek. After all, a son of the soil is industries minister, the country is going through an automobile boom, and the elections are drawing near. But the moot question is: does Marutineed a new plant as seems to have been suggested by the minister?

In fact, Maruti hiked the capacity of its two existing plants in Gurgaon, Haryana only last month. The first plant's capacity increased from 1,30,000 units per annum (upa) to 1,60,000 upa. But capacity utilisation is expected to be higher and the plant is expected to produce 2,20,000 upa. The capacity of the second plant has been increased from 70,000 upa to90,000 upa. Here again, the company expects the plant to produce around 1,20,000 upa. Hence, when these expanded plants work at full steam, Maruti expects to produce 3,40,000 cars a year, against the 2,06,330 vehicles in 1994-95.

 In addition, Maruti plans to set up a new plant next to its existing two, with a capacity of 100,000 upa. With this third plant, the company's total production is expected to touch a total of 4,40,000 vehicles a year. Considering the industry estimates total automobile sales to touch the 5,00,000 vehicles a year mark by the year 2000, the proposal to set up a fourth plant seems rather redundant. Says Bhargava: "Though I am not aware of what capacity this new plant is supposed to have, I believe our production targets have to be increased in tune with the market demand. If we hike the capacity too soon, without the market supporting the increased capacity, we could be in trouble. As of now, I don't see the market supporting the production from this proposed greenfield site which the minister has mentioned to the press." What then are the pros and cons of Maruti expanding outside Haryana?

Interestingly, Bhargava had initially suggested a greenfield project. The reason was Maruti's keenness for exports which made it beneficial to get closer to a port. The factories at Gurgaon also faced a water shortage and besides, they would eventually have faced the logistical problem of transporting raw material for the proposed 4,50,000 cars.

But Maruti had also decided to modernise its factories and let out certain sub-assembly work to its ancillary units, as it made economic sense. And this would have causedsome redundancy in its workforce. This surplus labour could however be absorbed if the new plant is set up near the existing two. This factor weighed heavily in favour of setting up the plant in Gurgaon. In addition, the Haryana government promised adequate water supply. The decision to expand in Gurgaon has also reduced the estimated project cost from Rs 2,200 crore to Rs 1,900 crore. Since expansion would be faster than a greenfield project, completion time has come down by six months.

In the circumstances, it does not make sense for the industries minister to present a case for having Maruti's already agreed-upon expansion take place in Kerala, or in any state other than Haryana. He thus needs to get Maruti to set up an additional fourth plant. Privately, some Maruti board members maintain that Kerala is not the ideal place to set up operations, even if the company agreed to a fourth plant.

There is an additional problem. Where do you source finances from for setting up the fourth plant? As yet, there is no agreement between the Government of India and Suzuki on the mode of financing the third Gurgaon plant. The project cost itself is considerable—Rs 1,900 crore. The Government can assist in three ways:

Maruti can raise money in three ways: debt, equity and internal accruals. The three merchant bankers that the company hired—DSP-Merrill Lynch, IDBI Merchant Banking Services and Kotak Mahindra Finance—suggested a mix of all three to finance the project. But the equity option is anathema to the Government since that means either shelling out funds or losingcontrol. Therefore, Karunakaran reportedly wants the project report being prepared by Maruti to recommend what the Government wants: financing through internal accruals and debt. But the Maruti top brass insists that the company does not have enough internal accruals to follow that option.

THE expansions completed last month were financed primarily through internal accruals and this, says thecompany, has already put its investible surpluses under tremendous pressure. Bhargava also expects cash surpluses to dwindle over the coming years. "Internal accruals won't amount to much over the next two years. So considering that we are short of funds for the expansion itself, how will we finance the proposed green-field project?" says Bhargava. The final decision on the financing of the expansion plan, according to him, would be taken by Maruti's board of directors. "We are a board managed company and not a public sector undertaking. While the shareholders can do their own analysis and present their points of view through their directors on the board, the final decision will be taken by the Maruti board."

As things stand, the Government and the company seem to be in a deadlock over the situation. With elections drawing closer, the Industries Ministry may be turning up the heat on Maruti to promise a new plant in Kerala. But Bhargava appears unwilling to deliver that commitment. And as for financing a third plant in Gurgaon, he says the project report with a detailed financing plan will be submitted to the board at the end of fiscal year 1995-96. This, he says, would give the board a better picture on the internal accruals front.

The "end of fiscal year 1995-96" can easily be read as "after the Lok Sabha elections". Bhargava's gamble is that since the Government will insist on financing through internal accruals till at least the '96 elections, he can keep the completion of the project report in abeyance till then. And hope for the best in the elections, which might give Maruti enough leeway to finance the expansion through a mixture of debt, equity and internal accruals as Bhargava and Suzuki desire.

Karunakaran, however, is hell-bent on anautomobile plant in Kerala—Maruti or no Maruti—during his tenure as industries minister. There are now reports that the Eicher-Volkswagen joint venture is being roped in to set up a plant on the Hindustan Machine Tools (HMT) property in Kalmassery near Cochin, the land being incorporated as HMT's equity in the company. If that comes to pass, India's largest car-maker may yet be let off the hook.