Country’s largest car maker Maruti Suzuki India on Tuesday posted a 35.87 per cent increase in net profit to Rs. 681.15 crore for the third quarter ended December 31, on account of higher localisation, favourable foreign exchange and cost reduction initiatives.

The company’s board on Tuesday decided that the investment in the Gujarat facility will be made by a 100 per cent Suzuki subsidiary and not Maruti Suzuki India (MSI).

“The company will be named Suzuki Motor Gujarat Pvt. Ltd. with a starting capital of Rs. 100 crore,” Suzuki Motor Corporation Chairman Osamu Suzuki told reporters in New Delhi.

Suzuki Motor Gujarat, which will be set up by April, will not be a listed firm, he added.

The company had posted a profit of Rs. 501.29 crore in the corresponding period of the previous financial year.

Net sales in the quarter under review, however, declined 3.07 per cent to Rs. 10,619.68 crore from Rs. 10,956.95 crore a year earlier.

“Higher localisation, favourable foreign exchange and cost reduction initiatives by the company contributed significantly to net profit,” the company said.

The volume of sales dropped 4.41 per cent to 2,88,151 vehicles during the third quarter from 3,01,453 units.

“Sales remained under stress during the period, in both domestic and export markets,” it said.

During the period under review, the company’s market share in the domestic market stood at 42.8 per cent, a gain of 2.5 per cent over the third quarter of 2012-13.

MSI board had in October 2011 approved purchase of land in Mehsana District of Gujarat for further expansion of manufacturing facilities.

Around 640 acres of land in Becharaji and around 550 acres in Vithalapur were acquired. The expansion of facilities was kept on hold due to market conditions.

MSI said it recently received an attractive proposal from Suzuki Motor Corporation (SMC) for implementing the expansion project through a 100 per cent Suzuki subsidiary.

Following which the company’s board on Tuesday decided that the time was now appropriate to expand production facilities in Gujarat.

“It (board) approved implementing the expansion through a 100 per cent Suzuki subsidiary because it would result in substantial financial benefits to MSI, and its minority shareholders,” the company said.

As part of the arrangement, MSI would enter into a contract with this subsidiary company under which all production in the subsidiary company would be in accordance with the requirements of MSI, and the vehicles would be sold to MSI.

Maruti Suzuki shares fell 8.12 per cent to Rs. 1,563.20 on the BSE at close.

MSI said the Suzuki subsidiary would not sell vehicles to anybody else.

“The price of the vehicles to MSIL would include only the cost of production actually incurred by the subsidiary plus just adequate cash (net of all tax) to cover incremental capital expenditure requirements,” it added.

The return on this investment for SMC would be realised only through the growth and expansion of MSIL’s business, the company said.

“MSI would financially benefit from the interest earnings resulting from not investing its money in this project. It would also benefit because the vehicles would be sold to MSIL by the Suzuki subsidiary without any return on capital employed,” it added.

Further, MSI would be able to avoid all risk inherent in any investment and also retain the option of investing its own funds for strengthening its marketing network, product development and R&D, it said.

“The land for the project would be leased by MSI to the subsidiary company to establish the production and related facilities. The rent would be determined on an arms’ length basis, the company said.

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