Maruti Suzuki India (MSI), which posted a 35.87 per cent increase in third quarter net profit, on Tuesday said its board had accepted a proposal from Suzuki Motor Corporation under which the expansion of the Gujarat facility would be done through a wholly-owned subsidiary of Suzuki instead of MSI.

The wholly-owned company, Suzuki Motor Gujarat Pvt. Ltd. (SMGPL), would be set up by April, said Suzuki Motor Corporation (SMC) Chairman Osamu Suzuki, adding that the firm would not be listed and would have a start-up capital of Rs.100 crore. SMC is looking at starting the plant by 2016-end or early 2017.

As a part of the new plan, SMGPL will have a contract manufacturing agreement with MSI, which will play a role as seller of the vehicles including export from India.

The announcement sent the company’s shares tumbling, which tanked 8.12 per cent to Rs.1,563.20 at close on the BSE on Tuesday, despite good financial results.

Mr.Suzuki said the move would be a win-win situation for SMC and MSI and would allow the Indian arm to focus on its sales and service network. “Maruti can invest surplus cash in expanding the network. The current network can do one million units, but if it is to increase to 1.5 million or 2 million units. It (network) needs to be doubled,” he explained.

“Suzuki Japan, Maruti Suzuki and Suzuki Gujarat will form one group and the benefits will be shared between the three partners,” he pointed out.

MSI Chairman R. C. Bhargava said, “Our capital will be available for investing in other purposes like strengthening sales and marketing, research and development. At the same time, the vehicles will be sold to MSI by the Suzuki subsidiary without any return on capital employed.”

The price of the vehicles sold to MSI would “include only the cost of production plus adequate cash, net of tax, to cover incremental capital expenditure requirements.”

In 2012, it had announced plans to invest Rs.4,000 crore to set up its third plant by 2015-16 with a capacity of 2.5 lakh units in the first phase. However, it was delayed due to the slowdown in the automotive market.

It invested about Rs.250 crore on acquiring land for the Gujarat plant, which would accrue to it once the agreements were finalised and would be leased out to SGMPL.

Asked if SMC was looking at increasing its holding in MSI, Mr. Suzuki said, “We do not have any such plan to hike stake in Maruti and we cannot comment on future plans.”

Meanwhile, Maruti Suzuki on Tuesday posted a 35.87 per cent increase in net profit at Rs.681.15 crore for the third quarter ended December 31, 2013, on account of higher localisation, favourable foreign exchange and cost reduction initiatives. The company had posted a profit of Rs.501.29 crore in the year ago period.

Net sales, however, declined by 3.07 per cent to Rs.10,619.68 crore from Rs.10,956.95 crore.

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