Maruti Suzuki India (MSIL) said on Tuesday the board of directors has  reviewed the Gujarat project. The board has decided to fund entire capex for the Gujarat Sub by depreciation and equity brought in by Suzuki Motor Corporation. ''In the event that both parties mutually agree to terminate the contract manufacturing agreement, the facilities of the Gujarat Sub would be transferred to Maruti Suzuki India at book value,'' the company said.

Commenting on the same, Nomura Financial Advisory and Securities said, ''We believe that this new set of clarifications by the company removes all uncertainties around the long-term earnings growth profile of MSIL. Based on the clarifications, Suzuki Gujarat will make zero EBIT margins - thus, MSIL's operating earnings will remain intact. In fact, MSIL's net profit and free cashflow generation will get a boost due to lower capex requirements.

For Suzuki, return on Gujarat investment would be only through MSIL, which is positive for MSIL shareholders. Further, the decision to seek approval of minority shareholders ensures high standards of corporate governance.

Assuming 12% annual volume growth over the long term, our calculations suggest that Suzuki will need to invest equity of around Rs 130 billion over FY16-22F while the remaining Rs 50 billion will be funded by depreciation charged to Maruti (we have assumed capex of Rs 30 billion for every 250,000 units).

At 13% discount rate, this Gujarat plant expansion by Suzuki implies NPV of Rs 50 billion (Rs 160/sh) for Maruti. If we assume that the Gujarat plant will be merged once the contract expires after 15 years at book value, then, the net benefit for Maruti shareholders would be around Rs 33 billion (Rs 110/sh)''

The stocks broker has recommended 'Buy' on Maruti Suzuki India (MSIL) with target price of Rs 2,135 as against current market price (CMP) of Rs 1,738 in its report.

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