May 16, 2008

Analysis - Maruti Suzuki Ltd

Maruti Suzuki is india’s largest car company with brands such as Maruti 800, Alto, Swift etc. The company sold around 760000 cars in FY08 and currently holds a 50%+ market share

The company has achieved a 10%+ growth for the last few years. In addition the ROE has been 20%+ for the last few years and net of cash the ratio is upwards of 50%. The net profit margins have gone up from 5.8% to 9.8% in the current year. The company is a zero debt company and has almost 3000 Crs + cash and investments as of 2007.

In addition the efficiency ratios have improved from 2003 onwards. The company is now working on 0 Wcap. The recievables ratio is up from 14 to around 19 (2007). The total asset ratio has improved to around 5.

The company has thus improved its profitability and asset turns in the last few years. The improvement in net margins is really commendable as this has happened in times of rising raw material prices and higher competition.

Maruti is one the most well know brands. I really doubt if there is an indian who is not aware of maruti suzuki (rather their cars).

The company has a strong balance sheet, great brands and has been able to add new successful models consistently in the past few years. In addition the company now has full support from the parent for new models.

In addition to the above the company has the largest dealer and service network.

I see competition as the biggest risk. There will be swings in the demand. However as India prospers, the unit volumes are bound to go up. However with China and India being the high growth markets globally, there is bound to be intense competition in this sector. This could have an impact on the margins going forward.

The risk to margins is not from the pricing alone. Higher competition means, shorter product cycles and hence the amorization of the development expenses is now over shorter period. Case in point – The Company has rightly hiked its depreciation rates.

In addition during the year 2000-2002, the company had quite a stumble. The company was suddenly faced with slowing demand and increased competition. As a result the company made its first loss in years. However the company has learnt from it and has become far more efficient.

Competitive analysis
The firm has competitive advantage from a high market share and well know brands. The high volumes drives economies of scale for the company in manufacturing, purchasing, distribution and such scale driven activities.

In addition the company has increased the lead by expanding its distribution networks (more dealers), opening new service centres and by expanding into allied services such as insurance and used car sales. All this results in higher customer lockin and more repeat business.

It is quite apparent that the company has considerable competitive advantage. However what is not easy to figure is how competition will increase and impact margins in the future.

With an assumption that the margins will remain between 7-9% (which is slightly higher than the global averages) and a 8-10% growth, and CAP of 9 years , the intrinsic value comes to around 1200-1300. I think the growth and CAP assumptions are reasonable. However the net margins are a wild card.

Added note: A 6-7% margin assumption would give an intrinsic value of around 1100.

The company sells at around 40% discount to the above intrinsic value. However I still have my doubts on the net margins. As a result although the company appears undervalued at current prices, I do not have any investment in the company. I would be prefer to have a higher discount to intrinsic value to make a commitment in order to reduce the downside risk from net margins.

Disclaimer – I may change my mind based on new information and may invest in the company. I may however not post when I do so. So as usual please make your own decision and read the disclaimer.


Anonymous said...

Hi Rohit

I think maruti has done a comendable job over the years maintaining its marketshare insipte of the level of competition from all over the world pouring into India.

Maruti's only Achilles heel was its ability to address the premium segment. The Baleno was a disaster and the Esteem had seen better days.

With SX4 and Dzire the company has managed to move the brand upwards. Prices on the Grand Vitare have also been slashed to make it competitive.

If it is able to build a product portfolio in the premium segment covering every price point as it has managed to do it in the volume segment then it will continue to be the formidable player.

The only joker in the pack could be the Nano. One doesnt know how the consumer will react to it. The consumer could prepone car purchase bcos of the Nano and then in the next upgade move straight to the Swift segment. This would affect the entire 800, Alto, Wagon R etc segment which is if I m not wrong about 70 % of the companys sales.

I dont know how it will play out.

BTW i just/finally started writing. I m on



Ranjit kumar said...

Hi Rohit,

I want to add one important point on Maruti. Their idea on making the dealers rich by helping them in building relationships rather than just treating them as middlemen is paying off the dividends very well.

Ranjit kumar

Rohit Chauhan said...

Hi ninad

congrats on your blog. would be visiting it regularly.

agree maruti has done a good job of maintaining its market share after the stumble in the late 90s. however as the global growth slows, we can expect to see more competition in india and china.

as the car majors expand and establish in india, we can expect to see a repeat of china to a certain extent where there is a lot of competition. that is what worries me ..

50% is huge market share to maintain and if there is a price war, then margins could be a casualty

i am not too worried about nano. even before nano, the M800 segment is shrinking and is now less than 10% of the volumes. so i am not too worried for maruti due to nano.

but i guess i am with you on the point, that it is difficult to see how it will play out


Rohit Chauhan said...

Hi ranjit
i agree. I think maruti has correctly realised that the dealer network is a key asset and a major competitive advantage. they have taken a lot of effort to sustain the profitability of the dealers and improve their revenue base via additional services such as insurance, used car sales etc


Ninad Kunder said...

Hi Rohit

Run thru this link in context to your post. Honestly I dont know whether this is really Maruti's startegy or a figment of imagination in the reporters mind.



Rohit Chauhan said...

Hi ninad
very interesting link . Let me give my thoughts

I assume you would have read clayton christensen's work on innovation. namely that a lot of companies in response to disruptive innovation tend to move upmarket. I see signs of that happening here with maruti. not a good sign in the long run although the company will do well in medium to short term