After comparing the largest commercial vehicle manufacturer in India i.e. Telco with global majors like Scania and Navistar (Click here to read the article), it is time to compare the country's largest car manufacturer, Maruti Suzuki, with some behemoths. Instead of comparing with the likes of GM and Ford that are not equally comparable owing to a diversified business interest, we have compared Maruti with Suzuki (the parent company) and Nissan.

Before going any further, a brief profile of all the three auto majors is of significance.

Maruti
Maruti Suzuki, incorporated in 1981, is the country’s largest passenger car manufacturer with a combined market share of 54.6% in FY03. While Suzuki, Japan holds a 54% equity stake in the company, the government of India has brought down its equity stake to 21% through two phases of disinvestment. Maruti’s market share stood at around 55% in 1HFY04.

Suzuki
Suzuki, manufacturer of passenger cars, motorcycles and engines for marine, is the 4th largest player in the Japanese market (11% market share). The company has a strong foothold in the mini, small and sub-compact segments of the car industry. As far as the motorcycle segment is concerned (19% of total sales), the under-125 cc segment contributed to 78% of motorcycle sales in FY03. Since General Motors (GM) holds a 20% stake in Suzuki, through an alliance, the majors cater to the Asia Pacific and European market through the ‘Chevrolet’ brand in the small car segment.

Nissan
Nissan, another Japanese major, has gone through a phase of turnaround. The company’s market share in FY03 stood at 19% as against around 17% in FY00 (more than 20% in FY98). Apart from market share gains in Japan, the turnaround was also led by increased focus in the US market (4.5% share in FY03 compared to 3.5% in FY98 in a highly competitive market). Renault, the European major, holds 44% stake in the company.

Having looked at the profile in brief, how do these three companies compare on various parameters?

As a precursor, it must be noted that the global auto industry is fragmented and therefore, there is significant pricing pressure (GM’s EBDITA margin in FY02 stood at 1%). Maruti’s financials are our FY04 estimates while Suzuki and Nissan are historical (FY03).

	Units	Maruti*	Suzuki**	Nissan**
Operating ratios
No. of units sold	('000s)	355	3,503	2,636
Sales	(US$ m)	2,123	16,766	56,905
CAGR (5-years)	(%)	1.7%	8.5%	0.9%
EBDITA margin	(%)	6.0%	7.8%	12.0%
EBDIT margin - Automotive	(%)	6.0%	6.8%	13.6%
Net profit margin	(%)	4.8%	1.5%	7.3%
Sales/NFA	(x)	3.6	4.5	0.9
R&D/sales	(%)	0.2%	3.0%	4.4%
Working capital/Sales	(%)	13.8%	13.9%	29.3%
Sales/employee	(Nos)	105.9	251.7	20.7
Return ratios
RONW	(%)	11.8%	4.8%	27.4%
ROA	(%)	6.9%	2.0%	6.7%
Valuation ratios
Price to earnings	(x)	27.5	32.5	12.3
Price to cash flow	(x)	14.7	8.8	7.0
Price to book value	(x)	3.3	1.6	3.4
Market cap to sales	(x)	1.3	0.5	0.9
EV/EBDITA	(x)	19.6	6.6	26.1

Though Maruti is one of the largest players in the Indian market with revenues of US$ 2 bn, when compared with its parent and Nissan, the largely domestic focus means that the company has still a long way to go. Except for Suzuki, both Maruti and Nissan have been through a restructuring mode and as a result, revenue growth over the last five years is not impressive. Suzuki has posted 9% CAGR growth in revenues in the last five years partly because of its presence in the two-wheeler segment.

As far as the scope of margin improvement is concerned, Maruti’s focus on increasing indigenous raw material components is likely to boost operating profits. Having said that, pricing pressure on account of competition and new model launches could partly negate benefits arising from savings on the raw material front. Nissan has higher operating margins because of rising contribution from Utility Vehicle (UV) sales in the US and growing volumes in Asia Pacific region.

What to expect?

The Indian passenger car industry (including UVs) compares poorly when compared with other countries in the Asia Pacific region. Just to put things in perspective, Chinese market has grown from a little over 1 m units per annum in 1990 to 3.5 m units in 2002, of which passenger car contribution stands at 36% in 2002 (19% in 1990). In India, however, annual volumes of passenger cars have languished at 600,000 levels.

Therefore, in terms of focus, China ranks higher when compared to India in the global auto majors priority list. As per GM, China is expected to contribute to 11% of global volumes by 2013 as compared to 6% in 2002 whereas the growth is not the same in other markets (including India, South East Asia). While it is true that all global majors have a presence in India, in terms of growth, we are lagging. Nissan, for instance, has targeted 550,000 units from China by 2006 (21% of FY03 volumes). On the other hand, since Suzuki already has a large presence in India, the focus is on growing volumes in India and servicing select European through its Indian outfit.

Going forward, while Maruti’s focus on exports for growth is a positive at the topline level, how profitable is it over the long-term remains to be seen. Further, the global auto industry is mired by high incentives and thinner margins. While we expect the Indian passenger car industry to grow at a CAGR of 6%-7% over the long-term, after one or two more years of margin expansion due to restructuring, further upside is likely to be limited.

Valuations
Demand for passenger cars is a function of growth in per capita income in the hands of consumers. While GNP (gross national product) per capita grew at a CAGR of 11% between FY71-FY01, passenger car production increased by 9%. With strong economic growth prospects in the long-term, considering the poor penetration level in India, demand is likely to rise. But in terms of valuations, Maruti trades at a significant premium, in line with its parent major as compared to Nissan, which has higher operating margin and return ratios. While we expect Maruti to post 170% growth in net profit in FY04, growth is likely to be lower beyond 2004.