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 54.2% equity stake in the company, the government of India has brought down its equity stake to 20.8% through two phases of disinvestment. After remaining a near monopoly till 1992, the entry of other multinationals and the emergence of domestic competition have resulted in the company losing market share. However, the company has been able to steady its share in the Indian passenger car segment through aggressive capacity expansion and new product introductions.
Reasons to buy:
Demand potential: Demand for passenger cars is a function of growth in per capita income in the hands of consumers. While GNP per capita (gross national product) grew at a CAGR of 11% between FY71-FY01, passenger car production increased by 9%. The co-relation seems to be stronger, even if one considers the twenty and ten year trend. As economy grows and income level increase, demand for passenger cars is also likely to improve over the very long term. Keeping in mind the low per capita penetration of passenger cars in India (5 cars per thousand person, Source: Statistical Outline), we expect industry demand to increase at a CAGR of 6% over the next five years.
Favorable interest rates: The significant fall in interest rates over the last five years have benefited the auto industry in a large way. It is estimated that about 70% of cars sold in India are financed (according to ICICI Bank, monthly retail disbursals towards auto loans alone in FY03 stood at Rs 16 bn, excluding two-wheelers). Since EMI (equated monthly installment) between an executive segment motorcycle and entry-level car of Maruti has also narrowed significantly, the company could benefit from any spillover effect. Maruti is the only company that has a model in the Segment A, the entry level.
Suzuki's products not in India
LIANA - Small car
LIANA - Sedan
LIANA - Estate
Grand Vitara XL-V
Reasons not to buy:
Increased competition: The Indian passenger car segment is extremely competitive with most of the MNCs already commenced operations in India. While Segment ‘A’ and ‘B’ are less fragmented (12 models account for 84% of industry volumes) as compared to ‘C’ and ‘D’ (25 models account for 16% of sales), we expect a slew of launches in FY04 and FY05. Opel, Chevrolet and Honda have plans for the ‘B’ segment, which could dent Maruti’s market share further. The company’s combined market share in these segments has come down from 65% in FY00 to 62% in FY03. Stiff competition could also impact price realisations going forward. Globally, excess capacity has resulted in lower profit margins or even losses for companies like Daimler-Chrysler, Ford and General Motors. The Indian market could be headed in this direction.
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