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Maruti Vs Suzuki: Head on? - Views on News from Equitymaster
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Maruti Vs Suzuki: Head on?
Sep 19, 2005

Post the loss in FY01, Maruti has come a long way to register a profit of Rs 8 bn in FY05. This has been partly because of active role played by the parent (Suzuki Motors, Japan) post acquiring majority stake in Maruti. In this article, we shall the compare the performance of the parent and its subsidiary. Suzuki Motors: Suzuki Motors Corporation, incorporated in 1920, is a leading player in the Japanese automobile industry. It has presence across the globe in 23 countries. In FY05, the passenger car business contributed 78% of the consolidated revenue and motorcycles accounted for 19%. In terms of geographical presence, domestic market contributed 37%, Asia accounted for 22%, USA’s and Europe’s share stood at 16% and 20% respectively of consolidated revenues.

Maruti Udyog: Maruti Udyog (MUL), incorporated in 1981, is the country's largest passenger car manufacturer with a market share of 60% in FY05 of the domestic car market. While Suzuki Motors, Japan holds a 54.2% equity stake in the company, the government of India has brought down its equity stake to 18.8% in phases. 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

Financials - A snapshot
FY05 Maruti Suzuki
Units sold (000s) 536 4,092
Sales (Rs m) 109,624 923,574
Operating expenses (Rs m) 95,561 846,715
Operating profit (Rs m) 14,063 76,860
Operating margin 12.8% 8.3%
Net profit (Rs m) 8,536 18,411
Net Profit margin 7.8% 2.0%
EPS 29.5 33.3
CFPS 45 99.9
As can be seen from the table, though Maruti is 1/9th of the size of the Suzuki group, its performance is better than the group as a whole. It should be noted that Maruti operates in an environment, which is not only competitive, but also a highly taxed one. On an average, the duties and taxes account for almost 1/3rd of the selling price of an automobile manufactured in India. Just to give a perspective, cost of sales accounted for 78% of net revenue in case of Maruti as compared to 69% for Suzuki. Further, Japanese government also provide subsidies to the company manufacturing small cars (the forte of the Suzuki), which further reduces the raw material costs. Given the fact the Indian government is contemplating further reduction in duties on compact cars, there exists an significant upside in the margins of Maruti as more than 70% of its volumes sales comes from compact cars.

Return ratios Maruti Suzuki
RONW 19.5% 8.5%
ROCE 19.0% 7.4%
Utilisation ratios
Sales/NFA 7.2 12.4
Sales (units)/employees 155.3 298.7
On the utilisation front, the parent scores over the subsidiary. This can be expected, given the fact that Japanese companies are renowned for their technological prowess and higher automation. However, Maruti has been improving on its efficiency, which is evident from the fact that it has improved its sales (units) per employee by 112% during the period FY02-05 as against 32% for the parent major. On the returns front, the Indian subsidiary has comprehensively outperformed the parent indicating a better utilisation of resources.

Valuation ratios Maruti Suzuki
P/E 19.0 24.7
P/CF 12.4 8.2
P/BV 3.7 1.5
As can be seen from the table, Maruti is trading at a discount to its parent on price to earnings basis. However, on basis of price to cash flow per share and price to book value basis, the parent is trading at a discount to the subsidiary. One should also keep in mind that Suzuki has a much larger revenue base and balancesheet. Apart from this, the company has wide geographical reach. Infact, the presence across the globe has enabled the company to maintain its topline growth at 10% CAGR during last five years in spite of the fact that the Japanese economy was facing the threat of deflation. On the other hand, only 9% of the revenues of Maruti are contributed by the exports. Further, the Indian passenger car industry has grown by 15% in last five years, which enabled the company to improve on its performance. Thus, the subsidiary, though very small in size is reasonably valued as compared to the global giant.

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