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Maruti: Research meet extracts - Views on News from Equitymaster
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Maruti: Research meet extracts
Dec 13, 2005

To get a better insight into the dynamics of the passenger car segment, we had a conference call with Maruti Udyog. This meeting was in furtherance to the information given by the management in its conference call, on 28th October 2005. What is the company’s business?
Maruti Udyog Ltd (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, 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.

Key highlights…

On the industry structure and characteristics… Currently, around 80% of the passenger car sales are accounted by small cars. However, globally, the share of small cars is not significant. The key reasons for the deviation from the global standards are:

  • Penetration levels: In India, the per capita income is on the lower side, as compared to developed and even some developing countries. Similarly, the penetration levels of passenger cars in India are significantly lower (7 cars per thousand people) indicating that the potential for first-time buyers of passenger cars remains on the higher side. As per the management, given the prospects of per capita income increasing going forward, in line with improved economic performance, there is likely to be demand for small cars.

  • Cost of buying a car: With lower interest rates and elongated repayment schedules, the EMI (equated monthly installments) for a small car has fallen to almost the levels of buying a two-wheeler. So, the affordability factor has amplified.

  • Cost of maintenance: Owing to relatively lower fuel efficiency and higher cost of spare parts, the cost of ownership for the customer is higher when it comes to ‘C, D and E’ segment cars. Even though the differential in EMI between ‘Maruti Swift’ and ‘Ford Ikon’ may be minimal, the aforesaid factors act as a deterrent and therefore, small cars will continue to dominate the scene. More importantly, first purchases of a customer typically tend to be a small car and this is unlikely to change in the next three to five years.

Two-wheelers owners – A potential market…
Currently, in India, owning a vehicle is more of an aspiration rather than a necessity. As per the company, this is in contrast to western countries where buying a car is need-based. As per the management, there are around 55 m two–wheeler owners (aspiring customers). The company hopes to convert these into buying a car. However, this is likely to happen gradually over the long-term.

The rationale for the diesel venture…
Diesel cars currently account for around 20% of the total passenger car sales in India as compared to just 2% in FY00. The demand is largely emanating from the tour operator segment. As per the management, globally, the price of the diesel and petrol are at par. Post the dismantling administered price mechanism (APM), Maruti had expected diesel and petrol prices to rationalise in line with the global standards. It should be noted that the differential in the price between a diesel and the petrol car is around Rs 80,000 to Rs 120,000. However, the rationalisation failed to happen and this is one of the reasons for the venture into manufacturing of diesel engines. Since Suzuki, the parent company, does not have presence in the diesel segment, over the long run, the parent could use the Indian facility to catering to select global markets.

Incentive per vehicle – leveraging the monopoly…
The incentive schemes of the company vary month-to-month and product-to-product. The company does not provide any incentives on ‘M-800’, ‘Alto’ and ‘Omni’ as these products enjoy virtual monopoly. The newly launched ‘Swift’, considering the order backlog, also has no incentives attached. Thus, out of the total units sales of around 50,000 per month, the company does not give incentive for around 32,000 units.

Cannibalization threat…
Currently, Maruti has a number of offerings within segments and at similar price points. For example, the price difference between ‘M-800’ and ‘Alto’ is shrinking. Similarly, since the launch of ‘Swift’, the top end models of ‘Zen’ have not performed well. As per the management, this is a conscious strategy on part of the company. The key rationale being that the company can easily promote any one of its products, depending upon the demand and festive season. Another advantage that the company envisages is that it reduces the dependence on any one model. For example, Tata Motors has lost market share due to lower demand for ‘Indica’, its only offering in ‘Segment B’.

What to expect?
At Rs 650, the stock is trading at a price to earnings multiple of 19 times 1HFY06 annualised earnings. The decline in the sales of ‘M800’ appears to have come to a full circle. The company currently caters to only 80% of the domestic passenger car market. With the proposed diesel venture (December 2006), it will add to its volume growth. Similarly, the introduction of one new model each year (as per the company) is likely to keep the company in good stead going forward. The success of ‘Swift’ is a vindication of the fact.

We are in process of updating our research report and would form a view post the completion of the same.

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