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The Maruti drive

Arun Jaitley's recent statement about selling off big chunks of public sector undertakings (PSUs) has led to consternation behind the scenes. In normal circumstances, this would have been ignored as just another politically correct statement. However, the recent sell-off of 74 per cent of Modern Foods suggests that Jaitley may have committed the cardinal sin of saying exactly what he means.

The shadow of the fiscal deficit, which will be around 10 per cent of GDP in 1999-2000 for states and Centre combined, is the cause of urgency. By pulling down interest rates, the government may refinance its debt cheaply. But PSU divestment is a better way to reduce the fiscal deficit. Divestment not only results in cash inflows, but also cuts future expenditures since the return on capital employed in PSUs is negative in real terms.

This year's target of Rs 10,000 crore from divestment will be missed. Best guesstimates are that the government will raise around Rs 3,000 crore this fiscal. But the first half of next fiscal (2000-01) is slated to see a series of mega PSU deals. Among them could be auto major Maruti Udyog Limited (MUL).

An MUL sell-off, if it occurs, could be a highly interesting exercise for several reasons. As in most joint ventures, the 50-per cent partner Suzuki Motors has the right of first refusal of the government stake. There are rumours that Ozama Suzuki, the patriarch of the Suzuki group, is flying down to Delhi soon to discuss this very issue.

Reasonable valuation of a $ 2.6 billion company that owns 66 per cent of the passenger car market is a little difficult. A lot of intangibles are inevitably associated with any such exercise. What makes it even more difficult is that none of the Indian car-majors except Telco is a listed entity. And Telco's commercial vehicle profile far outweighs its presence in the passenger car/utility market. So there are no benchmarks for comparison.

Now, on the face of it, MUL is an unassailable market leader with leading market share in all three segments - small, mid-size and luxury. After the commissioning of Plant III at its Gurgaon (Haryana) factory, it has a rated capacity of 350,000 vehicles and an actual production capacity of over 500,000 units. It dominates the small car segment with the 800 cc, the mid-size with the Zen and the luxury segment with the Esteem. It has recently launched the Wagon R and the Baleno to consolidate in the mid-size and luxury segments respectively.

Between April and November 1999, MUL sold 267,589 units in a total market of 475,040 units and in December 1999, MUL sales rose to 30,500 units. During the first three quarters (April- December 1999), MUL achieved a growth of about 35 per cent (about 220,964 units were sold during April-December 1998). During this period the sales of Maruti 800 grew by 27 per cent while the Omni and Zen growth rates touched 43 per cent and 23 per cent respectively.

However, the Indian car industry is in a huge state of flux and expansion. Many new majors including Toyota are entering the mid-size and luxury segments. The mid-size segment has grown explosively. It used to be only 20 per cent of the market in 1997-98 and is around 43 per cent of the entire 1999-2000 market. What's more, the market itself has seen a huge growth. Total sales this year (April-November 1999) are up 42 per cent. That comes on a flat 1998-99 when sales grew by only 2 per cent.

Part of the reason for the improved performance is, of course, the economic recovery. This has been aided by innovative transport financing schemes, which have made cars affordable for the great Indian middle class. Hire purchase, rather than outright sale now finance four out of every five new cars and even a substantial segment of the second-hand market.

In the last two years, MUL has seen improved sales coupled to an erosion of market share from over 80 per cent in 1997-98 to current levels of around 67 per cent. The delay in the induction of the highly successful original tall-boy 1100 cc Wagon R has enabled a clone, the Hyundai Santro, to grab second spot in the Indian market and pose a serious challenge in the mid-size segment.

MUL has also been hurt by a delayed expansion, which made it difficult to exploit the market expansion. It introduced the Wagon R (Rs 3.8- 4.8 lakh), some three years after it became a bestseller in Japan. The 1600 cc Baleno also came late to the luxury segment although it was launched at an attractive Rs 6.75 lakh. The 800 is operating on a 16-year old platform and has only recently seen the option of a new engine and gearbox which could improve performance.

The delay in inducting new technology and in carrying out expansions is widely attributed to the spat between the government and Suzuki over the successor to R C Bhargava that caused headlines two years ago. At the same time, MUL's inherent strength suggests it could maintain its leadership. It has a service network and a supply chain that is unmatched except perhaps by Bajaj in the two-wheeler segment. It has a lot of customer loyalty.

The preferred entry-level four-wheeler is still the 800. Maruti continues to retain a consistent market share of over 35 per cent in the luxury segment. The Esteem and the Baleno will operate in tandem, one at the entry level of the luxury segment and the other at the upper end, to maintain Maruti's leadership. The Zen has been severely challenged by Santro but the Wagon R may win back sales.

MUL was ranked 15th among the top 20 Indian companies by Asiaweek in 1998. MUL took the eighth spot among the top 1,000 Asian companies on 'Highest return on assets' at 18.2 per cent. MUL also ranks 25th among the top 1000 Asian companies on the "Highest return on equity" parameter with its profit as percentage of equity being 30.7 per cent. That year, it had sales of $2.1 billion and PBT of $244 million.

Now, let's come back to the original question. How do you value this company? It's the market leader in a fast-expanding market where competition is quickly increasing. It's doubtful that the warp speed year-on-year growth in 1999-2000 will be maintained. Estimates of market growth range from 8-10 per cent to 15-18 per cent between 2001-05. If a flood of second hand imports happen a la WTO, there will be a negative impact.

In open, globally competitive markets, leaders like Toyota usually enjoy about 30 per cent share. If that trend of increased competition continues here, MUL will inevitably see further erosion in market share and presumably, its margins as it fights price and marketing wars. However its performance in absolute terms is also excellent and it will continue to do well. What sort of price-earnings multiple would you assign when there are no comparable listed companies? Would the government get a better price if it sold out to Suzuki or would it be better if it made an IPO? Is such a deal actually happening?

Related articles:
Maruti's lead narrows in race for market shares
Interview with Arun Jaitley

Devangshu Datta

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