Maruti: Joint venture angst

Queries have cropped up over Maruti's growth prospects

Maruti Udyog Ltd sent a communication to the stock exchanges on Tuesday, confirming that the plan to manufacture diesel engines would not be carried by Maruti but a joint venture between the company and Suzuki Motor Corp (SMC).

The statement goes on to say that the joint venture will export diesel engines to other Suzuki companies in Asia.

But that's the least of Maruti's problems. It doesn't matter much that the manufacture of diesel engines will be done by an entity other than Maruti Udyog.

The moolah lies in the assembly and sale of passenger cars, and in a surprising move, SMC has also proposed that it will set up its second automotive assembly company in India as a joint venture with Maruti.

This new assembly will have a capacity of 250000 cars and will begin operations in 2007. Needless to say, growth in sales of Maruti/Suzuki cars in India from 2007 onwards will be largely reflected in this new entity, which is proposed to be called Suzuki Maruti India Ltd.

Maruti's share in this will be restricted to its stake in this joint venture, which has still not been decided. Maruti Udyog, in its communication to the stock exchanges and its investors in India, has provided no clarity whatsoever in this regard.

But whatever the stake Maruti has in the new entity, the very fact that it will not have a 100 per cent share in the growth story post 2007 is itself a big negative. It's no wonder the stock has fallen 10 per cent since SMC's announcement.

MNC clout in services

Consider the clout multinationals have in the Rs 9,000 crore Indian advertising industry. Global conglomerates "" WPP group, Omnicom, Publicis and the Interpublic group with their ad agencies""control 85 per cent of the market.

Just the WPP group's agencies and its associates"" J Walter Thompson (JWT), Ogilvy & Mather (O&M), Bates and the recently acquired Grey Worldwide, dominate 40 per cent of the sweepstakes. Ditto in the consultancy and accounting sectors.

PricewaterhouseCoopers, McKinsey & Co, Boston Consulting Group, Deloitte Touche Tohmatsu and KPMG are the reigning powerhouses. They are predominantly manned by Indians. Is this marriage of foreign capital and brand names with Indian talent, a model for other industries? How come MNCs dominate in just these sectors?

The reasons are aplenty. Unlike other service sectors like insurance or BPO, advertising and consultancy have been the early beneficiaries of liberalisation.

Agencies like JWT and O&M have been Indian residents for decades, co-existing with domestic agencies. But in the last decade, with global consolidation, many of the agencies and consulting firms have been flaunting their size.

With the premium of scale, they are able to leverage global practices, tools and techniques, something that many domestic outfits have been ill-equipped for. Next, of the top ten advertisers last year, 8 were multinationals. They obviously preferred being serviced by their parents' agencies.

Moreover, in this knowledge-based industry, where corporates were spending huge sums on branding and restructuring, value addition was looked upon as the brand equity to distinguish from the competition.

Even having an MNC to service them became an image issue. Compounding the issue was the fact that many domestic outfits were owner-driven . With growing competition, they were more than willing to sell out. An exception is Mudra Communications, which continues to thrive under the patronage of the Reliance group.

The bounce in midcap counters

Midcap shares are hitting new highs every other day. The CNX Midcap 200 index, which captures 75 per cent of the market capitalisation in the mid cap segment, has risen around 37 per cent in the past four months, compared with a 21 per cent rise in the Nifty.

Interestingly, the mid cap index even enjoys a higher discounting (PE), compared to the Nifty. Yet, some market experts feel that mid cap shares may not have run up too much, pointing out that there's value in many mid cap shares still. Chief among these are some mutual fund companies which are launching mid cap funds.

Also, one of the stories being sold is that mid caps are merely catching up with large cap stocks, which still enjoy a big premium.

But the catch up story may be a little outdated, considering that mid cap shares have outperformed large caps ever since last year's rally which began way back in April 2003. Ever since, the CNX Midcap 200 index has outperformed the Nifty by a huge margin.

With mid caps performing much better in the recent past, the level of outperformance has reached massive proportions. Since April 2003, the CNX Midcap 200 index has risen 184 per cent. In comparison, the Nifty has risen just 71 per cent. If, indeed, mid caps need to catch up, there may have to be a sharp correction in their share prices.

With contributions from Mobis Philipose and Nandini Lakshman