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| Even after a 200 per cent rise in prices since the IPO, one analyst is predicting a further run for Maruti. Here are his reasons
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| For K.N. Sreenivasan, auto analyst at Mumbai-based Alchemy Share and Stock Brokers, small is beautiful. And steering the second-biggest listed Indian auto-maker is all about playing the 'small' theme.
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| In his extensive 48-page report released last week on Maruti Udyog Ltd, Sreenivasan has placed a buy on the stock at Rs 327.50 with a target price of Rs 486, even as he admits candidly that he has been pretty late and behind several analysts in forming a positive view on the stock.
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| According to Sreenivasan, the big picture looks perfect. On one hand, Indian car ownership, at just about five per 1,000, is significantly below the Asian average of about 40 and way behind penetration levels in developed countries.
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| While Thailand and Indonesia have a penetration of 27 and 12 per 1,000 respectively, the corresponding figures for Malaysia and Singapore are 147 and 122.
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| On the other hand, there are numerous triggers at play like soft interest rates, customer-friendly vehicle financing, superlative growth in the IT and BPO spaces, increasing urbanisation, higher disposable incomes, multiplicity of new models, shrinking replacement cycles, falling product prices and a fast-developing national highway network which will help narrow this gap sooner than later.
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| Sreenivasan says that the combined impact of all these factors should ensure strong, secular sales growth of 12-15 per cent on a compounded annual basis over the next five years. In number terms, this would translate to 1.06 million cars by FY07, from 0.59 million in FY03.
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| In the case of Maruti, its exclusive tie-up for car loans with the State Bank of India would help the company improve its penetration in the rural and semi-rural markets significantly.
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| Besides, given income levels and the price-sensitive nature of Indian customers, small cars ('A' and 'B' segments) should remain the dominant passenger car segment. That's where Maruti scores over other car manufacturers.
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| Currently, Maruti has the largest single-location passenger car manufacturing capacity in the country (500,000 cars per annum) and is the acknowledged market leader in two small car segments - the 'A' and 'B' segments.
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| Parent Suzuki's core strength lies in the small car business, where it is regarded as the most cost-efficient global player. Maruti enjoys global economies of scale in mass market small cars.
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| With the arrival of new competition in the 'B' and 'C' segments, the company's marketshare has come off significantly from the FY98 peak of 82.6 per cent to 54.2 per cent in the first half of FY04.
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| Sreenivasan, however, believes that Maruti's market share has bottomed out. With likely new model launches and upgrades, Maruti's market share should stabilize and perhaps, grow, says Sreenivasan.
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| Maruti enjoys 100 per cent share of the 'A' segment, which accounted for 32.6 per cent of Indian car market in FY03. Aggressive 'B' segment players like Tata Motors and Hyundai have so far been unable to challenge its ubiquitous entry level Maruti-800 model.
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| In the 'B' segment, which accounted for 50.4 per cent of the Indian market in FY03, Maruti is a market leader with a 40.2 per cent share.
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| In FY 03, the 'A' and 'B' small car segments accounted for 83.0 per cent of the Indian car market, with Maruti enjoying a 63.7 per cent overall share of these segments.
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| Like Suzuki elsewhere in the world, Maruti will continue to dominate the small car market. Sreenivasan projects a CAGR of 18.3 per cent in Maruti's total sales volumes for FY04E-FY06E.
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| Apart from the big picture, there are some specific corporate initiatives which bode extremely well, says Sreenivasan.
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| Maruti is aggressively pursuing its Challenge 50 initiative (part of the company's efforts to benchmark itself to SMC's Kosai plant, which is the parent's most efficient plant globally), kicked off in April 2002 with specific targets of a 30 per cent reduction in production costs and a 50 per cent improvement in productivity in three years.
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| Maruti has, in the past, focused mostly on manufacturing and marketing cars. But Maruti also plans to shift to both products and associated services.
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| He says the sheer dominance of Maruti models in the overall Indian car population provides a powerful platform for it to tap new revenue streams.
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| With management control now firmly with SMC, investors can expect a higher degree of cooperation and integration between Maruti and its parent.
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| After gaining majority control, SMC has, along with Maruti, set up a full-fledged aluminum foundry at a cost of Rs 115 crore. The new foundry's production will result in full import substitution.
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| The localisation of critical aluminum-based aggregates and components should help it to save about Rs 70 crore annually.
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| Also, the recent wage negotiations with employees show that the management is keen on making wage structures more market-driven.
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| However, there are a few concerns too. Firstly, there is the threat of GM (which holds a 20 per cent stake in Suzuki Motor Corporation) entering the small car segment.
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| GM India has recently announced its intention to relaunch Daewoo's Matiz as the Chevrolet Spark in India. The Matiz is essentially an 'A' segment model and, hence, would compete directly with Maruti's 800 or the Alto.
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| SMC has to tread cautiously to do a balancing act to ensure that GM India's product launches do not dilute Maruti's powerful franchise in the Indian 'A' and 'B' segment car markets, says Sreenivasan.
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| Another threat is the expected entry of Tata Motors in the A segment. Tata Motors, a strong value-for-money player in the 'B' and 'C' car segments, has recently announced its intention to enter the 'A' segment with a car in the band of Rs 100,000-150,000.
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| Sreenivasan says that Maruti may not be able to sustain its monopolistic hold in the entry level 'A' segment in the face of competition from Tata Motors.
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| Another major concern is Maruti's diminishing presence in the C segment. "Our understanding is that the management is taking firm steps to address the weaknesses in its 'C' segment product portfolio," says Sreenivasan.
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| Overall, Sreenivasan projects an 84 per cent CAGR in Maruti's EPS from FY04 through FY06. On an estimated FY04 price to earnings ratio (P/E) of 17.9x, the stock trades at a PEG (price-earnings to growth ratio) of only 0.21 based on three-year earnings estimates.
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| Even after a likely capex of Rs 300 crore per annum during FY04-FY06, Maruti should be able to generate free cash flows of Rs 1,830 crore during the same period. Sreenivasan expects the stock to rise to Rs 486 over the next six to 12-months. |
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