Symbiosis Institute of Management Studies

Company Project Study

Analysis of the Auto Sector in India and Valuation
of Maruti Udyog

at
Religare Securities Ltd, Mumbai

Submitted by:

Dhruv Sharma
PGDM-Marketing and Finance
2005-07
Roll No. 59 (2A)
dhruvsharma05@gmail.com

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Acknowledgement
The Summer Project at Religare Securities Ltd, Mumbai offered both a learning
experience, as well as a glimpse into the daily management functions of an organization.
During the tenure of this project, I was fortunate to have interacted with people, who in
their own capacities have encouraged and guided me.
I would like to take this opportunity to express my sincere gratitude to my project guide
Mr. Sonal Kumar, Senior Analyst and Mr Arvind Jain, Research Analyst, for their support
and encouragement at every step. The project would not have been successful without
their invaluable guidance throughout the tenure.
Last but not the least I would like to thank Brig. H. Chukerbuti, Director, Symbiosis
Institute of Management Studies, for providing me with this opportunity.
Sincerely,
Dhruv Sharma

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Table of Contents
Executive Summary........................................................................................................................................... 5
Project Details ...................................................................................................................................................... 6
Project Title ...................................................................................................................................................... 6
Project Objectives .......................................................................................................................................... 6
Religare................................................................................................................................................................... 7
Group Companies ............................................................................................................................................... 8
Religare Securities Limited......................................................................................................................... 8
Religare Commodities Limited .................................................................................................................. 8
Religare Finvest .............................................................................................................................................. 8
Religare Insurance Broking Ltd................................................................................................................ 9
Auto Sector at a glance .................................................................................................................................. 10
Commercial Vehicles................................................................................................................................... 10
Passenger Vehicles ...................................................................................................................................... 11
Two-wheelers ................................................................................................................................................ 12
Three-wheelers ............................................................................................................................................. 13
Tractors............................................................................................................................................................ 14
Correlation and regression analysis of commercial vehicles............................................................ 15
Calculations......................................................................................................................................................... 19
Multiple Regression .......................................................................................................................................... 21
Maruti Udyog - Introduction ......................................................................................................................... 22
Financials in brief.............................................................................................................................................. 22
Shareholding Pattern....................................................................................................................................... 23
Stock Performance ........................................................................................................................................... 23
Car Segment....................................................................................................................................................... 23
Critical Factors ................................................................................................................................................... 24
Small cars to provide growth momentum .......................................................................................... 24
Entry into diesel segment would help cater to entire market..................................................... 24
Strong product pipeline To help maintain leadership position................................................ 24
Excise duty cut fails to boost volumes................................................................................................. 24
Intense competition leading to margin pressure ............................................................................. 24
Expensive valuations ....................................................................................................................................... 25
Business mix....................................................................................................................................................... 25
Sales mix .......................................................................................................................................................... 26
Strong growth in volumes. ........................................................................................................................ 27
Other significant factors................................................................................................................................. 27
Excise duty cut to boost volumes of small cars ............................................................................... 27
Launch of new products to drive growth ............................................................................................ 27
Entry into diesel segment to push volumes....................................................................................... 28
Alternative Fuels........................................................................................................................................... 28
Export earnings to witness volatility..................................................................................................... 30
EBITDA margins to witness pressure ................................................................................................... 30
Maruti to buy out 30% stake held by SMC in Maruti Suzuki Automobiles India ................. 31
Diesel engine plant to be set up in JV with Suzuki ......................................................................... 31
Tie-up with Nissan to boost volumes ................................................................................................... 31
To set up auto components JV................................................................................................................ 31
Competition and distribution network.................................................................................................. 31
Hardening interest rates to slow demand growth ........................................................................... 33
Strong Motorcycle sales peek into future car sales ......................................................................... 33

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Capex .................................................................................................................................................................... 34
Financials ............................................................................................................................................................. 35
Peer group comparison................................................................................................................................... 41
Valuations ....................................................................................................................................................... 41
Sensitivity Analysis...................................................................................................................................... 41
Party spoilers...................................................................................................................................................... 43
Competition .................................................................................................................................................... 43
Hardening interest rates ........................................................................................................................... 43
Increasing incentives.................................................................................................................................. 43
Risks to our view............................................................................................................................................... 43

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Executive Summary
The automobile industry has grown 19%yoy in the first two months of FY07. Key
segments like M&HCVs and passenger vehicles, laggards in FY06, have also
posted a strong recovery. With sustained growth momentum, we estimate 18%
volume CAGR for key industry segments over FY06-08. The impact of interest
rate and fuel price hikes has been offset by price cuts on passenger cars and
freight hikes by fleet operators. Though further increases in interest rates (up to
50-150bp) and fuel prices would lead to a small incremental cash outgo for
buyers, we do not expect demand to slow down in the near term on this count.
The two most influential factors can be considered to be excise duty cuts on small cars
and the Supreme Court ban on overloading.

Source:SIAM
After a weak FY06, MUL has witnessed a sharp bounce back in sales volumes (up
26% YTD to 101,401 units) in FY07. With ~80% of its volumes accounted for by
small cars, MUL has been the biggest beneficiary of the excise duty cut on small cars.
MULs exports, led by M-800, grew by 13% during April-May 2006 to 3,945 units
as against a 29% decline in FY06 to 34,781 units.

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Project Details

Project Title

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.
Project Objectives
Determining the effect of various factors on Auto Sector(Commercial Vehicles in
particular)
Valuation of Maruti Udyog Ltd.s share price

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Religare
Religare is driven by ethical and dynamic process for wealth creation. Based on this, the
company started its endeavour in the financial market.
Religare Enterprises Limited (A Ranbaxy Promoter Group Company) through Religare
Securities Limited, Religare Finvest Limited, Religare Commodities Limited and Religare
Insurance Advisory Services Limited provides integrated financial solutions to its
corporate, retail and wealth management clients. Today, we provide various financial
services which include Investment Banking, Corporate Finance, Portfolio Management
Services, Equity & Commodity Broking, Insurance and Mutual Funds. Plus, theres a lot
more to come your way.
Religare is proud of being a truly professional financial service provider managed by a
highly skilled team, who have proven track record in their respective domains. Religare
operations are managed by more than 2000 highly skilled professionals who subscribe to
Religare philosophy and are spread across its country wide branches.
Today, we have a growing network of more than 150 branches and more than 300
business partners spread across more than 180 cities in India and a fully operational
international office at London. However, our target is to have 350 branches and 1000
business partners in 300 cities of India and more than 7 International offices by the end of
2006.
Unlike a traditional broking firm, Religare group works on the philosophy of partnering for
wealth creation. We not only execute trades for our clients but also provide them critical
and timely investment advice. The growing list of financial institutions with which Religare
is empanelled as an approved broker is a reflection of the high level service standard
maintained by the company.

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Group Companies
Religare Enterprises Limited group comprises of Religare Securities Limited, Religare
Commodities Limited, Religare Finvest Limited and Religare Insurance Broking Limited
which deal in equity, commodity and financial services business.
Religare Securities Limited
RSL is one of the leading broking houses of India and are dealing into Equity Broking,
Depository Services, Portfolio Management Services, Institutional Equity Brokerage &
Research, Investment Banking and Corporate Finance.
Extension of services has been a constant feature in Religare to regard the needs of our
clients. Consequently, company is soon going to launch Internet Trading and Merchant
Banking. This would take care of different investment needs of different classes of
investors.
To facilitate free and fare trading process Religare is a member of major financial
institutions like, National Stock Exchange of India, Bombay Stock Exchange of India,
Depository Participant with National Securities Depository Limited and Central Depository
Services (I) Limited, and a SEBI approved Portfolio Manager.
RSL serves a platform to all segments of investors to avail the opportunities offered by
investing in Indian equities either on their own or through managed funds in Portfolio
Management.
Religare Commodities Limited
Religare is a member of NCDEX and MCX and provides platform for trading in
commodities, which is an online facility also.
RCL provides platform to both agro and non-agro commodity traders to derive the actual
price of the commodity and also to trade and hedge actively in the growing commodity
trading market in India.
With this realisation, Religare Commodities is coming up with its branches at 42 mandi
locations. It is a flagship effort from our team which would be helpful in facilitating trade
and speculating price of commodities in future.
Religare Finvest
Religare Finvest Limited (RFL), a Non Banking Finance Company (NBFC) is aggressively
making a name in the financial services arena in India. In a fast paced, constantly
changing dynamic business environment, RFL has delivered the most competitive products
and services.

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

RFL is primarily engaged in the business of providing finance against securities in the
secondary market. It also provides finance for application in Initial Public Offers to nonretail clients in the primary market.
RFL is also planning to initiate personal loan portfolio as fund based activity and mutual
fund distribution as fee based activities.
Along with this, the company also undertakes non-fund based advisory operations in the
field of Corporate Financing in the nature of Credit Syndication which includes inter alia,
bills discounting, inter corporate deposit, working capital loan syndication, placement of
private equity and other structured products.
Religare Insurance Broking Ltd.
Religare has been taking care of financial services for long but there was a missing link.
Financial planning is incomplete without protective measure i.e. structured products to
take care of event of things that may go wrong.
Consequently, Religare is soon coming up with Religare Insurance Broking Limited. As
composite insurance broker, we would deal in both insurance and reinsurance, providing
our clients risk transfer solutions on life and non-life sides.
This service will take benefit of Religares vast business empire spread throughout the
country -- providing our valued clients insurance services across India. We aim to have a
wide reach with our services literally! Thats why we are catering the insurance
requirements of both retail and corporate segments with products of all the insurance
companies on life and non-life side.
Still, there is more in store. We also cater individuals with a complete suite of insurance
solutions, both life and general to mitigate risks to life and assets through our existing
network of over 150 branches expected to reach 250 by the end of this year!
For corporate clients, we will be offering value based customised solutions to cover all
risks which their business is exposed to. Our clients will be supported by an operations
team equipped with the best of technology support.
Religare Insurance Broking aims to provide neutral, transparent and professional risk
transfer advice to become the first choice of India.

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Auto Sector at a glance

The Indian Automobile sector can be broadly classified into the following categories:
Commercial Vehicles
Passenger Vehicles
Two-wheelers
Three-wheelers
Tractors
Commercial Vehicles
The major players in this segment are Tata Motors, Ashok Leyland, Eicher Motors, M&M
and Swaraj Mazda.

Source: Religare Research, CRIS INFAC

10

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Source: Religare Research, CRIS INFAC

Passenger Vehicles
This segment is dominated by Maruti Udyog and Tata Motors.

Source: Religare Research, CRIS INFAC

Source: Religare Research, CRIS INFAC

11

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Two-wheelers
The major players are Bajaj Auto, Hero Honda, TVS Motors and Kinetic Engineering.

Source: Religare Research, CRIS INFAC

Source: Religare Research, CRIS INFAC

12

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Three-wheelers
The major players are M&M, Bajaj Auto and Atul Auto

Source: Religare Research

Source: Religare Research

13

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Tractors
The main players are M&M, Punjab Tractors, Eicher Motors and Escorts

Source: Religare Research, CRIS INFAC

Source: Religare Research, CRIS INFAC

14

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Correlation and regression analysis of commercial vehicles

The variables involved were:
Vehicle Population: which is defined as as total registered vehicles in India at the
beginning of the year, plus that years annual sales and less the estimated nonfunctional/junked vehicles for the year.
IIP (Index of Industrial Production): The values of this variable were taken with lag,
as effects of industrial production in one year materialize in the subsequent years.
WPI of commercial vehicles: For this, same year data is taken as it is the prevailing
prices that affect the purchase decision.
Credit amount outstanding for Transport Operators: The variable taken represents
the total credit amount outstanding for transport operators given by all scheduled
commercial banks.
Working population: This has been estimated as a percentage of total working age
population, working age population refers to population between the age group 15 to 65.

15

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

YE
March

Commercial
Vehicle
Population
(V)

Actual sales (A)

IIP(I)

WPI(W)

Credit Amount
( C)

Working
Population(P)

Estimated
Sales(E)

1980-81

716,000

75,083

39

66.20

9,142,600,000

16,200,000

78,826

1981-82

786,000

82,449

43

69.30

12,182,900,000

17,840,000

83,794

1982-83

860,000

90,559

47

70.50

15,231,700,000

19,750,000

87,365

1983-84

941,000

90,790

49

67.00

19,086,500,000

21,950,000

87,532

1984-85

1,045,000

98,929

52

67.90

22,572,900,000

23,550,000

90,958

1985-86

1,090,000

96,722

56

73.70

23,976,700,000

26,270,000

102,611

1986-87

1,229,000

103,693

61

78.30

26,019,100,000

30,130,000

111,268

1987-88

1,383,000

118,559

67

81.20

25,575,300,000

30,250,000

109,478

1988-89

1,457,000

117,413

72

86.70

27,646,900,000

30,050,000

117,104

1989-90

1,603,000

124,444

78

95.50

29,883,600,000

32,780,000

130,544

1990-91

1,687,000

141,782

84

103.50

36,392,600,000

34,630,000

140,944

1991-92

1,872,000

139,015

91

111.00

35,806,500,000

36,300,000

142,636

1992-93

1,967,000

120,636

92

117.00

37,432,000,000

36,760,000

106,795

1993-94

2,083,000

142,703

94

118.00

37,573,800,000

36,280,000

142,069

1994-95

2,217,000

168,919

100

124.40

39,568,900,000

36,690,000

166,665

1995-96

2,480,000

200,083

109

135.90

39,569,000,000

36,740,000

195,700

1996-97

2,748,000

221,676

123

146.10

45,774,800,000

37,430,000

228,535

1997-98

3,064,000

143,814

131

151.50

78,117,250,000

39,140,000

152,155

1998-99

3,094,000

129,822

140

157.40

64,684,900,000

40,090,000

148,139

1999-00

3,277,000

161,611

145

165.40

70,733,900,000

40,370,000

160,081

2000-01

3,582,000

136,585

155

175.50

80,750,000,000

41,340,000

138,813

2001-02

3,714,000

146,671

163

178.00

87,010,000,000

42,000,000

144,040

2002-03

3,851,000

190,682

167

185.90

93,230,000,000

41,170,000

184,900

2003-04

3,993,000

260,345

177

188.00

94,090,000,000

41,390,000

252,034

2004-05

4,141,000

318,438

189

196.90

105,107,600,000

42,380,000

318,194

2005-06

4,293,000

372,438

202

202.50

112,622,300,000

43,140,000

313,632

16

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

We see that the above variables have a linear relation with V. This can be shown
graphically:
V V/s I
5,000,000
4,000,000
3,000,000
Series1
2,000,000
1,000,000
0
0

50

100

150

200

250

V V/s W
5,000,000

4,000,000
3,000,000
V V/s W

2,000,000
1,000,000
0
0.00

50.00

100.00

150.00

200.00

250.00

V V/s C
5,000,000

4,000,000
3,000,000

V V/s C

2,000,000
1,000,000
0
0

50,000,0
00,000

100,000,
000,000

150,000,
000,000

17

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

V V/s P
5,000,000
4,000,000
3,000,000
V V/s P
2,000,000
1,000,000
0
0

10,000 20,000 30,000 40,000 50,000

,000
,000
,000
,000
,000

18

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Calculations
V

Summati
on
Sq
Summati
on

59,173,000

3,993,861

2,726

3,213

1,269,781,750,000

874,620,000

3,934,812

3,501,443,929,000,
000

15,950,925,687,321

7,431,076

10,325,297

1,612,345,692,633,060,000,000,000

764,960,144,400,000,000

15,482,745,475,344

ysq

34,331,810,653,84
6.20

61,257.38

54,103.67

24,191,288,655,110,100,000,000

1,664,708,984,615,380

105,126,090,075.85

23,605.34

25,109.81

0.00003686

-199,044.75

-827,398.58

475,755.16

xsq

B or beta (slope)

A or alpha (intercept)

ln alpha

15.27

15.27

15.27

15.27

ln beta b

1.26

1.26

1.26

1.26

0.0027853
826

0.0064660667

0.0000000000

0.0000000476

-0.0000079373

2,613,663.
3999

13,531,476.76
24

16,553,744.1573

28,520,659.7661

490,720.1262

13.00

5.60

7,514,700,000.00

760,000.00

-4,562.00

6,206.51

14,407.97

0.0000107

0.11

-17.69

1,625,156.
03

495,226.14

1,751,518.26

-1,295,389.59

4,952,500.75

Relative
Change
b ln log
lin
model

Change
b for lin
log
model

0.04

152,000.00

Mean
upto Y(t1)

2,195,200.00

Mean
upto Y(t)

2,275,884.62

Change
in Mean
Change
in X
New
beta
New a
(intercep
t)

80,684.62

19

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Change (no. of units)

Unit(s) as a % (U)

Change in V
% Change in V

1.00

1.00

1.00

0.49505

0.49

0.0000000009

23,605.34

25,109.81

0.0000368594

0.55

0.58

0.00000000086

Factor
(U) to be
multiplie
d with
so as to
be
converte
d to 1 %

2.02

2.03

1,126,223,000.00

431,400.00

3,136.32

%
Change
in V for
a 1%
change
in
indepen
dent
variable
s

1.11

1.18

0.97

1.30

1.08

104.85

123.59

48,837,759,615.38

33,639,230.77

151,338.92

Mean

2,275,884.62

153,610.04

20

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Multiple Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R

0.999

R Square
Adjusted R
Square

0.998

Standard Error

60088

0.997

Observations

26

ANOVA
Df

SS

MS

3.42596E+13

6.85192E+12

Residual

20

72210288182

3610514409

Total

25

3.43318E+13

Regression

Coefficients
Intercept

Standard
Error

t Stat

F
1898

P-value

Significance
F
5E-26

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%
-313811.8361

-513067.7184

95522

-5.37

3E-05

-712323.6007

-313811.8361

-712323.6007

X Variable 1

9381

4571

2.052

0.053

-155

18916

-155

18916

X Variable 2

12280

3035

4.046

6E-04

5948

18611

5948

18611

X Variable 3

4E-06

3E-06

1.494

0.151

-0

1E-05

-0

1E-05

X Variable 4

0.005

0.004

1.276

0.217

-0

0.013

-0

0.013

X Variable 5

-0.56

0.424

-1.32

0.203

-1.44

0.326

-1.44

0.326

21

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Maruti Udyog - Introduction

Maruti Udyog Limited (MUL) was established in Feb 1981 through an Act of Parliament, to
meet the growing demand of a personal mode of transport caused by the lack of an
efficient public transport system.
Suzuki Motor Company was chosen from seven prospective partners worldwide. This was
due not only to their undisputed leadership in small cars but also to their commitment to
actively bring to MUL contemporary technology and Japanese management practices
(which had catapulted Japan over USA to the status of the top auto manufacturing country
in the world).
A licence and a Joint Venture agreement was signed between Govt of India and Suzuki
Motor Company (now Suzuki Motor Corporation of Japan) in Oct 1982.
The objectives of MUL then were:
* Modernization of the Indian Automobile Industry.
* Production of fuel-efficient vehicles to conserve scarce resources.
* Production of large number of motor vehicles which was necessary for economic
growth.
Today, Maruti Udyog is the largest passenger vehicles company in India, where it accounts
for roughly 52% of the total passenger car market and 46% of the total passenger
vehicles market. Its competitors include Hyundai Motors, Fiat India, Tata Motors, General
Motors, Honda Siel Cars, and Hindustan Motors. It is also involved in consumer financing,
insurance and buying/selling of used cars. Japan's Suzuki Motor Corp owns 54.2 percent in
the company. Company has presence in the Utility Vehicles (UVs), Multi Purpose Vehicles
(MPVs), and mini (A1), compact (A2) and mid size (A3) car segments.
Financials in brief
Year to 31 March
Net Revenues (Rs mn)
Net Profit (Rs.mn)
EPS (Rs.)
EPS growth (%)
P/E (x)

FY03

FY04

FY05

FY06E

FY07E

FY08E

74,772

93,348

112,102

123,524

145,692

164,433

1,464

5,421

8,536

11,891

13,090

14,235

5.1

18.8

29.5

41.1

45.3

49.3

28.3

270.3

57.5

39.3

10.1

8.7
15.8

153.3

41.4

26.3

18.9

17.1

Div. yield (%)

0.2

0.2

0.3

0.5

0.5

0.6

RoCE (%)

9.8

21.8

31.2

34.0

31.5

29.2

RoE (%)

5.0

16.2

21.4

24.2

21.7

19.6

Price/BV (x)

7.2

6.2

5.1

4.1

3.4

2.8

36.4

15.5

12.1

10.1

8.6

7.6

2.9

2.2

1.8

1.6

1.3

1.1

5.42

0.15

0.46

0.48

1.70

1.80

EV/EBITDA (x)
EV/Sales (x)
PEG Ratio

22

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Shareholding Pattern

Stock Performance

Car Segment
The brand (or reputation of a car) and durability (or efficiency of a vehicle in terms of fuel
consumption) are the two major factors that customers have in mind when it comes to
decision-making. Maruti ranks in the top quartile of both the factors. Presence in the mini
and compact car segments has enabled Maruti to maintain its market share in excess of
50% for past many years. Lower running costs of its vehicles, and strong distribution
network has enabled Maruti to maintain its competitiveness in the hyper competitive
passenger car market. Maruti, which is 54.2 percent, owned by Japan's Suzuki Motor Corp
has been receiving good support from its parent company. Maruti would be participating in
Suzukis world wide program in sourcing cheaper raw materials and has found a place in
Suzukis recent tie-up with Nissan Motors. Suzuki will play an important role in drawing
Marutis international footprints.

23

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Critical Factors
Small cars to provide growth momentum
In FY06 growth in passenger car volumes was led mainly by sales of compact cars, where
Maruti is the industry leader with a market share of 58.5%. With increasing city traffic,
commuters find it easy to drive a small/compact car. Increasing interest rates and high
fuel costs have increased operating cost of a car, thus commuters would prefer a
small/compact car as they offer better fuel efficiency as compared to a mid-size or large
car.
Entry into diesel segment would help cater to entire market
Maruti would be entering the diesel car segment with the launch of diesel version of Swift.
Current diesel variants account for ~20 percent of the total passenger car volumes. The
key growth driver for the diesel segment is the gap between diesel and petrol prices at the
retail level.
Strong product pipeline To help maintain leadership position
In FY06 growth in sales was largely due to the launch of Swift, which strengthens our
belief that going ahead bulk of the volumes growth would be led by new model launches.
After a long gap Maruti has got aggressive with its new product launches, excluding
variants, it would be launching five new models in the next five years. In FY07, the
company would be launching 3 new variants and 1 new model, which include an LPG
variant of Wagon R, re-designed Zen, diesel variant of Swift and a yet to be announced
new model.
Excise duty cut fails to boost volumes
Reduction in excise duty has resulted in price cuts in the range of 5-7%; if the recent
monthly data after the excise duty cut is any indication then it seems that the excise duty
cut has definitely boosted sales of small cars. But lately hardening of interest rates,
increase in road taxes in few states and higher fuel prices have reduced the impact of
lower excise duty. Further extension of excise duty cut on vehicles run on alternative fuel
would improve sales.
Intense competition leading to margin pressure
Competition in the passenger car segment has started to heat up as existing players such
as Hyundai Motors, GM, Toyota and Ford are becoming more aggressive, and trying to
gain market share through introduction of new models and aggressive expansion of
distribution network. In the compact car segment Maruti is facing competition from
Hyundai Santro and Tata Indica.

24

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Expensive valuations
Despite correction of 25% from its peak, Maruti still appears expensive. The stock
currently trades at 21.1x and 13.8x earnings, 11.5x and 8.9x cash earnings and
EV/EBITDA of 12.0x and 8.6x for FY07E and FY08E respectively. We initiate coverage on
the stock with a Market Performer rating. Our DCF points to a share price of Rs700, or
10% below current levels. At our target price it would trade at 14x FY08E earnings.
Business mix
Maruti is the largest passenger vehicle company in India. It has presence in the passenger
car and multi purpose vehicle sub-segment.
Segments - Total volumes sales - Annual
FY03
FY04
Passenger Vehicles
306,549 403,618
UVs
3,471
3,703
MPVs
52,412
60,215
Total
362,432 467,536

FY05
464,825
5,290
66,169
536,284

FY06
489,892
4,468
67,459
561,819

Segments Domestic sales - Annual

FY03
FY04
Passenger Vehicles
275,031 354,030
UVs
3,241
3,624
MPVs
51,910
59,377
Total
330,182 417,031

FY05
417,179
5,204
65,019
487,402

FY06
456,298
4,374
66,366
527,038

FY05
47,646
86
1,150
48,882

FY06
33,594
94
1,093
34,781

Segments - Total industry sales - Domestic Market

FY03
FY04
FY05
Passenger Vehicles
541,648 697,805
819,938
UVs
114,010 146,777
176,223
MPVs
52,028
59,407
65,033
Total
707,686 903,989
1,061,194

FY06
882,094
194,577
66,366
1,143,037

Segments - Export sales - Annual

FY03
Passenger Vehicles
31,518
UVs
230
MPVs
502
Total
32,250

FY04
49,588
79
838
50,505

Source: SIAM

25

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Sales mix
Maruti derives significant revenues from the sale of passenger cars, which contribute 85%
to total vehicles sales. In this segment the company has been able to improve its market
share due to innovative sales and marketing programs, and launch of new variants and
models. In FY06 Marutis market share improved by 150 basis points to 46% as compared
to 45% in FY05.
In the other two segments including UVs and MPVs, the company has been doing poorly
as it has not addressed this market properly and has poor products, whereas its
competitors have been busy launching new variants/models.
Sales mix - Maruti Udyog
FY03
Passenger cars
306,549
Domestic
275,031
Exports
31,518
UVs
3,471
Domestic
3,241
Exports
230
MPVs
52,412
Domestic
51,910
Exports
502
Total
362,432
Domestic
330,182
Exports
32,250

FY04
403,618
354,030
49,588
3,703
3,624
79
60,215
59,377
838
467,536
417,031
50,505

FY05
464,825
417,179
47,646
5,290
5,204
86
66,169
65,019
1,150
536,284
487,402
48,882

FY06
489,892
456,298
33,594
4,468
4,374
94
67,459
66,366
1,093
561,819
527,038
34,781

Source:SIAM
Segment
Passenger cars
UVs
MPVs

Models
Maruti 800, Alto, Zen, Swift, Wagon R, Baleno, Esteem
Gypsy, Grand Vitara
Omni, Versa

Source:Company

26

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Strong growth in volumes.

Growth in volumes was led mainly by strong sales of compact cars, where Maruti is the
industry leader with market share of 46% and launch of Swift in FY06 further
strengthened companys position. In FY06 company sold 53,171 Swift constituting 16% of
its total sales in the compact segment. With its aggressive plans for the next few years we
believe it would continue to dominate the small and the compact car segments.
Passenger vehicles: Market Share - Maruti Udyog (in %)
FY03 FY04 FY05
Passenger Vehicles
50.8
50.7
50.9
UVs
2.8
2.5
3.0
MPVs
99.8
99.9 100.0
Total Passenger Vehicles
46.7
46.1
45.9

FY06
51.7
2.2
100.0
46.1

Source: Religare Research

Other significant factors
Excise duty cut to boost volumes of small cars
In the FY07 budget the Indian government reduced the excise duty on small cars from 24
percent to 16 percent. A small car has been defined as any vehicle whose overall length
does not exceed 4000mm. Also the vehicle should have an engine capacity upto 1500cc
for diesel cars and upto 1200cc for petrol cars. Cars that would fall under the proposed
definition include the Maruti 800, Maruti Wagon R, Maruti Zen, Maruti Alto, Hyundai
Santro and the diesel variant of Tata Indica. This reduction in excise duty has resulted in
price reductions in the range of 5-7 percent. Lately as per media reports, the government
is considering doing away with cubic capacity as one of the two criteria defining small cars
and would also include vehicles run on alternative fuels under the small car definition. If
the government does agree to this proposal, the petrol variant of Tata Motor Indica,
Maruti Swift, Hyundai Getz and Maruti WagonR Duo will also become eligible for lower
excise duty. In FY06 mini and compact cars accounted for 85% of total passenger car
sales.
Reduction in excise duty has resulted in price cuts in the range of 5-7%. If the recent
monthly data after the excise duty cut is any indication then it seems that the excise duty
cut has definitely boosted sales of small cars. But lately hardening of interest rates,
increase in road taxes in few states and higher fuel prices have reduced the impact of
lower excise duty.
Launch of new products to drive growth
In our view, it is the general improvement in the economy that spurs new car sales, which
then is determined by the appeal of new models. An automaker with weak products is
likely to fall behind in the race. After a long gap Maruti has got aggressive with it new
product launches, excluding launch of variants, it would be launching five new models in
the next five years.

27

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Over the past few years volumes growth was led by new model/variant launches. In FY06,
Maruti had launched Swift in the compact car segment which was instrumental in Marutis
improvement in market share. Sales from Swift contributed 83% to the growth of Maruti
sales in the compact car segment, whereas its contribution to total vehicle sales growth
was 134%, thus had there been no new model launch in FY06 Maruti would have even
found it difficult to even post positive growth.

New model contribution to vehicle growth Maruti

FY05
FY06
Increase
Compact Car sales
271,280 335,136
63,856
Total Passenger car sales
417,179 456,298
39,119
Total passenger vehicles
sales
487,402 527,038
39,636
Contribution by Swift
53,171
Swift contribution to Compact car sales growth (%)
83
Swift contribution to Passenger car growth (%)
136
Swift contribution to Total growth (%)
134

Source:Religare Research
In FY07, the company would be launching 3 new variants and 1 new model, which include
an LPG variant of Wagon R, re-designed Zen, diesel variant of Swift and yet to be
announced new model which we believe could be in the mid size segment after which
company may discontinue Baleno. All these three launches would help Maruti maintain its
market share in the passenger car segment.
Entry into diesel segment to push volumes
Maruti would be entering the diesel car segment with the launch of diesel version of Swift.
Current diesel variants account of ~20 percent of the total passenger car volumes.
In this high oil price environment, we believe, going ahead sale of diesel models will
continue to show higher growth as more diverse models are introduced in the passenger
car segment. Maruti with its launch of a diesel model in FY07 would be able to capture
significant market share in the diesel segment. The key growth driver for the diesel
segment is the gap between diesel and petrol prices at the retail level.

Alternative Fuels
In continuation of its aggressive strategy, Maruti is coming up with LPG and CNG variants.
This would help Maruti in tapping the cost as well as environment conscious segment of
customers. Both LPG and CNG variants are more economical as compared to diesel/petrol,
and also cause relatively lower levels of pollution. An area of concern is availability of CNG
as there is a dearth of CNG stations which can be attributed to high cost of setting up a
CNG station. This shortcoming is non existent in case of LPG as it does not require any
major investment and can be supplied from the same station where petrol and diesel is
sold.
In July07 Maruti would introduce "WagonR Duo" a new variant of Wagon R which runs
both on Petrol and LPG. Vehicles sales are likely to show strong growth after the launch of

28

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

this new variant. Running cost this variant is likely to be 20-25 percent lower when
compared with diesel variants in this segment.

29

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Export earnings to witness volatility

Maruti plans to introduce a new model In FY09 catering specifically to export markets.
Exports by company have been partially hit due to poor port infrastructure and lack of
new models to address the European markets. Over the next two years exports
contribution total sales is likely to fall, but from FY09 with the introduction of new model
for export market we believe export contribution increase significantly.
Geographical sales mix - Maruti Udyog (Rs mn)
FY02
FY03
FY04
Domestic
68,680
66,330
81,394
% of sales
97.2
91.4
89.6
Export
1,997
6,205
9,418
% of sales
2.8
8.6
10.4
Total
70,677
72,535
90,812

FY05
99,278
91.0
9,830
9.0
109,108

FY06E
113,042
94.2
6,992
5.8
120,034

FY07E
134,973
95.0
7,038
5.0
142,011

FY08E
153,019
95.3
7,488
4.7
160,507

FY09E
174,468
88.5
22,565
11.5
197,033

Source: Company, Religare Research

In Europe, few of Marutis models are already being exported by Suzuki so therefore till
the roll out of the new model, company would work with Suzuki and focus on the nonEuropean countries.
EBITDA margins to witness pressure
Surging commodity prices and increasing employee costs would strain EDITDA margin,
which is expected to decline from 15.6% in FY06 to 15.0% in FY07 and further to 13.9%
in FY08. In FY07 despite fall in excise duty on small cars companys gross realization (it
also includes excise duty) are likely to remain at last year levels mainly due to expected
hike in car prices in July06 and better product mix due to lower share of mini cars.
There is little scope in reducing costs by localization as almost all its models have been
localized to the extent of 75-90%, including the recently launched Swift, which is 90%
localized.
The company has started its new cost reduction program called Next Leap, which targets
to achieve 20% cost reduction and productivity improvement over FY06-08. Under this
initiative, Maruti intends to reduce the import content in the raw material costs by
localizing production.

30,000

( R s m n)

25,000
20,000
15,000
10,000
5,000
0

Raw material cost

( %)

79.0
78.0
77.0
76.0
75.0
74.0
73.0
72.0

% of sales

30

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Raw material price trend - Quarterly

Maruti to buy out 30% stake held by SMC in Maruti Suzuki Automobiles India
In May 2006, Maruti announced that it would buy out the entire 30% stake held by Suzuki
Motor Corporation in Maruti Suzuki Automobiles India Limited (MSAIL). MSAIL will now be
merged with Maruti. Maruti Udyog will buy SMC share at par, with total outgo of
Rs120mn. MSAIL is setting up a 250,000-car assembly plant, which is expect to be
commissioned in Q3FY07.
Diesel engine plant to be set up in JV with Suzuki
Maruti has formed a JV with Suzuki to set up a diesel engine plant, where Maruti will hold
49% stake. This will be the only operation of Suzukis car business in India that will not be
fully owned by Maruti. The diesel engine plant is being set up at a cost of Rs15.2b with an
initial capacity of 100,000 units, ramping up to 250,000 units in the next three years. This
plant is expected to be commissioned by Q3FY07.
Tie-up with Nissan to boost volumes
Suzuki has entered into an agreement with Nissan for manufacturing compact cars at the
Maruti Udyog plant in Manesar. The cars manufactured by Maruti would be exported to the
European market under the Nissan brand.
The exact time frame for production of Nissan cars by Maruti or the models to be
produced have not been disclosed. Nissan currently has only one model, the SUV X-Trail in
India, which it imports as a fully built unit.
To set up auto components JV
Maruti Udyog is setting up a joint venture with Bellsonica Corp of Japan for manufacturing
sheet metal components which will be used for its own requirements as well as for
Suzuki's motorcycles in India. Maruti is yet to disclose its stake in the panned joint
venture.
Competition and distribution network
Maruti has the strongest passenger car distribution network and local know-how to stay
ahead of the competition. However, competition in the passenger car segment has started
to heat up as existing players such as Hyundai Motors, GM, Toyota and Ford becoming
more aggressive, and trying to gain market share through introduction of new models and
aggressive expansion of distribution network.
In our view, Maruti benefits from its strong distribution franchise and brand equity, which
translates into a more stable sales performance relative to its peers. While Marutis
position remains firm in the market, competition in the small car segment is increasing,

31

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

especially from Hyundai and Tata Motors. In FY06 Maruti expanded its dealer network by
12% and has a target of similar growth in FY07. Maruti currently has network strength of
382 sales outlets in 230 cities, and 187 Maruti TrueValue outlets.
In the longer run, defending a 52% market share in passenger cars will be even more
difficult as long time competitors such as Hyundai, Honda and Ford turn more aggressive
and new competitors like GM and Toyota start to gain ground.

32

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Hardening interest rates to slow demand growth

With tightening liquidity situation, consumer financing companies have increased their
financing rates and down-payment requirements. As the availability of financing falls, car
and motorcycle purchases will also decline. Weak rupee (leads to partial increase in car
prices as critical components are imported) and higher fuel costs will also contribute to the
decline in car volume growth.
Strong Motorcycle sales peek into future car sales
The replacement demand for motorcycles has not grown at par with the demand for
scooters and mopeds. Though premium segment motorcycles have grown in absolute
terms its share in total motorcycle sales has declined from 11.5 percent in FY04 to 10.5
percent in FY05 and further to less than 10% in FY06.
The above two factors indicate that people who already have motorcycles are not too
inclined towards buying a motorcycle again and would rather graduate to a four wheeler
and this holds true to a larger extent for buyers of motorcycles constituting the premium
segment. The strong growth in motorcycle sales in past few years indicate better times for
car manufacturers in future periods.
In the table below, we have presented the ratio of car sales to motorcycles sales in few of
the emerging and developed economies:
Ratio of Car to Motorcycle sales - Emerging and developed economies
Passenger
Ratio(Cars/MYear
Motorcycles
Cars
C)
China
CY04
15,994,049
2,421,067
0.1513730
CY05
17,200,000
2,922,270
0.1698994
Indonesia CY04
3,890,000
483,295
0.1242404
CY05
5,070,000
468,186
0.0923444
India
CY04
4,754,822
802,808
0.1688408
CY05
5,580,053
852,974
0.1528613
Japan
CY04
700,021
4,600,000
6.5712314
CY05
710,521
3,928,400
5.5289006
US
CY04
965,339
7,500,000
7.7692914
CY05
1,008,994
7,800,000
7.7304721

Source: Religare Research

33

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

In the chart below, we observe that in Japan cars/motorcycle (c/m) sales ratio has been
steadily increasing for the last 45 years, this was the period when disposable income had
witnessed massive jump in Japan. In India the current c/m ratio is equal Japans ratio in
1960s. Assuming demographic changes in terms of age profile and disposable incomes,
c/m sales ratio is expected to improve.
Car/motorcycle (c/m) sales ratio - Japan
Year
c/m ratio
1960
0.10
1965
0.45
1970
2.00
1975
2.42
1980
1.20
1985
1.48
1990
3.15
1995
3.66
2000
5.46
2005
5.53

Source: JAMA and Religare Research

c/m ratio

C/M sales ratio - Japan

6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year

Capex
As part of its ongoing expansion plans Maruti would be spending Rs9.5bn and Rs4.8bn in
FY07 and FY08 respectively. Bulk of these expenses would be incurred in setting up the
assembly plant at Manesar, which is likely to be commissioned in Q3FY07.

34

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Financials
Balance sheet
FY02

FY03

FY04

FY05

FY06E

FY07E

FY08E

FY09E

FY010E

1,323

1,445

1,445

1,445

1,445

1,445

1,445

1,445

1,445

5
0

5
0

5
0

5
0

5
0

5
0

5
0

5
0

5
0

Total Reserves and Surplus

25,750

29,535

34,467

42,343

53,081

64,853

77,604

94,353

113,750

Total shareholders' funds

Total shareholders' funds excl pref
capital

27,073

30,980

35,912

43,788

54,526

66,298

79,049

95,798

115,195

27,073

30,980

35,912

43,788

54,526

66,298

79,049

95,798

115,195

102

107

124

152

189

229

274

331

399

0.24

0.15

0.09

0.07

0.05

0.04

0.00

0.00

0.00

Secured loans

3,951

3,000

3,119

3,076

2,776

2,376

Unsecured loans

2,609

1,560

Total loans

6,560

4,560

3,119

3,076

2,776

2,376

Year to 31 March (Rs mn)

Liabilities
Equity share capital
Face value
Preference share capital

Book value (Rs)

Debt/Equity Ratio (x)
LOANS

minority interest

Deferred Tax liability (net)

2,071

1,833

1,100

780

1,180

1,680

2,180

2,680

33,633

37,611

40,864

47,964

58,081

69,853

80,729

97,978

117,875

1,291

529

4,864

2,400

9,500

4,750

4,000

4,000

Total Liabilities
Capex
Assets
Gross Block

43,847

45,138

45,667

50,531

52,931

62,431

67,181

71,181

75,181

Depreciation

19,546

22,581

27,359

31,794

34,648

38,506

42,432

46,401

50,360

Actual depreciation for the year

dep % gross block
Net fixed assets
Capital WIP
Technical know how
Total non-current assets

44.6

50.0

59.9

62.9

65.5

61.7

63.2

65.2

67.0

24,301

22,557

18,308

18,737

18,283

23,925

24,749

24,780

24,821

724

93

749

421

360

475

713

600

600

25,025

22,650

19,057

19,158

18,643

24,400

25,461

25,380

25,421

INVESTMENTS
Diret investment in a company

Mutal funds and others

968

1,032

16,773

15,166

14,171

19,171

24,171

39,171

59,171

Total Investments

968

1,032

16,773

15,166

14,171

19,171

24,171

39,171

59,171

6,811

4,870

4,398

6,666

8,890

10,485

11,834

14,503

16,029

34

24

17

22

26

26

26

26

26

8,393

6,711

6,894

5,995

6,760

7,185

7,884

9,661

10,678

Deffered tax assets

Current assets
Inventories
Days of sales
Sundry debtors
Days of sales
Cash & bank balances

42

33

27

20

20

18

18

18

18

719

9,894

2,402

10,294

19,870

21,204

25,984

27,709

27,460

Days of sales
Loans and Advances

48

34

59

53

58

50

45

4,604

5,755

5,744

6,082

6,540

6,540

6,540

6,540

6,540

As a % of sales
Other current assets

6.3

7.7

6.2

5.4

5.3

4.5

4.0

3.2

2.9

479

598

751

683

480

480

480

480

480

As a % of sales

0.7

0.8

0.8

0.6

0.4

0.3

0.3

0.2

0.2

35

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.
Total current assets

21,006

27,828

20,189

29,720

42,540

45,895

52,722

58,893

61,187

4,988

10,659

Current liabilities
Creditors

3,729

4,538

5,365

5,912

6,973

7,869

9,644

As a % of sales
Adv/initial dep from dealers/customers

6.8

5.0

4.9

4.8

4.8

4.8

4.8

4.8

4.8

1,799

1,725

1,978

1,526

1,526

1,526

1,526

1,526

1,526

As a % of sales
Other liabilities

2.5

2.3

2.1

1.4

1.2

1.0

0.9

0.8

0.7

4,788

5,905

5,598

5,297

6,176

7,285

8,222

10,076

11,136

6.6

7.9

6.0

4.7

5.0

5.0

5.0

5.0

5.0

11,575

11,359

12,114

12,188

13,614

15,783

17,617

21,245

23,321

Proposed dividends & div tax

397

482

489

659

1,153

1,318

1,483

1,648

1,977

Provision for tax

102

330

568

876

148

154

168

215

249

others provisions

2,484

2,615

2,147

2,357

2,357

2,357

2,357

2,357

2,357

Total Provisions

2,983

3,427

3,204

3,892

3,659

3,829

4,008

4,220

4,584

Net current assets

6,448

13,042

4,871

13,640

25,268

26,282

31,097

33,427

33,283

Miscellaneous expenditure

1,192

887

163

33,633

37,611

40,864

47,964

58,081

69,853

80,729

97,978

117,875

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Inventories

6,811

4,870

4,398

6,666

8,890

10,485

11,834

14,503

16,029

Sundry debtors

8,393

6,711

6,894

5,995

6,760

7,185

7,884

9,661

10,678

Other current assets

5,083

6,353

6,495

6,765

7,020

7,020

7,020

7,020

7,020

20,287

17,934

17,787

19,426

22,670

24,690

26,738

31,184

33,727

Creditors

4,988

3,729

4,538

5,365

5,912

6,973

7,869

9,644

10,659

Other current liabilities

6,587

7,630

7,576

6,823

7,702

8,811

9,748

11,602

12,662

11,575

11,359

12,114

12,188

13,614

15,783

17,617

21,245

23,321

8,712

6,575

5,673

7,238

9,056

8,907

9,121

9,939

10,406

2,137

902

(1,565)

(1,818)

149

(214)

(818)

(468)

33,633

35,540

39,031

46,864

57,302

68,674

79,049

95,798

115,195

719

9,894

2,402

10,294

19,870

21,204

25,984

27,709

27,460

68

17

71

138

147

180

192

190

Cash & bank balances

719

9,894

2,402

10,294

19,870

21,204

25,984

27,709

27,460

Investments

968

1,032

16,773

15,166

14,171

19,171

24,171

39,171

59,171

1,687

10,926

19,175

25,460

34,041

40,375

50,155

66,880

86,631

13

76

133

176

236

279

347

463

600

As a % of sales
Total Current liabilities

Debit balance in the P&L account

Total Assets
Difference
Calculation of operating working capital

Total Current Assets

Total current liabilities

Working capital
(Inc)/dec in working capital
Capital employed
Cash & bank balances
Value per share

Total
Value per share

36

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Income statement
Year to 31 March (Rs mn)
Gross sales
Less: Excise duty
Excise as a % of sales
Net sales
Other operating income
Total Net sales

FY02

FY03

FY04

FY05

FY06E

FY07E

FY08E

FY09E

FY10E

90,809
20,132

90,636
18,101

110,196
19,384

132,914
23,806

147,043
27,009

167,072
25,061

188,831
28,325

231,803
34,770

256,367
38,455

22.2

20.0

17.6

17.9

18.4

15.0

15.0

15.0

15.0

70,677

72,535

90,812

109,108

120,034

142,011

160,507

197,033

217,912

2,301

2,237

2,536

2,994

3,490

3,682

3,926

4,478

4,808

72,978

74,772

93,348

112,102

123,524

145,692

164,433

201,511

222,720

2.5

24.8

20.1

10.2

17.9

12.9

22.5

10.5
169,267

% growth
Expenditure
RM costs

56,917

56,924

69,875

84,752

92,170

109,269

124,969

153,148

% of net sales

78.0

76.1

74.9

75.6

74.6

75.0

76.0

76.0

76.0

Consumption of stores

458

415

516

646

712

840

948

1,161

1,283

% of net sales
Staff costs
% of net sales

0.6

0.6

0.6

0.6

0.6

0.6

0.6

0.6

0.6

2,289

2,136

1,779

1,960

2,287

2,598

2,856

3,309

3,551

3.1

2.9

1.9

1.7

1.9

1.8

1.7

Manufacturing, administrative and other exp

% of net sales
Selling and distribution expenses
% of net sales
Total expense

EBITDA

4.6

4.3

3.9

3.9

3.9

4.0

4.0

4.0

4.0

6,078

4,060

3,699

4,382

5,390

6,172

7,577

8,380

6.6

8.1

4.3

3.3

3.5

3.7

3.8

3.8

3.8

67,836

68,782

79,865

95,398

104,316

123,901

141,602

173,348

191,476

1.4

16.1

19.4

9.3

18.8

14.3

22.4

10.5

93.0

92.0

85.6

85.1

84.4

85.0

86.1

86.0

86.0

5,142

5,990

13,483

16,704

19,209

21,791

22,830

28,163

31,244

16.5

125.1

23.9

15.0

13.4

4.8

23.4

10.9

7.0

8.0

14.4

14.9

15.6

15.0

13.9

14.0

14.0

3,429

3,221

4,949

4,568

2,854

3,858

3,926

3,969

3,959

(6.1)

53.6

(7.7)

(37.5)

35.2

1.8

1.1

(0.3)

EBITDA growth (%)

EBITDA margin (%)
Depreciation

1.6
3,229

4,821

% growth
% of net sales

1.6
3,351

% growth
% of gross block

15.6

7.2

10.9

9.5

5.5

6.7

12.6

11.8

#DIV/0!

% of net block

28.2

13.7

24.2

24.7

15.4

15.4

15.4

15.4

15.4

1,713

2,769

8,534

12,136

16,354

17,933

18,904

24,194

27,285

61.6

208.2

42.2

34.8

9.7

5.4

28.0

12.8

EBIT
EBIT growth (%)
EBIT margin (%)

2.3

3.7

9.1

10.8

13.2

12.3

11.5

12.0

12.3

VRS & other ext ord exp/ (inc)

318

371

1,196

Other Income

879

1,387

1,518

1,436

1,350

1,905

2,641

3,316

4,561

58

(5)

(6)

41

39

26

38

% growth
Interest exp/(inc)

764

% growth
% of loan
Prior period adjustment
Deferred revenue exp. written off

23.3

558

434

360

204

193

89

(27.0)

(22.2)

(17.1)

(43.4)

(5.2)

(53.9)

(100.0)

#DIV/0!

10.0

11.3

11.6

7.0

7.5

7.5

7.5

7.5

20

324

386

724

163

37

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

PBT

1,183

% growth
PBT margin (%)

1.6

2,821

7,698

13,049

17,500

19,645

21,456

27,510

31,846

138.5

172.9

69.5

34.1

12.3

9.2

28.2

15.8

3.7

8.1

11.5

14.0

13.3

12.8

13.4

14.0

Current year taxes

138

351

2,515

5,246

5,873

6,090

6,651

8,528

9,872

Effective current tax rate (%)

11.7

12.4

32.7

40.2

33.6

31.0

31.0

31.0

31.0

Deferred taxes

1,006

(238)

(733)

(320)

400

500

500

500

Fringe benefit tax

57

65

70

85

100

Taxes

138

1,357

2,277

4,513

5,609

6,555

7,221

9,113

10,472

Effective tax rate (%)

11.7

48.1

29.6

34.6

32.1

33.4

33.7

33.1

32.9

0.0

0.0

0.0

0.0

0.0

1,045

1,464

5,421

8,536

11,891

13,090

14,235

18,397

21,374

40.1

270.3

57.5

39.3

10.1

8.7

29.2

16.2

1.9

5.7

7.5

9.5

8.9

8.5

9.0

9.4

Prior period adjustments exp/ (inc)

PAT
PAT growth (%)
PAT margin (%)
Ext ord inc/(exp) (Adj for taxes)
Adjusted net profits

1.4
0

(234.0)

1,045

1,464

5,421

8,536

12,125

13,090

14,235

18,397

21,374

40.1

270.3

57.5

42.0

8.0

8.7

29.2

16.2

1.9

5.7

7.5

9.7

8.9

8.5

9.0

9.4

Adj PAT growth (%)

Adj PAT margins

1.4

DPS (Rs)

1.5

1.5

1.5

2.0

3.5

4.0

4.5

5.0

6.0

Retained earnings

648

982

4,932

7,877

10,738

11,772

12,752

16,749

19,397

Basic and diluted EPS(reported)

4.0

5.1

18.8

29.6

41.2

Basic and diluted EPS(calculated)

3.9

5.1

18.8

29.5

41.1

45.3

49.3

63.7

74.0

28%

270%

57%

39%

10%

9%

29%

16%

3.9
16.9
777
196.6
45.9
0.2

5.1
16.2
777
153.3
47.9
0.2

18.8
35.9
777
41.4
21.6
0.2

29.5
45.3
777
26.3
17.1
0.3

42.0
51.0
777
18.9
15.2
0.5

45.3
58.6
777
17.1
13.2
0.5

49.3
62.8
777
15.8
12.4
0.6

63.7
77.4
777
12.2
10.0
0.6

74.0
87.7
777
10.5
8.9
0.8

205,462
210,335

224,409
218,043

224,409
208,353

224,409
202,025

224,409
193,144

224,409
186,409

224,409
174,254

224,409
157,529

224,409
137,778

P/BV
EV/EBITDA
EV/Sales

7.6
40.9
2.9

7.2
36.4
2.9

6.2
15.5
2.2

5.1
12.1
1.8

4.1
10.1
1.6

3.4
8.6
1.3

2.8
7.6
1.1

2.3
5.6
0.8

1.9
4.4
0.6

PER SHARE DATA

Year-end shares (m)
Weighted avg shares (m)
DPS (Rs)

265
265
1.5

289
277
1.5

289
289
1.5

289
289
2.0

289
289
3.5

289
289
4.0

289
289
4.5

289
289
5.0

289
289
6.0

Dividends (Rs mn)

Tax on dividend (Rs mn)
Equity div outflow (Rs mn)
Dividend pay-out (%)
Pref div outflow (Rsm)
Book Value

397
0
397
38.0
0
102

427
55
482
32.9
0
107

434
56
489
9.0
0
124

578
81
659
7.7
0
152

1,012
142
1,153
9.7
0
189

1,156
162
1,318
10.1
0
229

1,301
182
1,483
10.4
0
274

1,445
203
1,648
9.0
0
331

1,734
243
1,977
9.3
0
399

EPS Growth
Adj EPS
CPS
Price
P/E
Cash P/E
Dividend yield (%)
Market Capitalization
Enterprise Value

38

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Growth
Net sales (%)

2.5

24.8

20.1

10.2

17.9

12.9

Reported net profit (%)

40.1

270.3

57.5

39.3

10.1

8.7

EBITDA (%)

16.5

125.1

23.9

15.0

13.4

4.8

Valuations
EPS (Rs)
BVPS (Rs)

5.1

18.8

29.5

41.1

45.3

49.3

107.2

124.3

151.5

188.7

229.4

273.5

36.4

15.5

12.1

10.1

8.6

7.6

EV/EBITDA (x)
Profitability

1.9

5.7

7.5

9.5

8.9

8.5

EBITDA margin (%)

8.0

14.4

14.9

15.6

15.0

13.9

RoE (%)

5.0

16.2

21.4

24.2

21.7

19.6

RoCE (%)

9.8

21.8

31.2

34.0

31.5

29.2

(Rs mn)

NPM (%)

160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
FY02

FY03

Total Net sales

FY04

FY05

EBITDA

FY06E FY07E
PAT

24.0

20.0

(%
)

16.0

12.0

8.0

4.0

0.0
FY02

FY03

FY04

EBITDA m ar gin (%)

FY05

FY06E

FY07E

PAT m ar gin (%)

39

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

300.0
250.0
200.0
(%)

150.0
100.0
50.0
0.0
FY02

FY03

EBITDA

FY04

FY05

PAT

Ne t Sale s

De bt/Equity Ratio (x)

0.3
0.3
0.2
0.2
0.1
0.1
0.0
FY02

FY03

FY04

FY05

FY06E

FY07E

FY08E

40
34 .0

35

31.2

3 1.5

(%)

30
25

21.8

20
15

9.8

10
5

0 .2

0
Div. yie ld (%)

0.2

0 .3

0 .5

0 .5

RoCE (%)

40

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Peer group comparison

Valuations
Marutis immediate outlook is positive. While Maruti will introduce a number of new
models, but it would be difficult for the company to maintain its market share as its
competitors including Toyota, Ford, GM and Tata Motors are getting aggressive with new
product launches. In spite of this we expect company to report strong earnings growth
mainly due to better industry outlook and company export thrust.
Peer comparision: FY08E
PE
Maruti
15.8
M&M
16.7
Tata Motors
14.1

P/BV
2.8
3.1
3.0

EV/EBITDA
9.8
10.1
7.7

Source:Religare Research and Bloomberg

EV/EBITDA - P/BV

P/BV

4.0
3.0

Tata Motors

M&M
Maruti

2.0
1.0
6.0

7.0

8.0

9.0
10.0
EV/EBITDA

11.0

12.0

Peer comparision: Financials - FY08E

(Rs mn)
Maruti
M&M
Tata Motors

Sales
164,433
103,964
294,482

EBITDA
22,830
13,375
40,455

EBITDA
margin
13.88
12.87
13.74

PAT
14,235
8,533
25,708

PAT
margin
8.66
8.21
8.73

Market
price

EPS
49.25
34.73
55.43

PER
777
580
780

15.76
16.71
14.08

Sensitivity Analysis

Perpetual Growth
rate

The following grid gives a sensitivity analysis based on different discount rates and
perpetual growth rates:

2.00%
2.50%
3.00%
3.50%
4.00%

11.9%
900
919
940
964
991

12.4%
868
884
902
923
946

12.9%
839
854
869
887
906

Discount Rate
13.4%
814
827
840
855
872

13.9%
792
803
815
828
842

14.4%
772
782
792
804
816

14.9%
755
763
772
782
793

15.4%
739
746
754
763
772

41

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

4.50%
5.00%
5.50%
6.00%

1,022
1,057
1,098
1,145

971
1,001
1,034
1,073

928
952
980
1,012

890
911
934
961

858
876
895
917

830
845
861
880

805
818
832
848

783
794
806
820

Perpetual Growth rate

The following grid gives a sensitivity analysis based on different market risk premiums and
perpetual growth rates:

2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%

2.5%
1,113
1,144
1,179
1,219
1,265
1,319
1,383
1,461
1,555

3.0%
1,051
1,077
1,106
1,140
1,178
1,222
1,274
1,335
1,409

4.0%
947
966
987
1,011
1,038
1,068
1,103
1,143
1,190

Market Risk Premium

6.0%
5.0%
862
792
876
803
892
815
909
828
842
929
950
858
975
876
1,002
895
1,034
917

7.0%
734
742
751
761
772
783
796
811
827

8.0%
684
690
697
705
713
722
732
743
755

9.0%
641
646
652
658
664
671
679
687
696

DCF Valuation per share (Rs)

Sum of PV of Free Cash Flow 148,210
Present Value of Terminal
Value
78,071
Enterprise Value
226,281
Net debt

(17,094)

Equity Value

243,375

Shares outstanding (mn)

Implied share price
Market Price as on date
Expected Premium
Assumptions
Risk free rate*
Market Risk Premium*
Adjusted Beta*
Cost of equity
Effective tax rate
Cost of Debt
Cost of Debt after tax
% debt
% equity
WACC
*:From Bloomberg

289.00
842
777
8.45%

8.0%
6.0%
1.00
14.0%
33.4%
9.0%
6.0%
1.4%
98.6%
13.9%

42

Analysis of the Auto Sector in India and Valuation of Maruti Udyog Ltd.

Based on our DCF valuation, assuming a WACC of 13.9% and terminal growth rate of 4%,
we arrive at target price of Rs842. This translates to 9% upside from current levels. At
this target price, the stock is trading at 17.2x FY08 earnings, a 14% premium to our
target sector multiple.
Party spoilers

Competition
Intense competition will force Maruti to engage in a price war or hefty promotions to
defend market share. Fight for market share may even extend price war beyond period of
weaker sales.
Hardening interest rates
Tight liquidity in the Indian financial system would push banks to raise interest rates.
Rising interest rates are likely to have a negative impact on volumes; this would certainly
trigger tighter competition and rising marketing expenses, and depressing profitability.
Increasing incentives
The strong market over the past three years eased competitive conditions as there was no
need to cut prices and offer big incentives to gain volume. It was indeed a sellers rather
than a buyers market, with customers willing to wait almost three to five months to get
the latest model Maruti Swift in FY06. But it would be little different in FY07 & FY08 as
backlogged orders for passenger car companies are evaporating and more so for Maruti.
Risks to our view
The obvious risk to our negative view is that the movement of Marutis share price is
sometimes influenced by fund flows instead of fundamentals. However, over the longer
term, we believe fundamentals will provide a stronger base for the share price
performance.
Maruti has outperformed since its listing in 2003. This performance can not be sustained
as it was driven by strong volumes growth, which is unlike to sustain at such higher level
over the next two years.
The biggest risk to our view is increase in disposable income, which can alter our negative
view on Maruti.
Easing liquidity position in the Indian financial market may lead to lower interest rates as
against our assumption of tight liquidity and higher interest rates. Lower interest rates
may lead to strong growth in sales as 90% of vehicles in India are financed.

43