RESEARCH ANALYSIS — MARUTI SUZUKI LIMITED
HISTORY
Maruti Suzuki India Limited, formerly known as Maruti Udyog Limited was established through the efforts of Dr. V Krishnamurthy in 1981. In 1982, a license and joint venture agreement (JVA)was signed between Maruti Udyog Ltd, and Suzuki of Japan wherein Suzuki owned 26% stake.
At first, Maruti Suzuki was mainly an importer of cars. In India’s closed market, Maruti received the right to import 40,000 fully built-up Suzuki in the first two years. After two years in December, 1983 the company went ahead and started local production with its first plant Gurgaon. But the early goal was to use only 33% indigenous parts as there were some concerns from Suzuki that the Indian market was too small to absorb the comparatively large production planned by Maruti Suzuki. But as thing gradually progressed, the company started receiving strong demand for its vehicles “Maruti Van” and “Gypsy”. Because of this strong growth and demand, the Japanese company raised its stake from 26% to 4o% by 1987.
By 1991, 65% of the components, for all vehicles produced, were indigenized. After liberalisation of the Indian Economy in 1991, Suzuki increased its stake in Maruti to 50% , making the company a 50–50 Joint Venture with the Government of India the other stake holder. This stake was further increased to 56.21% which made the Japanese manufacturer a majority shareholder.
MANAGEMENT
As earlier mentioned, Dr. V Krishnamurthy established Maruti Udyog Limited. He was the chairman and CEO from the inception of the company till 1990. Mr. Krishnamurthy is an Indian civil servant born in TamilNadu, widely regarded as a “Man with a golden touch”. Mr. Krishnamurthy is also known as the “Father of Public Sector undertakings in India” for his leadership and successful contribution in turning around BHEL, Maruti Udyog Limited, SAIL and GAIL into the most profit making industry in India and globally.
The current chairman is Mr. R.C. Bhargava.After a long career in administrative and industrial services, he joined Maruti in 1981where he has remained ever since. In 2016, he was awarded “Padma Bhushan”third highest civilian award in the Republic of India.
Mr. Kenichi Ayukawa is the Managing Director and CEO of the company. When he took control of Maruti Suzuki in 2013, it was a tough phase for the company as repeated labour unrests at Manesar manufacturing facility had hit Maruti Suzuki’s market share. Since then, Maruti Suzuki has settled the labour issues. And, with Ayukawa, in control, it has moved from being a small car specialist to one that is a significant force in more premium segments of the Indian market. We will try understand Mr. Ayukawa strategy in the business model section ahead.
So, lets jump straight into its business model.
BUSINESS MODEL
It’s quite a straight forward business. The company manufactures and sells passenger vehicles which constitutes almost 90% of the business. The rest 10% of the business comes from sale of spare parts, vehicle components and other services.
So, if it is so simple then what’s the point in discussing?
The point here is to understand that how Maruti Suzuki has turned itself such into a huge giant in the Indian Automobile sector. They own close to 50% of the market share in India. This means that out of 100 cars sold, half of the cars are sold by Maruti.
So, how did Maruti managed to achieve this.
The first point is the joint venture with Japanese Car and Motorcycle “Suzuki”. The biggest beneficiary was Maruti as Suzuki at that time was the front runner in Research and Development. Introduction of any new/ innovative technology by Suzuki, would directly reach to Maruti due to their JV. Maruti, therefore used to get early access to these technologies.
Maruti being an Indian Company, was very much aware about the Indian automobile market, therefore it used to customize these technologies according to Indian market and would use it in the Indian product portfolio.
The second point is “Value Migration”. In 2000, cars were viewed as a luxury more than a necessity. The whole automobile sector’s value was derived from the two-wheeler market. There was not much emphasis on the four-wheeler market. Four-wheeler was not looked as a mass market product. However, post 2003–05, things started changing. India started emerging as one of the fastest developing economy. Investments/ started pouring into the Indian Market. People started developing a higher purchasing power. Maruti sensed an opportunity here and introduced its most successful car till date. We all know this vehicle by the name of “Maruti Suzuki Swift”. This vehicle changed the landscape in the Indian automobile Sector. The vehicle instantly struck a chord with the Indian consumers and it became a hot selling product.
The last and most important point for any automobile company is the penetration level in the country. This is important to understand because if the company doesn’t have enough penetration across different cities, they won’t be able to sell cars well. Let us understand how Maruti planned its expansion strategy and penetrated into every corner of India.
As you can see, they have four sales channels. The first one is “Maruti Suzuki Arena” wherein the company provides a dynamic, trendy, social and connected new-age car buying experience. They have 2,264 outlets with presence across 1,859 cities.
The next is the “True Value”, this is a place wherein people can buy preowned Maruti Cars at a fair and transparent value. This is a huge market for Maruti, as many people cannot afford to buy a new car, therefore Maruti with their true value tries to help consumers to buy a used car which fits into the budget of everyone. Here, they have presence across 942 cities with 1,252 outlets.
The next is the “Commercial or Franchise”based model. Here, they have 310 outlets with presence across 230 cities.
The newest entrant in its sales channel is the “NEXA”. The biggest problem for Maruti was the perception problem amongst the consumers. People regarded Maruti has a mass product and not a class product. Whenever, Maruti launched a premium product, it was always perceived as a cheap car. This is where Mr. Ayukawa strategy came into picture. When Mr. Ayukawa came on board, he realised this problem and bought in the “NEXA” sales channel. It was targeted at new customer segments offering global buying experience, innovative technology and enhanced hospitality.
When it launched NEXA, many industry observers had questioned the rationale behind Maruti Suzuki selling products through a new and niche distribution channel, rather than the expansive network it already had. But the decision has paid off. The premium models helped Maruti Suzuki retain its old customers who wanted to upgrade to a higher segment, as well as entice new buyers. Maruti Suzuki’s dogged persistence in providing upgrade options to its broad customer base in the past three-four years has helped it corner around 50% of sales in the market. Currently Maruti has presence across 204 cities with 360 outlets for Nexa.
These are the three main points which made Maruti a giant in this space. However, Maruti does have its own share of problems which it has been facing since inception which is the labour issues. Let’s discuss this aspect in detail.
KEY ISSUES
Since its founding in 1983, Maruti Udyog Limited has experienced problems with its labour force.
In 2000, a major industrial relations issue began and employees of Maruti went on an indefinite strike, demanding among other things, major revisions to their wages, incentives and pensions. When Maruti began it privatisation and disinvestment drive, the union opposed it stating that the company will lose a major business advantage of being subsidised by the Government, and the union has better protection while the company remains in control of the government. However, the management refused union demands citing increased competition and lower margins. Therefore, the central government privatized Maruti in 2002 and Suzuki became the majority owner of Maruti Limited.
The company was hit badly again because of the labour issues in July, 2012. This issue is known as the “Manesar Violence”. It continued till mid 2013.
On18 July 2012, Maruti’s Manesar plant was hit by violence. According to Maruti management, the production workers attacked supervisors and started a fire that killed company’s General Manager of Human Resources Avineesh Dev and injured 100 other managers, including two Japanese expatriates. The workers also allegedly injured nine policemen. However Maruti Suzuki Workers Union (MSWU) President Sam Meher alleged that management ordered 300 hired security guards to attack the workforce during the violence. The incident is the worst-ever for Suzuki since the company began operations in India in 1983.
Maruti said the unrest began, not over wage discussions, but after the workers’ union demanded the reinstatement of the low caste worker who had been suspended for allegedly beating a supervisor. But, according to the Maruti Suzuki Workers Union, a supervisor had been abused and made discriminatory comments to a low-caste worker. The workers even claimed harsh working conditions and extensive hiring of low-paid contract workers about half the minimum wage of permanent employees. Company executives denied harsh conditions and claim they hired entry-level workers on contracts and made them permanent as they gained experience.
In July 2013, the workers went on hunger strike to protest the continuing jailing of their colleagues and launched an online campaign to support their demands.
The Maruti Suzuki Workers Union is continuing to organise industrial action and protests calling for the workers to be released and criticising the judgement made in 2017 by the court. 31 workers were found guilty of variety of offences. 18 were convicted on charges of rioting, trespassing, causing hurt and other related offences under Indian Penal Code sections. The remaining 13 workers were sentenced to life in imprisonment after being found guilty of the murder of General Manager of Human Resources Avineesh Dev.
INDUSTRY DYNAMICS
So, lets discuss few important points here. If we look into the whole manufacturing GDP, 49% contribution comes from the automobile sector. Apart from this, automobile sector gives employment to almost 35 million peopleand lastly, if we talk about the overall GST collection, 12–13% is contributed by the auto sector. You can understand how important is this sector for the economy.
However, with the recent economic slowdown, automobile is the worst hit sector. Sales figures have been going down consistently. There have been job cuts and many more issues which this sector is facing. It is important to understand the factors which affected the automobile sector.
The first factor is the NBFC crisis, you must be wondering how the NBFC crisis hit the automobile sector? The fact is that everything is inter-related. Almost majority of the cars sold in India, are sold on a loan. So, if people are getting problems getting loans for vehicles, they would definitely not buy or maybe delay their plans. This can hurt the company’s sales and also their profitability.
The second factor is Bharat Stage 6 emission norms.This norms basically means cleaner engine and better fuel efficiency which will be less harmful for the environment. The company’s had just accustomed to the Bharat Stage 4 norms which was relatively new and the company had made major capex for the same. However, with the introduction of Bharat 6, companies had to again make changes to its plant and machinery which incurred heavy capex. However, the vehicles which were based on older engines started facing a slowdown in sales as people started preferring the newer engine which would be compliant. This resulted in people delaying plans to buy the vehicle and thereby resulting in a slowdown.
The last point is the changes in the psychological behaviour of the people,with the economic slowdown and Nbfc crisis, the government was in pressure to get the economy back in track by providing relief packages for various sectors and increasing demand in the economy. This resulted in many people, delaying the plans to purchase new vehicles as they expected a tax cut in the automobile sector. This psychological change in the mind of people further added pain to the automobile sector.
FUTURE OUTLOOK
What next? The introduction of Electric Vehicles, Government Initiatives and Scrap Policy are the important factors that will determine the roadmap for the automobile sector.
I would like to emphasis a little bit on the “Scrap policy”. Going ahead, Scrappage policy is very important because there are 1000s of vehicles in the market which are still running since last 10–15 years. These vehicles are already over their prime and can cause various environmental effects and lots of additional out of pocket expenses for the existing owners. In majority cases, the vehicle is passed on to third, fourth or even fifth owner. If there is a scrappage policy in place, demand for new cars will increase in exchange for old cars. There can be incentives for the owners to scrap their cars and buy a new one. This can maintain consistent demand-supply ratio in the market. Many developed countries have this policy in place and India is already in advance talk to bring in this policy and it will be a game-changer.
FINANCIALS & VALUATIONS
Talking about the balance sheet, they have 62,913 crores worth of total assets. More Half of this is in the form of investments. Property, Plant & machinery the other major chunk of assets. The amounts 37,503 and 14,986 crores respectively.
The total liabilities stand only at 16,790 crores. This is so low, because the company hardly any debt. This is the best thing because usually, many automobile company raise huge debt to fund their operations and buy state of the art equipment’s, land and also spend on R&D. In case of Maruti, they have everything in place. Plus up, they have huge pile of money placed as investment in the debt fund which can be used to plan any major capex. The major chunk of the liabilities comprise in the form of trade payables which is close to 10,000 crores. That’s it.
In the Profit & Loss statement, the company’s net sales has increased from 42,644 crores in FY14 to 83,026 crores in FY19.This is almost double in 5 years which is 20% CAGR growth.The profits have rose from 2,783 crores in FY14 to 7,500 crores in FY19. The best part is the PAT margin, generally most of the automobile sector companies have margins ranging between 5–7% as the industry is capital intensive. But, in the case of Maruti, the margins are close to 8–10%. That’s a huge gap which is the main difference in terms of profitability and growth of this company.
In the Cash Flow statement, the company is generating consistent free cash flow and they have been improving it. The company generated 1,410 crores worth of free cash in FY14. This increased to 7,919 crores in FY18. However, due to the slowdown the company got a hit in FY19 in overall terms of growth, profitability and free cash flow.
SHOULD YOU INVEST
A fun fact, if you had invested Rs. 1,70,000/- in Maruti shares instead of buying Maruti 800 car in 2003,the value would have been more than Rs. 90,00,000 in 2018. That is the amount mass wealth the company has generated for its investors.
But now the scenarios have changed, the company recently had to contend with a 4.73% fall in market share to 48.16% as against 52.89% share in July 2018. Maruti’s market share in Indian auto industry usually has been in the 52–53% range for quite some time now. But it has gradually declined. Maruti’s market share loss, is gained by Hyundai and Mahindra. Plus up, there are new competitors such as KIA and MG Hector lining up with attractive cars models and prices.
Maruti Suzuki is set to launch its first electric vehicle in 2020, and consumer acceptance on a mass scale will depend on affordability. The company plans to balance cost and technology.
Lastly, the company has set up a new manufacturing plant in Hansalpur, Gujarat through Suzuki Motor Gujarat Private Limited (SMG), a subsidiary of SMC, to cater to the increasing market demand for the Company’s products and has been operational since 2017. Through this new facility, an additional annual production capacity of 0.5 million units has been made available, thereby taking the combined production capacity to a little over two million units.
Considering all this fact and the backing of Suzuki Motors, the company looks fairly valued at the current price point.
