ANALYST REPORT: MARUTI SUZUKI: BUY( ESTIMATED PRICE Rs.4748.48)

ANALYST REPORT: MARUTI SUZUKI: BUY(ESTIMATED PRICE Rs.4748.48)

Introduction:

Maruti Suzuki India Limited, formally known as Maruti Udyog Limited, is founded in 1981. It is a subsidiary of Japanese automobile and motorcycle manufacturer Suzuki. In the Indian markets, Maruti Suzuki has approximately 44.8% share in Passenger vehicles and 51.9 % share in the car segment, which makes this company a market leader. At present, company has 14 car models which include Alto 800, Alto K10, Wagon R, Celerio, StingRay, Ritz, Swift, DZire, Ertiga, Omni, Eeco, Gypsy, Grand Vitara, and Ciaz.   

Shareholding Pattern:

Category of Shareholders Promoters and Promoters Group	No. of Shareholders	Total No. of Shares	% of Total Shares
Foreign Bodies Corporate	1	169788440	56.21
Public Shareholding Institutions
Mutual Funds/UTI	364	20229842	6.7
Financial Institution/Banks	62	24611986	8.15
Foreign Institutional Investors	562	66498881	22.01
Non- Institution
Bodies Corporate	1515	13982802	4.63
Individuals	97911	6096940	2.02
Others	2455	871169	0.28
Total	102870	302080060	100

..

Business Description:  

Company people:

Name	Age	Since	Current Position
R. Bhargava	80	2007	Non-Executive Chairman of the Board
Kenichi Ayukawa	59	2013	Chief Executive Officer, Managing Director, Director
Toshiaki Hasuike	55	2013	Joint Managing Director, Whole-Time Director
Kazuhiko Ayabe	55	2013	Managing Executive Officer - Supply Chain, Executive Director
Shigetoshi Torii		2014	Director - Production, Whole- time Director
T. Hashimoto		2012	Executive Officer - Marketing & Sales
C. Raman			Executive Officer – Engineering
Y. Suzuki			Executive Officer - Quality Assurance (QA)
A. Tomer			Executive Officer - Quality Assurance (QA)
Mayank Pareek		2013	Senior Executive Officer - Marketing & Sales
S. Siddiqui		2013	Chief Mentor
M. Singh		2013	Chief Mentor
S. Ravi Aiyar		2013	Executive Director - Legal, Company Secretary
Kinji Saito		2012	Non-Executive Director
Osamu Suzuki	84	2002	Non-Executive Director
Toshihiro Suzuki	55	2013	Non-Executive Director
Davinder Brar		2006	Non-Executive Independent Director
Amal Ganguli	75	2006	Non-Executive Independent Director
Pallavi Shroff	58	2005	Non-Executive Independent Director
R. Singh	62	2013	Non-Executive Independent Director

 Other Services offered by Maruti Suzuki:

 Maruti Finance: Maruti Finance helps customers in owing Maruti cars. Maruti provide finance to the customers for car through its Finance partners. It helps in lower down payment as well as lower interest rates. It basically helps customers in selecting the right loan plans for themselves and provides end to end service, right from selection up to disbursement of the loan. They help in reducing the time taken for loan to be passed and disbursed. This helps in reduction of cash cycle and thereby decreases working capital requirements and hence lowers the finance costs bared by the dealer.  Maruti’s financial partners are as follows:

HDFC Bank	ICICI Bank	Axis Bank	IndusInd Bank	Yes Bank
Mahindra & Mahindra Financial Services Ltd.	Sundaram Finance Ltd.	Magma Fincorp Ltd.	Kotak Mahindra Prime Ltd.	Reliance Capital Ltd.
Cholamandalam Investment and Finance Company Ltd.	Shriram City Union Finance Ltd.	L&T Finance
State Bank of India	State Bank of Bikaner and Jaipur	State Bank of Patiala	State Bank of Travancore	State Bank of Hyderabad
State Bank of Mysore	Punjab National Bank	Bank of Baroda	Oriental Bank of Commerce	Union Bank of India
Corporation Bank	Punjab and Sind Bank	Allahbad Bank	Canara Bank	Syndicate Bank
UCO Bank	IDBI Bank	Jammu and Kashmir Bank	Bank of India	United Bank of India
Andhra Bank	Bank of Maharashtra	Central Bank	Indian Overseas bank

 Maruti Insurance: Maruti Insurance Broking Private Limited is Insurance Broker licensed by IRDA. It takes care of all the car insurance needs on a single window concept and is trusted for their customer centric approach and services. The policy is available instantly through the Internet. This reduced the turnaround time whenever accident takes place. Claims are passed at recommendable speed and apart from that, dealer gets cash easily and in less time period. This gives the float to the company.

Auto Card: Through auto card, Maruti Suzuki provides 4% value back, discount, exciting rewards and complimentary gift vouchers etc. To maximize the benefits on the Loyalty Card, Maruti has partnered with State Bank of India- India's leading and most trusted bank. Maruti & SBI are the leading brands and have consistently spelt trust and quality in all their products and offerings for the Indian customers. One can use this card while buying any of the upcoming Maruti Suzuki models. This program is basically for building up the customer loyalty and retaining old customers. Through this program, they are trying to reduce the customer retention cost and maximizing the customer lifetime value.

Maruti Driving Schools: Maruti Driving Schools (MDS) are opened association with Maruti dealers, where a customer can get world class driving training.

Training includes:

ü  Classroom and Attitudinal Training.

ü  Advanced simulators to create on-road driving situations, so that learners get a first-hand feel of the road before they actually drive.

ü  Special initiatives that have lady instructors for women learners.

Maruti Genuine Parts: Maruti Suzuki has a huge network of Maruti Suzuki dealers and Maruti Suzuki service stations across the nation, there to help customers with genuine spare parts. By using the genuine parts, it enhances the car’s performance. Parts & accessories showed 21% growth in the year 2013-14. It forms a significant part of other operating revenue.

Maruti Genuine Accessories: The Parts and Accessories business registered an impressive growth of 21 percent during the year. Despite pressure on new car sales, the Company was able to enhance sales of Maruti Genuine Accessories through innovative marketing ideas, promoting sales among existing customers at service workshops and a larger and improved product portfolio. Sales of Maruti Genuine Parts also grew on the back of effective customer education campaigns and a wide distribution network.

Capacity of the Company: Maruti Suzuki plants are located at two locations, Gurgaon and Manesar. The capacity for these plants is given below individually….

Gurgaon Plant: This plant turns out 9 lakh cars every year. An advanced K-Series engine assembly has already produced over 10 lakh advanced K-Series.

Manesar Plant:  the Manesar Plant spreads over 600 acres and houses 3 fully-integrated plants, with an annual capacity of 5.5 lakh cars.

At Manesar, JV Suzuki Power train India Ltd is manufacturing world-class diesel engines. Currently at 3 lakh engines per year, plans are underway to up production to turn out 7 lakh diesel cars annually.

Industry Analysis:

Industry Value Chain:

Industry Cost Structure:

Distribution of total Expense	% of Total Expense
Operating Expenses	92.31
Financial Charges	2.11
Provisions	0.22
Non-cash charges	3.91
Prior period and extraordinary expenses	0.08
Provisions for taxes	1.59

Performance of the Industry:

The first six months of FY15 have been fairly decent for Auto Industry, which has mostly witnessed growth almost on all the fronts including production, sales and exports. However, it would yet take some time for the industry to completely stabilize since the production of commercial vehicles segment continues to show de-growth indicating lack of demand for this segment of vehicles. India is expected to become a major automobile manufacturing hub and the third largest market for automobiles by 2020, according to a report published by Deloitte. India is currently the seventh-largest automobiles producer in the world with an average annual production of 17.5 million vehicles, and is on way to become the fourth largest automotive market by volume, by 2015.

The Government of India encourages foreign investment in the automobile sector and allows 100 per cent FDI under the automatic route. To boost manufacturing, the government had lowered excise duty on small cars, motorcycles, scooters and commercial vehicles to eight per cent from 12 per cent, on sports utility vehicles to 24 per cent from 30 per cent, on mid-segment cars to 20 per cent from 24 per cent and on large-segment cars to 24 per cent from 27 per cent.

Production: April - September FY15

In the first six month of FY15, a total of 11,831,693 vehicles were produced which is 14.95% more than that produced in the same period in 2013-14. Barring the commercial vehicle segment, all the other segments recorded growth in their production in the run up to festive season, improving consumer sentiment and declining prices of fuel. However, Commercial vehicle sales continue to perform poorly in the face of India's industrial slowdown, with sales of vans and trucks declining once for sixth straight month in the month of September. The total production of passenger vehicles in the first six months of FY15, i.e. April-September has declined by 6.83% at 338,909 vehicles as compared to 363,745 in the same period of the previous year. On the flipside, the production of two-wheeler segment registered 18.12% growth at 9,429,850 vehicles as compared to 7,982,963 vehicles in the same period the previous year; this was followed by total Three Wheelers segment, which produced 478,733 vehicles against 413,194 in the same period the previous year, up by 15.86%. Lastly, passenger vehicle segment recorded 3.3% growth by producing 1,584,201 units as compared to 1,533,131 units produced in the corresponding period of 2013-14.

Market Analysis:

Definition of Market: A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand.

Market Size: Market size of passenger cars in automobile industry was 15.1 % of to total size of industry in 2013-2014.

Market Segmentation of automobile indistry:

Porter’s five force model:

Financial Analysis

Balance Sheet of last Five Years

Balance sheet(in crores)	2010	2011	2012	2013	2014
EQUITY & LIABILITIES
Shareholder's Fund
Share Capital	144.5	144.5	144.5	151	151
Reserves & Surplus	12038.1	14164.3	15530.2	18876.8	21345.4
Total equity	12182.6	14308.8	15674.7	19027.8	21496.4
Non-current Liabilities
Long term borrowings	494.3	274.7	169.8	704.9	627.4
Deferred tax liability	146.1	173	306.9	417.6	596.2
Other long term liability	26.5	105.1	102.8	258.8	247.6
Long term provisions	45.4	140	169.3	225.9	200.7
Total Non-current liabilities	712.3	692.8	748.8	1607.2	1671.9
Current Liabilities
Short term borrowing cash &  overdraft	0	0	0	90.1	440.3
Short term borrowings credits	384.7	40.3	1092.4	773.8	797.6
Trade payables	0	2692.3	3465.8	4277.2	4999.8
Other current liabilities	3026	996	1593.9	1088.4	1320.5
Short term provisions	623.3	376.1	523.6	641.9	672.7
Total current liabilities	4034	4104.7	6675.7	6871.4	8230.9
Total Equity & Liabilities	16928.9	19106.3	23099.2	27517	31411.4
ASSETS
Non current assets
Fixed asset
Total Tangible asset	5155.4	5626.1	7534	9797.7	10849.3
Total Intangible asset	15.9	45.7	211.5	224	184.4
Capital Work in Progress	392.2	879.2	942.7	1966.5	2639.5
Total fixed asset	5563.5	6551	8688.2	11988.2	13673.2
Non current investments	497.3	1443.7	1790.9	2171	1521.2
Long term loans & advances	0.8	1310.8	1345.8	1287.8	1653.9
Other non-current assets	1625.8	54.4	32.3	894.6	9.5
Total  non-current assets	7687.4	9359.9	11857.2	16341.6	16857.8
Current Assets
Current Investments	5273.3	3995.6	4754.1	5250.4	9005.9
Inventories	1227.6	1438.6	1837.8	1887.2	1763.2
Trade receivables	894.4	881.3	1006.6	1535.5	1489.1
Cash and bank balances	162.7	2532	2463.4	814.8	648.6
Short term loans & advances	1595.2	703.1	799	1134.3	1283.2
Other current assets	88.3	195.8	381.1	553.2	363.6
Total Current assets	9241.5	9746.4	11242	11175.4	14553.6
TOTAL ASSETS	16928.9	19106.3	23099.2	27517	31411.4

As we can see from the above table, total equities have grown at CAGR of 15% Y-O_Y. This is mainly due to increase in reserves & surplus which comes from P&L account. This shows that company is making good growth.   Maruti Suzuki’s long term borrowings are increasing year on year. Total non-current liabilities are growing at 23% CAGR and fixed assets are also growing at 22% CAGR. These long term loans are taken to finance the fixed assets and the company is going for the expansion. The expansion is financed by the long term loans. Even the short term liabilities are growing and they are growing to finance the inventory and working capital requirements.

High growth is seen in the intangible assets of the company. This is because previously Maruti was focusing just on the low cost of the car and not on the R&D. Now, it has got into technologies like automatic transmission. It had filed 19 patents in the year 2013-2014 and so a sharp increase is seen in the growth of intangibles. It is trying to inculcate new technologies and make better product. It is working towards making automobiles more fuel efficient. Fuel efficiency is the only factor on which they are focusing.

P&L of last Five Years

P & L(in crores)	2010	2011	2012	2013	2014
Revenue
Revenue from Operations	32180.5	40633	39156.9	48797	48530.5
Less: Excise Duty	2877.7	4300	3959.7	5581.1	5258.7
Revenue from Operations (Net)	29302.80	36333.00	35197.20	43215.90	43271.80
Other operating income	288.70	822.80	892.70	1088.50	1178.80
Other income	1034.4	514.5	844.3	830.1	830.5
Total Revenue	30625.90	37670.30	36934.20	45134.50	45281.10
Expenses
Raw material	22017.9	27542.6	27104.6	30789.8	29345.2
Purchase of traded goods	912.4	1278.1	1557.9	2242	2487.4
Change in inventory	-194.1	-60	-150.6	19.2	20.4
Employee benefits	560.5	731.9	877.9	1120.2	1423.7
Manufacturing administrative & other expense	2813.1	4007.7	4217.7	5849.5	6004.4
Vehicles/dyes for own use	-29.6	-25.7	-42.7	-43.8	-34.3
Total Expenses	26080.2	33474.6	33564.8	39976.9	39246.8
EBITDA	4545.70	4195.70	3369.40	5157.60	6034.30
Depreciation and Amortization	841.4	1031.3	1162.5	1889.7	2116
EBIT	3704.30	3164.40	2206.90	3267.90	3918.30
Finance cost	37.4	29.4	61.6	197.8	184.5
Profit before tax	3666.90	3135.00	2145.30	3070.10	3733.80
Total tax expense	1121.9	827.9	511.5	621.5	902.2
Profit for the year	2545.00	2307.10	1633.80	2448.60	2831.60

..

Apart from the financial year 2013-2014, in which Manesar Plant incident took place, the revenues  of the company has been growing at about CAGR of 15%. There is very high growth rate CAGR of about 42% observed in other operating income. This income consists of income from Maruti insurance, accessories, driving school, finance and other such institutes. Employee benefits as a percentage of revenue has been increasing year on year. This is because they are giving on higher benefits to employees to retain them.  Their finance cost has been significantly low compared to the other companies because they obtain debt from the foreign banks at a very low interest rate. This reduces their cost of capital significantly.

We have assumed that this sector will see high growth in the coming years. Not just diesel vehicles, but also petrol vehicles will see high growth because of reduction in petrol prices. As the per capita income is increasing, the segment will see growth. As Maruti’s new plant will be operational this year, and apart from it, exports of the units will start and Maruti will enter into LCV (Light Commercial Vehicle) segment in the coming years, the company will seek high growth. We have assumed that the company will see 20% growth for the coming 2 years and then their growth will decline.

Projected Balance Sheet for Next Five Years

Balance sheet(in crores)	2015	2016	2017	2018	2019	Terminal
EQUITY & LIABILITIES
Shareholder's Fund
Share Capital	151	151	151	151	151	151
Reserves & Surplus	24976.08	29444.99	34824.90	41656.81	50534.42	61924.21
Total equity	25127.08393	29595.99	34975.9	41807.81	50685.42	62075.21
Non-current Liabilities
Long term borrowings	758.7701276	917.6476	1109.792	1342.169	1623.204	1963.084
Deferred tax liability	596.2	596.2	596.2	596.2	596.2	596.2
Other long term liability	456.9214943	456.9215	456.9215	456.9215	456.9215	456.9215
Long term provisions	200.7	200.7	200.7	200.7	200.7	200.7
Total Non-current liabilities	2012.591622	2171.469	2363.614	2595.991	2877.025	3216.905
Current Liabilities
Short term borrowing cash &  overdraft	506.0257408	581.5627	668.3754	768.1471	882.8122	1014.594
Short term borrowings credits	916.6616644	1053.496	1210.757	1391.492	1599.207	1837.929
Trade payables	5131.448754	6157.739	7081.399	7789.539	8412.702	8833.337
Other current liabilities	1320.5	1320.5	1320.5	1320.5	1320.5	1320.5
Short term provisions	672.7	672.7	672.7	672.7	672.7	672.7
Total current liabilities	8547.336159	9785.997	10953.73	11942.38	12887.92	13679.06
Total Equity & Liabilities	35699.21171	41565.66	48305.45	56358.38	66462.57	78983.37
ASSETS
Non current assets
Fixed asset
Total Tangible asset	13384.24137	16412.69	20043.26	20644.15	19612.16	18820.91
Intangible assets
Total Intangible asset	486.5058934	417.6047	358.4615	307.6945	264.1174	226.7119
Capital Work in Progress	2639.5	2639.5	2639.5	2639.5	2639.5	2639.5
Total fixed asset	16510.24727	19469.79	23041.22	23591.34	22515.77	21687.12
Non current investments	1521.2	1521.2	1521.2	1521.2	1521.2	1521.2
Long term loans & advances	1653.9	1653.9	1653.9	1653.9	1653.9	1653.9
Other non-current assets	9.5	9.5	9.5	9.5	9.5	9.5
Total non current assets	19694.84727	22654.39	26225.82	26775.94	25700.37	24871.72
Current Assets
Current Investments	9005.9	9005.9	9005.9	9005.9	9005.9	9005.9
Inventories	2122.502137	2547.003	2929.053	3221.958	3479.715	3653.701
Trade receivables	1788.09779	2151.371	2490.362	2771.635	3044.482	3278.127
Cash and bank balances	1441.06452	3560.189	6007.509	12936.14	23585.3	36527.13
Short term loans & advances	1283.2	1283.2	1283.2	1283.2	1283.2	1283.2
Other current assets	363.6	363.6	363.6	363.6	363.6	363.6
Total Current assets	16004.36445	18911.26	22079.62	29582.44	40762.2	54111.65
TOTAL ASSETS	35699.21171	41565.66	48305.45	56358.38	66462.57	78983.37

Projected P&L for next Five Years

P & L(in crores)	2015	2016	2017	2018	2019	Terminal
Revenue
Revenue from Operations	58236.6	69883.92	80366.51	88403.159	95475.41	100249.2
Less: Excise Duty	6310.44	7572.528	8708.407	9579.2479	10345.59	10862.87
Revenue from Operations (Net)	51926.16	62311.39	71658.10	78823.91	85129.82	89386.31
Other operating income	1675.67	2381.97	3385.99	4813.20	6841.98	9725.91
Other income	786.1446	744.1581	704.414	666.79259	631.1805	597.4703
Total Revenue	54387.97	65437.52	75748.50	84303.90	92602.98	99709.69
Expenses
Raw material	35214.24	42257.09	48595.65	53455.216	57731.63	60618.22
Purchase of traded goods	2984.88	3581.856	4119.134	4531.0478	4893.532	5138.208
Change in inventory	24.48	29.376	33.7824	37.16064	40.13349	42.14017
Employee benefits	1708.44	2050.128	2357.647	2593.4119	2800.885	2940.929
Manufacturing administrative & other expense	7205.28	8646.336	9943.286	10937.615	11812.62	12403.26
Vehicles/dyes for own use	-41.16	-49.392	-56.8008	-62.48088	-67.47935	-70.85332
Total Expenses	47096.16	56515.39	64992.7	71491.971	77211.33	81071.89
EBITDA	7291.81	8922.13	10755.80	12811.93	15391.66	18637.80
Depreciation and Amortization	2288.556	2776.856	3366.112	3456.8767	3279.417	3142.696
EBIT	5003.26	6145.27	7389.69	9355.05	12112.24	15495.10
Finance cost	215.7717	252.4926	295.6396	346.36989	406.0546	476.3198
Profit before tax	4787.49	5892.78	7094.05	9008.68	11706.18	15018.78
Total tax expense	1156.803	1423.876	1714.139	2176.7722	2828.571	3628.996
Profit for the year	3630.68	4468.91	5379.91	6831.91	8877.61	11389.79

Valuation

Discounted cash flow method was used for calculating the value of the equity share. The calculated intrinsic value of the share comes out to be Rs. 4748.48; The Current Market price is Rs. 3650.55.

Price performance 

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About the Author

This report has been authored by Virali Shah and Anoop Awasthi. Both are pursuing MBA from Institute of Management, Nirma University, Ahmedabad, Gujarat, India.

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.