Maruti Suzuki India Ltd. – Will it win the Battle, again?

Maruti Suzuki’s 10 YEAR X-RAY*: Green (Very Good)

(* 10 YEAR X-RAY shows the financial performance of a company in the last 10 years.)

Maruti Suzuki, in brief

Maruti Suzuki India Ltd, a subsidiary of Suzuki Motor Corporation of Japan, is India’s largest passenger car company, with over 50% market share. Almost all its models are in the A2 passenger car segment. Suzuki’s technical superiority lies in its compact & light-weight engines, which are clean and fuel efficient

Maruti Suzuki has two state-of-the-art manufacturing facilities, one at Gurgaon and the other at Manesar, with a total installed capacity of 10,00,000 cars per year. It has a strong sales network of 600 outlets and service network of 2628 workshops. It exports its cars to over 100 countries. Exports accounted for over 17% of the company’s sales in FY10

What does Maruti Suzuki’s past say?

Stock Shastra #3 talks about the 5 Financial Parameters(Net Sales Growth Rate, EPS Growth Rate, BVPS Growth Rate, ROIC & Debt/Net Profit Ratio) by which we can shortlist wonderful companies with an Excellent Financial Track Record. In case of Maruti, the growth in Net Sales has been consistently good, because of increasing demand over the years. Its EPS and BVPS growth rates have been impressive too.  Maruti’s management has been utilizing its funds in an optimum manner, as indicated by its average ROIC of 25.5%. The company has a comfortable debt position too. Looking at all these parameters, we can say that Maruti Suzuki is a company worth short-listing, on the basis of its financial track record

The 10 YEAR X-RAY of Maruti Suzuki is Green (Very Good)

What is Maruti Suzuki’s Short-term Outlook?

• Maruti is currently facing capacity constraints due to the unexpected increase in demand in FY10 – hence it was operating at 102% of its total capacity. To overcome this, the company will be increasing its capacity at the Manesar plant to manufacture additional 2.5 Lakh units by June 2011

• Implementation of Euro-IV Norms have increased costs: The Company has begun to increase its price to pass on the cost-increase – Since April 1, 2010, eleven selected cities have moved to Euro-IV emission norms. Hence, Maruti Suzuki needs to change the engine completely for some models; while in others the ECU (Electronic Control Unit) will need tweaking. Some models (Ritz, SX4 and Estilo) are already Euro-IV compliant

• Re-launch of WagonR priced Rs.5000-10000 higher, after technical & physical up gradation to meet Euro-IV emission norms

Increasing competition, interest rates, fuel prices and withdrawal of European incentive scheme will affect its demand in the short term. Besides, increasing raw material prices, excise duty hike from 8% to 10% are other concerns. Despite these concerns, higher employment rate and increased salaries will drive the sale of A2 segment cars in India. Maruti, being the leader in this segment will benefit the most from this increase

Hence, we can expect the short-term outlook of Maruti Suzuki to be Orange (‘Somewhat Good’)

What is Maruti Suzuki’s Long-term Outlook?

Increasing Competition in the small car segment poses a threat:   Tata Motors has taken over the tag of ‘entry-level-car-maker’ with the launch of Nano. With other companies like Toyota, Volkswagen, Ford etc planning to launch cars in the A2 segment, competition is set to heat up; putting pressure on Maruti’s market share

In this context: Will Maruti remain a winner in the future?

Maruti has been the market leader for over 2 decades now. Before the Government allowed foreign car makers in India, Maruti was competing with local players like Telco, Hindustan Motors etc. Once foreign players started entry in 90s, Maruti initiated strategic responses to its new competition & fought hard to maintain its position. It narrowed down on a plan and changed its focus from only production to ‘marketing & customer focus’ Under this phase, Maruti launched a new model every year, it increased its sales & service network to reach customers and improved its technology. As a part of the plan, it completed a Rs. 400 Cr. expansion project which increased the total production capacity to over 3,70,000 vehicles p.a. It thus, won the battle then, maintaining its leadership position

This redesign phase helped Maruti develop a few moats (sustainable competitive advantage):

These moats have remained its key growth drivers till date and in the future.

The Company is now taking steps to fight the current competition it is facing:

• It has repositioned Alto as its entry-level car at a more competitive price, as it has phased out Maruti 800 from across 13 cities from April 2010 onwards
• Maruti will now concentrate on the A2 segment where it is already the market leader with a 60% share. It has a wide range of models – A-Star, Swift, Ritz, Estilo and WagonR in this segment. The company is betting big on this segment especially with the re-launch of WagonR – the bestselling car in this segment. It is planning to launch new models in new segments
• It is setting up its independent R&D facility in India, the biggest outside Japan for parent Suzuki, by 2012, with an expenditure of up to Rs 1,500 Cr; in collaboration with Suzuki’s product development cell to meet global standards. It will manufacture cars for the local and export market, keeping in mind the expectations of customers. This will help India turn into a global hub for small car design

Volkswagen, the largest car-maker in Europe with 57% market share, has purchased a 19.9% stake in Suzuki Motors. Does this have any significance for Maruti? In the long term, we expect Maruti Suzuki to gain from this, as Suzuki will benefit from the diesel-engine technology strengths of Volkswagen. Also, Europe is a major export destination for Maruti Suzuki. It will also help the Company access better technology in the future, which will strengthen its position globally. This deal will also help Maruti compete better in India and in exports

Yes, competition is getting aggressive. But Maruti Suzuki is  taking appropriate steps to fight  competition and remain a winner

Considering all the above factors, we can expect the long-term outlook of Maruti Suzuki to be Green (Very Good). It is likely to overcome its roadblocks and remain  successful. However, it will not be a smooth ride for the company, along the way

Conclusion:

Maruti has proved itself in the past by sustaining its market leadership position. It is well-poised for growth in the long term due to its growing business, the competitive advantage of its market share especially in the A2 segment, its wide sales & service network and superior technology. Competition is  likely to give it a bumpy ride, but it is well-armed to remain successful

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