BSE: 532500
website: www.marutisuzuki.comCMP: Rs 1175/Share; Value Rs 1250/Share
Very strong company, but available at a small discount to value. May be we should wait!Company
Maruti Suzuki is a leader in passenger vehicles in India. It has been in business for long and has transformed the four-wheeler scenario in India. Currently, it has 45% market share in the passenger vehicle segment. It has a dominant position in the entry level segment. The company's value proposition is low cost of ownership and fuel efficiency. It has set up a large dealer and service network covering 668 and 1395 cities respectively. This gives them a unique advantage to tap rural market which now accounts for 20% of their total domestic volume. They have outstanding service network and have been rated the best for 11 continuous years by JD Edwards. As an erswhile Maruti owner (and now Tata) myself, I can vouch that they are very strong on service and cost of ownership. These propositions are difficult to beat. Most players struggle to deliver a reliable sales and service network. Maruti's incoming supply chain is also quite strong. They have been able to develop suppliers in close proximity, again an advantage very difficult to implement.
Though their product portfolio spans entry level to sedans they are the strongest in the small / economy segment with 80% market share.
Historical
During the 6 year period 2006-11, Maruti has hardly raised any debt and funded all its requirements through internal accruals amounting to Rs 11,300 Cr. Roughly half the accrual was used for funding growth capex and the remaining was either distributed to shareholders or retained as liquid investments. The capex deployed earned 24% returns after accounting for depreciation. 24% is a high return given the quantum involved and Maruti has done well to allocate its capital.
Exhibit: Historical
During this period,
- Sales grew by 25% yoy
- Operational Cash Earnings averaged 9.6%
- ROCE averaged 34%
Maruti, today, is USD 8 bn in Sales. From here, how big can they grow? And what are the risks facing Maruti?
Well, the most potent risk Maruti faces is competition risk. Market risk is negligible in the long run. As still per capita ownership is low. Maruti already is tapping the rural base which currently contributes 8% to its topline. But real threat can come from new car launches by competitors. However, this threat is most likely to realize in the premium segment where currently Maruti has only 3-4% share. In the economy segment where customers are price and value conscious, Maruti has a great brand recall. Many foreign players have struggled to parallel the sales and service network that Maruti has been able to create and that will be a source of competitive advantage for Maruti in the years to come.
I have used rather conservative estimates on growth and earnings to estimate value of Maruti shares which are as follows:
- Sales growth at 8% for the next year (2012) and 13% from thereon for the next 6 years
- Operational Cash Earnings to be lower by 1.2% (88% of current levels)
- Company redeploys 66% of internal accruals and keeping in line with Capital structure will not use debt for funding investments
- Capex rate is Rs 1,150 Cr for 1 L cars including engine and allied capacities (at present, company invested at a rate lower than Rs 1,100 Cr per 1 Lakh cars for new capacities)
Valuation
What is the value of Maruti shares? As always I have discounted cash earnings to shareholders to estimate value. I have also assumed terminal growth rate of 5% for Maruti. And, further assumed the returns on additional capital deployed to halve once growth phase is over.
Exhibit: Valuation
Applying some of the above assumptions, the following emerges:
- Value of Maruti shares: Rs 1,250/Share
- CMP: Rs 1,175/Share
- Margin of Safety: Slim 6% (much higher than 25%)
- Expected returns over 5 years: 13% yoy
I must submit that I bought some Maruti shares at Rs 1,100/Share (12% margin of safety, which is high than recommended levels) and was hoping it drops further. But shares started inching upwards and market didn't give me further opportunity to accumulate. So from my side, its a waiting game.
