Maruti Suzuki- The King of Automobile Sector
December 15, 2021 by Vandana S · 6 min read
Maruti Suzuki India Limited also known as Maruti Udyog Limited is an Indian automobile company. It began in 1981 and was owned by the government of India till 2003. Suzuki Motor Corporation took over in 2003. More than 49% of Indian cars are manufactured by Maruti Suzuki. It sold 1.3 million cars in 2021 alone.
Sanjay Gandhi, son of former PM Indira Gandhi, interned in Rolls Royce and was fascinated by the automobile industry. He wanted to build cheap, affordable and a car for the people. During the year 1971, it was the time of License Raj. Companies needed the approval to execute the business. Indira Gandhi granted permission for the incorporation of Maruti Motors. The land was acquired near Gurgaon and was converted into a factory to produce the cars.
When the company launched its prototype car, it failed the test put forth by Vehicle Research and Development Establishment to make it commercial friendly. Despite this, in 1974 it got permission to produce 50,000 cars. This dream was short-lived as in the year 1977, Janta Dal won the elections and this led to Maruti losing out on orders and permissions. Three companies that were started by Sanjay were liquidated. However, when Indira Gandhi came to power in 1980, her son’s dream was fulfilled and it was called Maruti Udyog Limited. In the year 1982, a joint venture was formed between Maruti Udyog and Suzuki Motors Limited, a Japanese company. Suzuki held 26% of the equity and the rest was held by Maruti.
In 2003, the share price of Maruti Suzuki was 170. Currently, it’s trading at 7401. Suppose you had brought a Maruti 800 car for a sum of 1,70,000, the value of the car would have depreciated. Although if you had bought 1000 shares of Maruti Suzuki, now the value would be 74,01,000 in 2021. How did the valuation grow to this extent? A car that was permitted to outsource the cars is now the leading manufactures of cars in the automobile sector.
In the year 1983, they launched the Maruti Omni and Maruti 800 which are still one of the most popular cars in India after 3 decades. In the year 1985, the Maruti Suzuki Gypsy, or the police vehicle was introduced.
Most of the new technology used to get launched in Japan. As soon as the launch was made, the technology was made available to Maruti Suzuki as more than 50% stake is held by Suzuki. Since Maruti is an Indian company, molding the technology to the Indian market was done exceptionally well. In the year 1986, the 100000 th vehicle was launched by the company.
In the year 1989, the first sedan was rolled out by Maruti to the Indian market. Before the beginning of the new century, Maruti had successfully produced and sold 1 million cars to the Indian population. In the year 1999, Wagon R, another popular car was launched. In 2001, Alto was launched and within 3 years it became the highest selling car in India. In the year 2005, Maruti Suzuki Swift was launched. The red swift is a sight we see even today.
In the year 2015, the Nexa brand was launched which focused on selling luxury cars to the Indian population.
Many companies often change their valuation away from their parent company to derive a separate valuation of their own. For example, ITC separated its valuation from tobacco to FMCG and hotel business. Similarly, there was a shift in the automobile sector in the year 2000. Until 2000, the automobile sector valuation was done based on the 2-wheeler market. Post the year 2000 the shift in valuation was done to the 4-wheeler sector.
The compounded sales growth in the last 5 years is by 4% and the TTM (Trailing 12-month) is around 40% growth. Their compounded profit growth over the last 5 years is in negative of 14% and their TTM is 27% growth. The good news for Maruti Suzuki investors is that the company is almost debt-free and has been maintaining a healthy dividend payout of 31.49%
The sales growth of the company is not as much as its previous performances. It has a mere growth of 4.09% in the last 5-year period. And the return on equity for the last 3 years is as low as 7.97%. This is also due to the harsh hit suffered by the automobile sector in recent years. The ROCE has dropped from 31% to a mere 5% in the year 2021.
Between the 1st and 2nd quarter of 2021, the drop in profits faced by Maruti Suzuki is close to 69% from March to June 2021. This drop was seen due to the impact of the second wave of Corona in many states which resulted in another lockdown in India. Along with this, the ever-increasing petrol prices have created a blow for the automobile sector. In recent years, there has been a slight drop seen in the sale of Maruti Suzuki cars as compared to its peers Hyundai, Kia, M&M, and TATA Motors. This is due to the recent trend of SUV cars sought by the public. Maruti has only one SUV car which is the Maruti Vitara Brezza, whereas its peers have close to 2-3 cars in the SUV sector and hold a good chunk of market share.
Reason for share price drop
The share price saw a fall too. This is due to the semiconductor chip shortage. The demand for the cars was more as compared to the orders given by the company for the chip manufacturing. This fix led to the loss of potential consumers for Maruti. Along with that, the rise in steel prices led to an increase in car prices. Along with it, many companies are launching electric vehicles. Although Maruti has no electric vehicle launched as they are waiting for the boom in that sector. This is considered a drawback to Maruti as they are not making a name in the new sector which is going to upgrade in the coming years.
In manufacturing GDP, contribution by automobile sector is close to 49%. The number of people working in this sector is approximately 35 million. Under GST collection for state and central government, 13% of the contribution is by the automobile sector. Although there is a shift seen in this sector in recent years.
The automobile industry has its pitfalls due to the NBFC crisis, economic slowdown, demonetization, GST norms, the BS V1 norms, and covid 19 impact.
The majority of the shares which is close to 56% is held by Suzuki, 7.47% of the shares are held by Mutual funds, 22% of the shares are held by FII, 4.97% of the shares are held by other financial institutions, and 8.29% is held by other investors.
Collaboration with Toyota
Maruti Suzuki wants to have a collaboration with Toyota where Maruti Suzuki will give its ready-made cars to Toyota to sell in its name. What is the catch for Maruti then? While Maruti wants to expand into hybrid and electric vehicle manufacturing. The technology for which Toyota has is ample. The barter of manufacturing cars and exchanging technology will work well for both the company’s growth and profits.