I did a deep dive to understand the Maruti Suzuki India Limited (MSIL). Here are the notes for everyone’s scrutiny-
About the Company
Incorporated in 1981, MSIL, which is the market leader in the domestic passenger car industry, was established in 1981. In 1982, a JV agreement was signed between the Government of India(GoI) and Suzuki Motor Corporation (SMC), Japan, whereby SMC acquired a 26% stake in the MSIL. The Company became a subsidiary of SMC, which currently holds 56.21% of its equity stake, in 2002. By September 2007, GoI had offloaded its equity to Indian financial institutions, including banks and mutual funds.
MSIL currently has 17 models with over 150 variants across segments and has a market share of 51%+ in India’s Passenger Car segment. The Products are:
1- Passenger Cars: Mini(Alto, S-Presso), Compact(Wagon-R, Swift, Celerio, Ignis, Baleno, Dzire. Tour S), Mid-Size (Ciaz)
2- Utility Vehicles (Gypsy, Ertiga, S-Cross, Vitara Brezza, XL6) & Vans (Omni, Eeco)
3- Light Commercial Vehicle (Super Carry)
The company has manufacturing facilities in Gurgaon (two plants) and Manesar (three plants). The manufacturing capacities of the company has evolved as below over the years:
In January 2014, the MSIL board approved a proposal from Suzuki Motor Corporation, Japan, (SMC) to implement the Gujarat expansion project through a 100 percent subsidiary of SMC. In Q4FY17, Suzuki Motor Gujarat Private Limited (SMG), a subsidiary of SMC, became operational in Hansalpur (Gujarat). Through this new facility, which is fully financed by Suzuki Japan, 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. MSIL, which aspires to sell 2 million units in the near future, is responsible for the sales and distribution of units produced at the SMG and had set up a Sales & Distribution facility at Hansalpur, Gujarat, in FY17. As per latest RATING Report from CRISIL “Besides manufacturing vehicles at its own plants in Gurgaon and Manesar in Haryana, it sources vehicles from SMC’s wholly-owned subsidiary in Gujarat, Suzuki Motor Gujarat (SMG), under a contract manufacturing arrangement, wherein the vehicles will be sold to MSIL at cost. Plant I at Gujarat was completed and started commercial production from February 2017 with an annual capacity of 2.5 lac units. In January 2019, SMG completed the construction of Plant II and started production. Plant II also has an annual capacity of 2.5 lac units. Along with Plant II, the powertrain plant has also become operational. Construction of Plant III has already begun and the same is expected to come online in fiscal 2021, taking the capacity of the Gujarat plant to 7.5 lac units annually and cumulative installed capacity of MSIL plus SMG to 22.5 lac units.”
MSIL & SMC: Joined at the hip-
As MSIL is now SMC’s largest subsidiary in terms of production volume and sales, SMC will benefit immensely in keeping MSIL highly competitive and agile in manufacturing, technology, and market response. The SMG set-up seems to be a giant step in that direction. While the back office job of incremental manufacturing engagement is outsourced to a trusted partner, MSIL could provide more focus to strategic areas including R&D, new products, and infrastructure for marketing and sales. Due to the bandwidth created by this arrangement, MSIL has primarily focussed on front end key activities such as the creation of sales channel, established 350 outlets under NEXA channel and 310 outlets for LCV in a span of 3 Yrs, and acquisition of land parcels to expand the network, which ensures to provide the best value over the period of Vehicle ownership and the land is the most important resource for its fast-paced expansion. As shown in the below table, the company is laying the foundation in the form of network to achieve the sales to the tune of total available capacity of 2 million as and when demand rebounds:
What’s interesting?
• Dividend Policy: Dividend pay-out ratio will be within the range of 18% to 40%
• Business has staying power due to a strong Balance sheet (B/S). As of FY20, B/S is almost debt-free & 59% of total assets consist of investments. Out of these investments, 30K+ Cr. is invested in Debt MF schemes.
• Building foundation to encash demand revival in the future by –
o Buying land parcels for sales and service outlets in order to better dealer viability & faster expansion.
o Production capacity at SMG is in place and can be expanded as and when the opportunity arises.
o The vast and expanding network of Sales and Service.
• Aspires to increase the share of vehicle dispatch, through rail mode, and has dispatched around 8% of the vehicles during FY19.
• Working on Electric Vehicle (EV) development. Till the time EVs gain prominence overcoming the lack of infrastructure and high costs, a more workable solution is in place as a business partnership b/w SMC and Toyota Motor Corporation to promote other powertrain options of clean energy based on hybrid technology.
• Lions share in the Domestic PV segment: Under the leadership of K.Ayukawa (MD & CEO), the market share of MSIL has improved from 39% (FY13) to 51% (FY20).
• Excellent efficiency to convert Sales to Cash:
• Both Cash flow from Operations and Free Cash flow are positive for the company in the last 5 years:
The huge dip in FCF of FY-20 as compared to FY-16, compared these two years as their PBT is in ballpark range, seems reasonable as it’s contributed by 2 items majorly - highlighted in yellow in the below snapshot:
• Improved profitability and cash flow have resulted in a ballooning Investment book (amount in Cr.) as shown below. The majority of these investments (~93%) are in Debt MF.
What’s not so pleasant?
• Due to the cyclical nature of the industry, the profitability of MSIL may be stressed during downcycle as it’s a volume player (~50% of the domestic market) with fixed committed cost in terms of own as well as SMG plants. However, a challenging business environment should be an opportunity for the company to improve its market share by supporting business partners by harnessing the strength of the pristine balance sheet.
• Hyper competitive market that allows new entrants who are lured by India’s PV market potential due to extremely low car penetration rates.
• Stringent regulatory changes in the future will lead to an increase in product prices, a key factor for Indians to buy the entry-level vehicle, or postpone the purchase, of entry-level cars.
• Suppressed ROE as ~70% of EQUITY (Refer NFA as % of Equity in Image 1) is tied in financial assets that earn post-tax returns of about 6% (Refer R-NFA in Image 2). What’s the plan to utilize the Financial Asset? I have no idea yet but it remains a key item to track in the future. In image 2, ROE for FY-20 is 11.5% but the return on Operating Assets (RNOA), which is hidden in numbers, is 22%. Overall calculations are as shown below:
IMAGE-1:
IMAGE-2:
Valuation:
The key characteristic of the business:
It’s a cyclical business whose basics are new products, productivity, cost, quality, and customer service.
A correlation b/w the growth of the company and either the GDP or industry’s growth could not be established but it’s evident that compounded revenue growth stands in the range of 10~15% depending upon what period one opts among 10Yr, 7 Yr, 5Yr or 3 Yr keeping FY-09 as the base year. Data for the past period is as shown below –
How much to Pay? Here are the past numbers as charts from our beloved screener.in:
Although it’s homework for all of us 
, I am sharing mine using the wonderful template/model provided by @Yogesh_s @ Spreadsheet Model for Valuation of a Company
Note: Star marked entries are subjective. I inverted the DCF by assuming that the market price reflects the true value of the company in order to understand the baked expectations,
Critical Risks:
• Regulatory Changes (Vehicle Fuel Economy, Emissions, and Safety):
Impact: Increases the price of Vehicles and may affect customer demand.
Mitigation: Continuous technical support from Suzuki Japan; VA-VE and Localization by India R&D center to devise economical alternatives.
• Labour relations for smooth manufacturing operations (Manesar plant incident in July 2012)
Impact: Emotional and financial impact that leads to bad press/goodwill among the stakeholders.
Mitigation: Focus on EMPLOYEE WELLBEING- Besides medical insurance, the Company also facilitates a housing scheme for workers to enable them to own a home. Subsidized meals are provided to regular staff, while free meals are served to contractual staff. Active efforts to improve INDUSTRIAL RELATIONS- The Managing Director has monthly meetings with the unions and the senior management has regular meetings with unions, associates, and supervisors.
• Exposure to Forex Risk | Japanese Yen:
Impact: TBD.
Mitigation: TBD.
• Exposure to commodity prices:
Impact: TBD.
Mitigation: TBD.
• EV:
Impact: TBD.
Mitigation: TBD.
Disclosure: This note is created to improve my understanding of the business and shared for others feedback/learning and the same should not be used as investment advice. I am not an investment advisor and do not own the stock.
Thanks for this very detailed post. I am adding the past valuation multiples that Maruti has traded at. I am showing the past P/sales and dividend yields for the last 10 years below.
P/sales: low (1), average (1.6), high (2.4)
Electrification of Vehicles: The unstoppable trend
Which categories of vehicles will be targeted at first?
Based on a report hosted at Niti Aayog vehicles on Indian roads are estimated to be consisting of:
Categories 1, 2 & 3 are already seeing the major interest of EVfication by both manufacturers and government policies. Category 4 is best suited for MSIL.
MSIL: What’s the Good Action Plan?
MSIL is constantly elevating its products in a phased manner to adopt clean energy. Besides the existing capability to supply vehicles with CNG kits, MSIL has started to market hybrid EVs using technology provided by collaboration between Suzuki and Toyota.
In FY17, India’s first lithium-ion battery manufacturing plant for EV was started by Suzuki Motor Corporation-Parent of MSIL, along with Toshiba and Denso in Gujarat with an initial investment of 1150 Cr. The plant will manufacture batteries for 2W as well as 4W and supply to all OEMs beside MSIL. In FY20, investment of another 3715 Cr. is announced over a period of 5 years depending upon future scope of EV trend.
As of now infrastructure and regulations on Li-ion battery recycling are in a nascent stage in India,
but MSIL is proactively establishing a mechanism for collection, storage, and subsequent disposal of Li-ion batteries since the safety and environmental concerns associated with these batteries make it necessary to ensure their safe handling and disposal.
In FY19, Showcased Electric Vehicles (EV) prototype for the Indian market and has commenced a nation-wide fleet testing of fifty EV’s. Vehicles were built using EV technology developed by Suzuki and has been produced at the Company’s Gurugram plant.
Hypothesis: MSIL’s existing plant will become obsolete with EV transformation: My answer is “NO”
AR of FY14 states that 75% of vehicle by value is outsourced to component or system manufacturer. I assume that MSIL is mostly focused on ‘Vehicle Assembly Operations’. These plants are capable to assemble 17 models with 100+ variants. I anticipate that they are flexible enough to realign for EV needs.
Hypothesis: MSIL’s will be saddled with the burden of huge Sales and Service network as EVs do not need much maintenance: My answer is “NO”
Basic service elements such as Wheel Alignment, Brakes, and other Cosmetics changes- Dent (which are very common in India’s infrastructure) will remain AS IS.
On the contrary, vehicles are becoming moving gadgets loaded with ‘N’ types of sensors. EV is bound to have these more in number. Due to the same, customer will be forced to visit the service centers as only an OEM can do a fool proof job. This might migrate service from unorganized to organized sector.
Echoing thoughts from fellow VPers is most welcome.
This is sales data but extrapolation can be made. Have heard that the 4 wheeler industry is sitting on 3-4 months of inventory in general
Hi
Below is the sales pattern monthly for Maruti
For the monthly average of Aug+Sep in last few years
Rgds
Hi
Some concerns that car registrations are ‘abysmal’ in the media. Was looking at registration data during previous festive periods. PV registrations are a mere 1.47% down in 2020 compared to 2019. In addition note the demand planning scenario of Maruti wrt to 2019 vis a vis 2020.
Rgds
This is one gentleman that I personally am not too fond of for his choices and his constant opposition to any forward going moves. He was the one who opposed improved safety in cars and is now opposing stricter emission rules.
Suzuki (they no longer use Maruti even in the newly sold cars) is successful only because they have some very budget but at the same time very badly designed and unsafe cars which sell in volumes. Although they look destined to be the number 1 forever, with increasing purchase power and growing knowledge of products customers are looking at better options like the Tatas which have safer and more desirable cars.
Suzuki also seems disinterested in electric vehicles and although the numbers are paltry currently, things could change very fast. Many companies including Nokia realised their folly only once it is too late as an example.
at the moment Maruti definitely does not appear forward looking and RC Bhargava has lost the impact which he used to have representing car manufacturers. Opposing BS-IV, EVs continuously and blaming govt repeatedly won’t help this company. Even then, Maruti has performed well in terms of new product launched in the past by introducing alternatives to the successful models of other brands at lower price range. Today everyone is hopeful of economic revival but is this an ideal time to launch new models? I personally feel as usual they will wait for sale of successful models of competitors to reach a certain number and then launch replacement.
EVs is such a boon word today that whoever says EV roadmap their stocks starts soaring, be it Tata or Ashok. Maruti is lagging behind for sure here.
If one study the market or sale of units in last three quarters Maruti and Huyndai are only two companies which increase the market share and most other has lost the market share during the Covid first wave and second wave which will help the company to get revenue . Avergae they increase the price to 2 to 4 % and if we increase the the average 3% price hike there would be around 15% increase in the EBITA margins . which will give a long runway to the company .
Negatives :
positives
Disc : invested earlier but now company is in watch list . This is not any recommendation to buy or sale
Maruti and Hyundai are going strong in the indian market and their market shares are still going strong.
It’s very rare for a market leader to be displaced by another existing player (exceptions: PSUs who were market leaders in the past)
if EVs were to dominate in the next 10 years, then it has to come from the existing players. There is very little chance of new players coming and dominating the passenger car market. Even in Europe , where EVs are slowly gaining traction, its the existing players who are selling more EVs (exception : Tesla)
Personally, i am sceptic on EV in passenger cars in short to medium term. In a country where your current trips when couple of flats switch on their ACs, i don’t think EV can become mainstream in next 2-3 years (two wheelers may undergo drastic change).
The main challenger for Maruti in coming years will be Hyundai.
if i remember right, maruti sells 50% of their cars in rural ares. i don’t think EVs will gain traction in rural India in next 3-5 years with poor electricity grid.
Disc: Invested in Maruti. Heard same stories a decade back of Tatas toppling Maruti and sold at 700s . still regretting it.
Maruti has fallen behind in SUV game. Hyundai kia and tata mahindra are running away. Today most people are preferring SUV and their first choice is venue because of its looks and affordability.
True. It would have been good if Maruti could capture SUV market, but its market is sub 10L cars, where it is the undisputed leader. It’s market share increased, although % sales reduced.
For reference, in Aug.
KIA sold 15k units
Maruti sold 103k units
Going ahead, “Experts” are expecting a sharp revival. Maruti’s forte is CNG vehicles, which are cost effective, probably even cheaper than public transport in some cases.
CNG fuel cost is less than Rs.2 per km, whereas with petrol/diesel touching Rs.100 per litre the per km cost is close to Rs.10 per km.
Maruti’s cash flow is intact, still working at a -40 days working capital cycle and zero debt, leaving plenty of room to leverage for growth.
While the world is looking towards EV, Maruti will focus sharply on CNG vehicles output.
There are only 2 manufacturers of CNG vehicles, and Hyundai is a distant second.
September Numbers.
Not that they were unexpected but woah.
Here is a thread from team-bhp on Maruti falling behind competitors especially Hyundai and Tata with respect to R & D, product launches etc. Take the financial aspects discussed in the thread with a pinch of salt though - Maruti sleeping at the wheel | Where are the new car launches? | Why is Maruti missing new trends? - Team-BHP
Quoting a few important points from the thread -
it’s been a l-o-n-g time since I tested a Maruti. Had a quick look and the all-new Maruti launched was way back in September 2019
(S-Presso). In the same time period, we have tested 9 Hyundais (including spicy variants like the i20 N-Line) and 7 Tatas (including the upcoming Punch & the electric Tigor). Clearly, other market leaders are pushing hard, while Maruti is resting on its laurels.
Everyone knows that fresh new cars are the best way to stimulate customer interest, maximise profits & draw footfalls to your showrooms. New launches are critical to staying relevant.
Where are the new Marutis? Their line-up sure is looking awfully dated + uninspiring. Other than a new-gen Celerio (which will really be more of the same thing…yawn), I don’t see anything fresh in the near future. The company had better watch out as its long-term position could weaken. Sure, Maruti has been enjoying good sales (September aside), but those are the fruits of the previous years of labour. I’m talking more about the coming 5 - 8 years and the company looks dangerously unprepared.
Poor crossover / SUV portfolio. In a market that has greatly moved to them.
No product in the 15 - 25 lakh segment which is the new “goldmine” of the Indian car industry. Why goldmine? Because it gives previously unseen volumes & fat profits, both. Forget the MNCs, Tata & Mahindra have developed competent SUVs in this segment, but Maruti simply doesn’t have the in-house capability. How the heck can a company with 50% market-share miss the most important new segment in the market? What were the Maruti CEO, product planners, strategists & analysts doing??? Busy with 4-lakh rupee Altos?
Poor R&D capability. Truth is, Maruti doesn’t know how to build a class-leading modern engine, AT gearbox or premium product. It’s great at cutting costs, in an era when the Indian customer is ready to pay extra for a premium car & premium experience.
Selling terribly outdated technologies. E.g. same old 1.2L K-Series (no turbo-petrol).
Out of touch with the next generation. I help a lot of people buy cars, and hardly any <30 year old in the recent past has called me about buying a Maruti. On the other hand, I get a whole lot of calls for Hyundais & Kias, Tatas & even MG Motors! Sure, this is anecdotal evidence, so make of it what you will.
Jerky AMTs, but no proper ATs. Maruti’s torque converter dates back to the 90s! Who the hell sells a 4-speed AT with an overdrive button today? Only dudes wearing bell bottoms.
No BS6 diesel on sale. 2/3rds of Creta sales are still from the diesel.
The focus & money has moved inside the cabin. When was the last time a Maruti interior impressed you? Meanwhile, do check out the Astor by a newbie auto entrant. Sucks to say this, but Maruti’s management needs to spend the coming 7 days in MG, Hyundai, Kia, Tata, Mahindra showrooms. Maruti is serving tap water when the customer is demanding bottled water!
Tata is selling two affordable “proper” EVs. Meanwhile, Maruti keeps harping about its smart-hybrid tech which offers marginal benefits at best. Is Maruti ready for an electrified future?
Maruti’ strong portfolio is in starter and mid segment. It will take a long time for EV to catch-up in these segments. Looks like Maruti wants to focus on hydrogen cell rather than LI based battery way. It could be the influence of Toyota holding stake.
Tata motors has roped in a strategic investor in EV space with 9.1 billion USD valuation (EV alone) while Maruti is still not ready to accept that Electric vehicles can have future in Indian markets.
While they may be right, but the market and government policies signal a Deja vu of mobile industry where Nokia refused to have Android phones and passed it’s market share to other players.
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