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MARUTI UDYOG LIMITED

MARUTI UDYOG LIMITED. A Due Diligence for the Government of India. GROUP NO. 1 Priya Aggarwal PGP-05-001 Alok Samtaney PGP-05-056 Deepak Miglani PGP-05-111 Hem Singh Tanwar PGP-05-141 Pradeep K PGP-05-121. Objective of the Diligence. Background

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MARUTI UDYOG LIMITED

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  1. MARUTI UDYOG LIMITED A Due Diligence for the Government of India GROUP NO. 1 Priya Aggarwal PGP-05-001 Alok Samtaney PGP-05-056 Deepak Miglani PGP-05-111 Hem Singh Tanwar PGP-05-141 Pradeep K PGP-05-121

  2. Objective of the Diligence Background • Maruti Udyog Ltd started as a JV between the Government of India and Suzuki Motor Corporation in a 74:26 proportion • Success of the JV led to Suzuki increasing its stake in the company to over 51% and the Government of India diluting its stake • Presently the Government of India holds 10.27% stake in Maruti Our Objective Advising the Government of India to divest its stake in Maruti Udyog Limited

  3. Agenda Indian Automobile Industry Maruti Udyog Limited Financial Diligence Valuation

  4. Agenda • Indian Automobile Industry Maruti Udyog Limited Financial Diligence Valuation

  5. Indian Automobile Industry • Largest 3 wheeler market in the world • 2nd Largest 2 Wheeler Market in the world • 4th Largest Passenger Vehicle market • 4th Largest Tractor Market in the world • 5th Largest commercial vehicle market in the world India’s share is a mere 1.2% as compared with US which is appx 17%  Huge potential for India to grow

  6. Size and Structure of the Industry • Tata Motors • Mahindra • Maruti • Tata Motors • Hyundai ( **Figures in brackets are no of manufacturers)

  7. Industry Statistics • Domestic market growing @ 14.5% CAGR (2000-01 to 2004-05) • Industry contributes 4% to national GDP (2003-04) • 0.45 million direct employment and 10 million people indirectly • To meet Bharat III norms: • Appx 250 bn required for investment till 2010 by automobile companies • Appx 120 bn required for investment till 2010 by oil domestic oil companies • Govt has given certain incentives in this respect • Total 10 mill. Car/UV parc in India at present • Low Car Density of 8 cars per 1000 households • Explosive Growth forecasted for next half decade: 16.2% CAGR • Demand to zoom past 2 million by 2009-10

  8. Passenger Car Market • To grow from 0.75 million in 2000 to 1.9 million in 2010 (Growth rate of 51%) • Small cars account for 70% of revenues • 1/3rd of customers go for replacement within the first three years • Replacement demand at 35% of annual demand Players: • Maruti Udyog Limited • Tata Motors Limited • Fiat India Limited • General Motors India Ltd. • Hyundai Motors India Ltd. • Ford India Limited • Hindustan Motors • Honda SIEL Cars India Ltd. • Daimler Chrysler India Ltd. • Skoda Auto Motor Ltd. • Toyota Motors

  9. Segment-wise Market Shares Maruti’s Market Share

  10. Segment-wise Market Shares

  11. Changing Profile of Segments Major shift from A1 segment to A2 segment [ A2-segment (Wagon-R, Santro, Indica) taking over A1 (M800) as the largest and fastest growing segment ]

  12. Key Demand Drivers • Increase in the disposable incomes of families • Easy Availability of Finance • Lower Equated Monthly Installments • Frequent introduction of new models • Growth in demand for second car in a family • Reduction in holding period of a car (from 7-8 years to 3-4 years) • Increase in distribution / dealership of cars • Aggressive growth (20%) in exports of Indian vehicles abroad

  13. Industry Capacities Companies plan to bridge the gap between Demand and supply in 2010 by Exports + Based on sales projections, *Only announced expansion Source: BW 29 Jan, 07

  14. Investments planned

  15. New Car Models expected • Mahindra Logan • Chevrolet Spark • Hyundai’s Hatch • New Fiat Palio • Tata Indigo LBW • Maruti’s Swift Diesel • Hyundai Sonata Diesel • Bentley Continental • Maruti’s New Baleno • Chevrolet Captiva Segment A2 Segment A3 SUV

  16. Global Scorecard Indian Companies doing well Compared to US Counterparts * Includes Passenger Vehicles & Trucks, + Includes passenger Vehicles & LCV’s Source: BW Jan 29, ‘07

  17. Porter’s Diamond – An analysis of the industry • India’s comparatively cheap and skilled workforce can be effectively utilized to set up large low cost production base • Huge investments from the companies for capacity expansion, R&D etc. • A large number of domestic and multinational players • Highly competitive industry Firm Strategy, structure & rivalry Demand conditions Factor Conditions Government • High demanding consumers • Rapid urbanization, increasing literacy Related & supporting industries • Liberalized policy regime • Automatic approval for 100% FDI • The customs duty on inputs and Raw materials has been reduced from 20% to 15%. • Strong industry associations to promote industry’s interest • Well established components industry support OEM’s

  18. Summing up Opportunities in the auto sector look good - Sales expected to grow at a CAGR of 15% - Income levels expected to continue to rise leading to a demand increase - Excise duty cuts to fuel growth - Easy availability of cheap finance to continue - India, though under penetrated, its GDP expected to grow at 8% till 2060 However, factors such as - Liberalised government policies - Intense Competition and entry of new foreign players - Planned Capacity increases - Slew of new models in the pipeline - Competition in the export market from foreign companies - Products like the Rs 1 lac car by the Tata’s expected to change sector dynamics could be a threat to the sector from an investment perspective

  19. Agenda • Indian Automobile Industry • Maruti Udyog Limited Financial Diligence Valuation

  20. Maruti Udyog Limited • Largest player in the passenger car segment in India (mkt share of over 50%) • Established in 1981 as JV between GOI and Suzuki Motor Corporation • Credited for bringing the automobile revolution in India • Brought in the latest technology, more fuel efficient cars and brought down the prices • First vehicle roll out in 1983 – M800, now offers 13 models. • First Indian company to sell 1 million vehicles (1994), and has produced over 5 million vehicles (2004) MUL fuels Automotive Growth • MUL’s emphasis on localization and indigenization led to development of component industry • Started with a dozen JV’s with India entrepreneurs, got them foreign collaboration • This led to development of component industry as a whole with more such JV’s and influx of technology • It brought in better financing means enabling more people to buy cars

  21. Maruti Car Models

  22. Maruti Sales and Market Share While Sales have growth at an 8% CAGR, Market share has dropped as new players have entered the market

  23. Production Capacities

  24. Segment wise production pattern Clear shift in production focus from A1 segment to A2 in line with the market dynamics

  25. Sales and Service Network • Largest and strongest dealer network in India • 182 Authorized dealers, 243 sales outlets in 161 cities • 342 dealer workshops, 1545 MASS’s

  26. Maruti’s Strategy New Plant at Manesar to cater to the growing demand Production of Swift to be shifted to Manesar Maruti to launch diesel varients of all existing products (priced higher with higher margins) New Products and Markets Like the Estello and New Baleno to drive sales growth Plan to test running vehicles on LPG as against CNG by other players New model to cater to the European export market Productivity and Margins Improved technology with more automation at the new plant, saving in usage of power and utilities, younger workforce will improve productivity and margins

  27. Agenda • Indian Automobile Industry • Maruti Udyog Limited • Financial Diligence Valuation

  28. Shareholding Pattern • JV between GOI (74%) and Suzuki Motor Corporation (26%) • Success of JV led SMC to increase the stake to 40% in 1987 and further to 50% in 1992 • GOI decided to divest its stake under the disinvestment policy • 2003, GOI offered 25% of its holding as public offering • Due to oversubscription GOI increased the offering by 10% • Current shareholding : GOI (10%), SMC (55%) and Retail & Institutional investors (35%)

  29. Summary Financials – Profit and Loss A/c EBIDTA Margins increased from 14.4% in FY04 to 17.1% in FY06

  30. Summary Financials – Balance Sheet E Finished Goods Inventory holding period doubled from 8 days in FY05 to 16 days in FY06

  31. Summary Financials – Key Ratios

  32. Financial Diligence Findings

  33. Financial Diligence Findings • Other items found out, but which may not have be of a material nature: • Financial Statements of subsidiaries, joint ventures and associates have been audited by other • auditors whose reports were furnished to PWC, Maruti’s auditors who have relied entirely upon • the reports of the other auditors. • Ownership of assets worth about Rs. 4 crores yet to be registered in the name of the company. • Also for assets jointly owned by Maruti and other subsidiaries, pro rata cost has been taken

  34. Agenda • Indian Automobile Industry • Maruti Udyog Limited • Financial Diligence • Valuation

  35. Assumptions

  36. Assumptions

  37. DCF Valuation DCF Valuation Parameters • Risk Free Rate: 7.5% • Beta: 1.22 • Market Risk Premium: 5% • Cost of Capital: 13.62% • Terminal Growth Rate: 6%

  38. Financial Projection – Profit and Loss A/c

  39. Financial Projection – Profitability

  40. Financial Projection – Balance Sheet

  41. Intrinsic Value per share Base case value – Rs.965 Average value – Rs.958 Max value – Rs.1165 Min value – Rs.806

  42. Comparable Multiples At Par Premium Premium At Par Premium Note: Hindustan Motors has not been considered as it is a loss making company

  43. Multiples Analysis Industry Multiples Auto companies historically traded at a 11 – 13 times 12 – 18 month forward earnings Presently all auto companies trading at about 15.5 times FY08 earnings Current valuations look stretched, have never reached these levels in the last 5 years Maruti v/s Competition Maruti’s EBIDTA growth for FY08 is lower than competition Maruti’s EPS growth for FY08 is also lower than competition However, Maruti still trades at industry average levels for P/E multipes and a significant premium no an EV / EBIDTA multiple It is unlikely that Maruti will be able to sustain these valuations as these are at peak in terms of a P/E compared to the historicals of the industry. That too at a time when Maruti’s EPS growth is expected to be lower than the industry.

  44. Summing up • Though Maruti’s sales have grown at a CAGR of 8% • Its market share has dropped as new players have entered the market • Though Maruti’s margins are expected to increase in the future • The entry of new foreign players and new model launches will be a threat to Maruti to retain its market share • There is not much of an upside between Maruti’s current price and its intrinsic value • Maruti still trades at par with competition even though its EBIDTA and EPS growth is less than competition • At a time when new foreign players are setting up manufacturing facilities in India and existing players are expanding capacities • This seems to be the right time for the Government of India to offload its 10.27% Maruti stake in the market

  45. Thank You

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