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Maruti Suzuki puts troubles firmly behind as shares, car sales soar

LiveMint logoLiveMint 08-08-2017 Amrit Raj

New Delhi: Maruti Suzuki India Ltd cannot seem to put a foot wrong. Shares of India’s biggest carmaker rose 0.78% on Monday to Rs7,839.45 on BSE, another record high, on a day the benchmark Sensex ended 0.2% lower to 32,273.67 points.

The stock has risen more than sevenfold from a 52-week low of Rs1,047 it hit in the immediate aftermath of labour unrest at its Manesar plant in July 2012. One executive died and 100 others, including Japanese, were injured and equipment burned in a riot at the factory that led to production losses.

Maruti and its parent Suzuki Motor Corp. have put that dark chapter firmly behind it, judging from parameters other than the surge in its share price. Maruti sales rose 9.8% to a record of more than 1.58 million units in the past fiscal, which it ended with a market share of 48%, the highest since 2010.

Suzuki Motor, which owns 56% of Maruti’s stock, saw its global sales climb to an all-time high of 741,000 in April-June (largely pushed by a 14% increase in India sales).

In a vindication of Suzuki’s strategy of investing in a new Gujarat factory on its own and keeping Maruti’s cash reserve intact, Maruti is sitting on an impressive cash pile of Rs24,000 crore. Maruti will source the cars from its parent.

This cash reserve has become a war chest for Maruti to take on any new competition (read Kia Motors Corp., Daihatsu Motor Co., etc.,) beside expanding its own business.

The idea is to sell 3 million units in India in the long run, according to chairman R.C. Bhargava, a development that will raise Maruti sales to more than Rs1 trillion from Rs79,546.20 crore in 2016-17 on sales of 1.58 million units.

Since becoming the managing director and chief executive of Maruti in 2013, Kenichi Ayukawa has revamped all verticals—manufacturing, human resource, finance and marketing and sales infrastructure.

Now, the company is chasing the innovative idea of buying real estate across country, which will then be leased out to its dealers to build showrooms, workshops, etc.

“Why is Suzuki bringing in free money? In a sense, it will subsidise sales and service of dealers without incurring the cost. This money is zero cost money to the company and shareholders. We will own the land and lease it to dealers who will build the building. It will take care of their investments and that way they will be tied up to me and they cannot run away,” Bhargava said.

He shared an interesting bit of trivia that Suzuki chairman Osamu Suzuki’s initial plan was to own the dealerships and run the network.

“We told him while you may be doing it in Japan, it won’t be successful in India. Ayukawa agreed with me. Then I suggested this model, which meets all of his objectives and still does not disturb the entrepreneurship as I reduce his cost but in addition to that I get the benefit of individual ownership and entrepreneurship, which as a company I won’t get,” he explained.

“If this works the way we have thought of it, it will give us enormous stability going forward,” Bhargava added.

The future of automobiles indeed hangs in the balance globally due to the advent of new technologies and concepts such as electric vehicles, shared mobility, autonomous driving. Amid all this, Suzuki has placed all its bets on India, which is expected to be a market with sales of 9.4 million units by 2026 if GDP grows 5.8% a year.

A tie-up with Toyota will help it with electric and hybrid technologies. Suzuki, along with Maruti’s research and development centre, will build future products for the world.

According to Chirag Jain, an analyst at SBI CAP Securities Ltd, Maruti Suzuki’s sales will grow at a compound annual growth rate of 13% till 2019-20.

Maruti currently has a strong order book of 16 to 22 weeks for the Baleno, Dzire and Brezza models. Therefore, between the three models alone, the firm is sitting on an order backlog of 150,000 units, with other models also currently wait-listed.

“MSIL’s perfect inter-play of significant cost-leadership, extensive distribution reach and wide product portfolio have created several self-perpetuating virtuous cycles and a strong moat, enabling the company to consistently enjoy monopoly over industry profit pools (~90% share),” Jain wrote in a 1 August report, recommending a buy rating with a target price of Rs8,120 on Maruti shares.

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