Maruti Suzuki: No near-term gains

Cost pressures due to rising input prices may hit profitability.

Volkswagen (VW), the largest carmaker in Europe, purchased 19.9 per cent stake in Maruti Suzuki’s parent, Suzuki Motors, for $2.5 billion. While Suzuki will use these funds for R&D with a focus on environment and gen-next technology and reducing interest burden, does the deal have any significance for Maruti?

In terms of a global presence, while Suzuki is stronger in India and Japan (a fourth of sales mix in 2008-09 comprises Asia), 57 per cent of Volkswagen’s sales mix is from Europe. The noteworthy point is that Volkswagen does not have a significant presence in the entry level ($4,000-10,000) car segment (a domain where Suzuki has proven track-record), but is very strong in diesel engine technology (an area where Suzuki lags far behind).

For Maruti Suzuki, it has already achieved 100,000 cumulative export of its compact car A-Star since its first shipment to Europe in January 2009, making it a major export destination for the company. “Export benefits (on account of the global deal) may not be reflected into numbers in the immediate future, but visibility for long-term export development will definitely improve,” states an MF Global report. Analysts believe there is not going to be any immediate structural change in Maruti’s business model. However, going forward, it can have access to better technology and can strengthen its position globally. The deal will also help Maruti to compete with Honda and Toyota who plan to enter India with their respective small cars.

Meanwhile, analysts’ estimates domestic sales of Maruti to grow 16 per cent and 13 per cent in 2009-10 and 2010-11 respectively, while its Ebitda margin is expected to improve 379 basis points and 28 basis points, respectively. However, costs pressures due to rising inputs prices may impact profitability going ahead.

The stock has run up 8.4 per cent in the last one month and trades at 15 times its 2009-10 and 13 times its 2010-11 cash EPS. BRICS Securities expects it to trade at 14 times its cash EPS (its long-term average multiple). Analysts suggest that one can stay invested for the long-term.