Maruti Suzuki, which was formerly known as Maruti Udyog Limited is the largest automobile manufacturer in India. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation. The Company is engaged in the business of manufacturing and sale of passenger vehicles along with services and spares. Making a small beginning with the iconic Maruti 800 car, Maruti Suzuki today has a vast portfolio of 16 car models with over 150 variants.
The company’s shares have 52 weeks price band of INR 7758-4001 and a total market capitalization of INR 1.61 trillion which makes it a Large-Cap company. The shares have a P/E ratio of 26 and a dividend yield of 1.50%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The parameters are as follows.
1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the passenger cars segment of the automobile industry in India. Market dominance in such an industry is obtained through scale, innovation, distribution along with a low-cost structure (as the business is asset-heavy). The company is a market leader in the passenger segment in India and exports to 95 countries in the world. It also has an annual capacity of 2.07 million units across its product portfolio and the capacity utilization of 90% before the auto sector slowdown in India. On the innovation front, the company employs 1600+ R&D engineers and has 100+ patent filings and 12+ patent grants till now. The company has a dedicated new design pipeline which also includes new models and facelifts of existing car designs.
On the distribution front, the company has 2264+ MS Arena at 1850+ locations in India. They also have 360+ Nexa showrooms at 204+ locations along with 1250+ True value outlets at 942+ locations in the country. The company is also a market leader in after-sales with 3600+ service stations across 1780+ locations and 1400+ Mobile support vehicles. The industry is also asset-heavy which prevents the entry of new players in the market. Thus, the company has a wide economic moat but the industry is still an oligopoly with many foreign and domestic players. Therefore this category gets 4 stars in Maruti Suzuki fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ★)
The business model is such that the largest revenue contribution comes from passenger vehicle sales (around 85% of total revenue) followed by spares, service and component sales (around 11%). The company has also stopped its production in the diesel segment since February 2020 and only had around 8700+ diesel cars in the inventory during that period. Diesel contributed 29% to industry volumes last year (lowest in decades) and 20% for Maruti Suzuki.
Post BS6, the company expects industry share of diesel to decline further to 15-20%. Even in mid-sized SUVs like Hector, Creta and Venue, the share of petrol models is picking up. Maruti Suzuki should benefit from this change due to its strength in petrol. Out of total 50.1% market share, around 40.1% comes from petrol and 10% comes from the diesel segment. The near term growth outlook still remains gloomy for the entire industry and any recovery will only be witnessed after FY 2021.
Mr R. C. Bhargava is the Chairman of Maruti Suzuki and has been with the company since last 3 decades. He was a select in the Indian Administrative Services (1st in batch) and Director of BHEL before that. Mr Kenichi Ayukawa is the MD and the CEO of the company and represents the parent company’s interest on the board. Overall the management has no previous record of any principal-agent conflict and has shown interest in minority shareholder’s wealth. Therefore this category gets 5 stars in Maruti Suzuki fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has seen a CAGR growth of 12.6% over the last 10 years. The operating income and net income has also seen a growth of 9.2% and 12.8% CAGR respectively. The Cap-Ex has also increased linearly with scale, but this will only create overcapacity in the near future. The working capital has also been negative and will deteriorate further in the coming years. Therefore this category gets 4 stars in Maruti Suzuki fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The gross margin has seen a steady improvement over the years due to economies of scale but it is expected to decline due to higher commodity prices in the near future. The other margins along with return on assets will also take a hit due to price discounts, overcapacity and production losses amidst the Covid-19 outbreak and worsening of the slowdown in Indian Auto Industry. Therefore this category gets 3 stars in Maruti Suzuki fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ☆)
The net income margin has declined and Cap-Ex as a percentage of sales has almost remained constant. The free cash flow as a percentage of net income has been positive and the operating cash flow growth has gone negative. However, the cash flow will improve in the future as the company will downsize, defer Cap-Ex and will try to conserve cash during these uncertain times. Therefore this category gets 4 stars in Maruti Suzuki fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ☆ ☆)
The company does not have any debt in its capital structure therefore the financial leverage and debt to equity ratio has been flat over the years. The profitability margins have declined over the years, but this, however, is not a significant concern to the solvency of the company. The current and quick ratios have seen a recovery last year due to lower inventory but will again deteriorate in the near future. Therefore this category gets 3 stars in Maruti Suzuki fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ★)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has improved with scale for the company. The inventory days have remained stable over the years and will improve further with the removal of the diesel segment from the portfolio. The payables period have increased and receivables period has declined which is a good indicator of business efficiency for the company. Overall the cash conversion cycle has been negative over the years. Therefore this category gets 5 stars in Maruti Suzuki fundamental analysis.
8. Valuation Ratios (★ ★ ★ ☆ ☆)
The company has seen a slow increase in the valuation multiples over the years due to the nature of the automobile business and increasing competition. The multiples have corrected drastically since 2019 and any recovery is not on the horizon for the company. The stock however still remains a good long term investment in a diversified portfolio at correct price levels. Therefore this category gets 3 stars in Maruti Suzuki fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The leverage ratio along with asset turnover has remained flat over the years. The interest burden ratio has remained almost 100% due to no interest-bearing debt in the capital structure of the company. The operating margin has seen a slight decline and the tax efficiency has been stable. Overall the Return on Equity has declined slightly along with profitability. Therefore this category gets 3 stars in Maruti Suzuki fundamental analysis
10. Future Prospects (★ ★ ☆ ☆ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- The impact of Covid-19 outbreak along with the subsequent lockdown in the country has worsened the Auto Industry slowdown in India. Maruti Suzuki is suffering from rapidly declining sales, serious overcapacity and labour crunch. The company’s production fell by 98% in May 2020 to 3,714 units.
- Maruti Suzuki’s 11 top-selling models are already BS6 compliant. The company will look for selective price cuts, down trading and increasing benefits in order to stimulate demand. Credit availability in the market will also play an important role in the revival of the auto industry in India.
- The company will also face reduced gross margins in the near future as the commodity prices are on the rise. Steel, rhodium, palladium etc. have seen a sharp increase in price due to disrupted supply chains across the globe. This will start reflecting in the P&L from the 1st Quarter of FY 2021.
- Before the Covid-19 outbreak, the Society Of Indian Automobile Manufacturers (SIAM) estimated the passenger vehicle industry to grow by 3-5% for FY 2021. But this will now be in the range of negative double digits.
The company has a good record of financial performance and profitability, but the industry is suffering from a serious slowdown. The growth in exports will also decline in the future due to the global nature of the pandemic. Any recovery can only be witnessed after FY 2021 once the effect of government stimulus is seen and credit availability gets restored in the market. Therefore this category gets 2 stars in Maruti Suzuki fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
MARUTI SUZUKI SHARES (3.6/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
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|Maruti Suzuki Shares|
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ★|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ☆|
|Liquidity & Solvency||★ ★ ★ ☆ ☆|
|Efficiency Ratios||★ ★ ★ ★ ★|
|Valuation Ratios||★ ★ ★ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ☆ ☆ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)