The Hindu Business Line : Maruti Udyog: Hold

Mr Jagdish Khattar, Managing Director, Maruti Udyog Ltd... The merger with Maruti Suzuki Automobiles India Limited will create value for all stakeholders. - S. Subramanium.

Investors with a medium term perspective can continue to hold on to the stock of Maruti Udyog. At the current price of Rs 780, the stock trades at a price to earnings multiple of about 18 times.

Despite the recent volatility in the stock price, the recommendation factors in issues such as the company's aggressive market leadership position, the potential for a further consolidation of its market share later this year, and the innovative new cost-savings measures that could pay off in the medium term. The company's earnings performance for the fourth quarter and full year was in line with market expectations.

The merger

Last month, Maruti received a boost to its earnings potential with its decision to buy out the entire 30 per cent stake held by its parent, Suzuki Motor Corporation of Japan, in Maruti Suzuki Automobiles India Limited (MSAIL). The merger will make the fourth plant (which was to come under MSAIL) also a wholly-owned outfit of Maruti. The merger of MSAIL with MUL will create value for all stakeholders. It will retain all the benefits of the earlier arrangement, ease concerns on inter-company transactions and enable management to focus on critical issues of business operation.

Another important factor that could favourably influence the company's performance in the near future is the rationalisation of products and platforms. This could result in a couple of products and platforms being discontinued. After being earmarked as the manufacturing base for some new small cars, Maruti is also on schedule to begin roll out of a new volume car exclusively for the export market by 2008-09. The new model will be compliant with the norms that are coming into effect in Europe, and those benchmarks constitute the blueprint for future product development.

Recent initiatives

Due to its size, MUL has to think laterally when it comes to issues such as productivity and cost savings. A few recent initiatives that have the potential to deliver are in the areas of raw material procurement and cost savings measures implemented among the company's vendors.

First, for ensuring that the required quantity of steel (its biggest raw material component) is pre-ordered at the beginning of the year, Maruti is entering into annual supply contracts for volumes and for six months for price. This should give it considerable flexibility in weathering the current price volatility in the metals market.

While four years ago MUL's domestic steel procurement was 20 per cent, now domestic and imported steel content are nearly equal. A further improvement in favour of domestic steel is likely soon and this should help boost the company's bottomline.

Maruti has also contributed Rs 10 crore for setting up a Centre for Excellence to which the company's vendors have also contributed Rs 5 crore. The centre's focus is to help vendors cut costs.

While measures such as commonalised procurement and other manufacturing synergies have paid off with MUL's Tier-I suppliers, the model will now be replicated with the Tier-2 vendors.

On the product side, Maruti is set to launch five new models in the next five years, including a new diesel-engine vehicle later this year that could help boost its sales volumes in this growing segment where it has no presence now.

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