iapm final

8/11/2019 Iapm Final

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Project Report

OnEquity Research Maruti Suzuki

Submitted To:

Professor Monika Chopra

Submitted By:

Hemant Tejwani

153/2013


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Indian Automobile Industry

With a scintillating 2.3 million units produced in 2008 the Indian automobile industry bagged the position of being the ninth largest in the world. Following economic liberalization, Indian domesticautomobile companies like Tata Motors Maruti Suzuki and Mahindra and Mahindra expanded their

production and export operations in and across the country and since then the industry has onlyshown signs of growth. The automobile industry comprises of heavy vehicles (trucks, buses, tempos,tractors), passenger cars, and two-wheelers.

The Indian automobile industry came a long way since the first car that was manufactured in Mumbaiin 1898. The automobile sector today is one of the key sectors of the country contributing majorly tothe economy of India. It directly and indirectly provides employment to over 10 million people in thecountry. The Indian automobile industry has a well-established name globally being the secondlargest two wheeler market in the world, fourth largest commercial vehicle market in the world, andeleventh largest passenger car market in the world and expected to become the third largestautomobile market in the world only behind USA and China.

The growth of the Indian middleclass along with the growth of the economy over the last few yearshas resulted in a host of global auto giants setting their foot inside the Indian Territory. MoreoverIndia also provides trained manpower at competitive costs making the country a manufacturing hubfor many foreign automobile companies. India proves to be a potential market as compared to mostof the other countries which are witnessing stagnation as far as automobile industry growth isconcerned. A recent research conducted by the global consultancy firm Deloitte says that at least oneIndian automobile company will feature among the top six automobile companies that will dominate

the car market by 2020.

The Indian automobile industry proved to be in good shape last year even after the economicdownturn. This was majorly due to the fact of renewed interest shown by global automobile playerslike Nissan Motors which consider India to be a potential market.As far as authorized dealer networks and service stations are concerned Maruti Suzuki is the mostwidespread. The other automobile companies are also showing rapid progression in this field.

Indian Automobile Export market

India is a very favourable market for small cars be it production, sales or export. Since the Indianautomobile industry is the largest manufacturer of small cars companies like Hyundai and NissanMotors export about 2,40,000 & 2,50,000 annually. India emerged as Asia's fourth largest exporter ofautomobiles, behind Japan, South Korea and Thailand. The Indian automobile exports registered a22.30 percent growth in the year 2009. The growth trend was as follows: Two Wheelers- 32.31

percent, Commercial Vehicle-19.10 percent and Passenger Cars grew by 19.10%.


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Maruti Suzuki SWOT Analysis

PESTLE Analysis

Political Environment

The policies & objectives laid down by the Indian Government regarding the automobile sector are:

Exalt the sector as a lever of industrial growth and employment and to achieve a high degreeof value addition in the country

Promote a globally competitive automotive industry and emerge as a global source for autocomponents

Establish an international hub for manufacturing small, affordable passenger cars and a keycenter for manufacturing Tractors and Two-wheelers in the world

Strengths1. Maruti is the largest passenger car company inIndia, accounting for around 45% market share2. Over 6,000 people are employed with Maruti3. Good advertising, product portfolio, self-competing brands4. Largest distribution network of dealers and aftersales service centres5. Strong brand value and strong presence in thesecond hand car market6. Having different revenue streams like Marutifinance, Maruti Insurance and Maruti driving schools

7. Over 700,000 units sold in India annually including50,000 exports

Weaknesses1.Inability to penetrate into the internationalmarket2.Employee management, strikes, workerwage problems

Opportunities1. Developing hybrid cars and fuel efficientcars for the future2.Tapping emerging markets across theworld and building a global brand3.Fast growing automobile market andincreased purchasing power

Threats1. Government policies for the automobilesector across the world2. Ever increasing fuel prices3. Intense competition from globalautomobile brands and cheaper brands4. Substitute modes of public transport likebuses, metro trains etc


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Ensure a balanced transition to open trade at a minimal risk to the Indian economy and localindustry

Economic Environment

Sales of Passenger car has been increased to 8.45% per year. Maruti now plans to tap the rural market, 60 per cent of which runs on cash . Maruti has appointed 2,000 sales executives to target customers in the rural areas. The manufacturing sector has grown at 8 10 per cent per annum in the last few years. More than 70 per cent of the VEHICLES purchase is on credit. Finance availability to CV buyers has grown in scope during the last few years.

Social

Welfare Camps Medical support & welfare Education to underprivileged Road Safety Maruti Driving Schools

Greening of Supply Chain Adopting energy saving technologies Reducing water wastage Green Growth

Technological Environment

Launched CNG kit for Alto, its highest selling small car.

Th p p iv v i i i h i v hi ELV .

The company is involved with the development of small and fuel-efficient car engines. In future, the company has high plans to increase the engine development work in India along

with other R&D operations The company uses next generation KB series Engine in its new Hatchback car A-star. The company added Virtual Design Review to its R&D activity to enable virtual validation to

reduce cycle time and development cost. In the field of alternate fuel technology, the company developed LPG/CNG/HYBRID system

for MPI engine.


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Ecological Environment

Practicing 3 R

3R- reduce, reuse, and recycle. Continuous process of promoting 100% recyclable and reusable car parts. Targets reducing fresh water consumption and implement rain water harvesting. Physical infra-structure such as roads and bridges affect the use of automobiles. If there is

good availability of roads or the roads are smooth With the development or evolution ofalternate fuels, hybrid cars have made entry into the market.

Legal Environment

Follows highest standards of Corporate Governance Customer can contact the Secretarial & Legal Department for any questions/clarifications. Legal compliance reporting

The board periodically reviews reports of compliance with all laws applicable to the Company,as well as steps taken by the Company to rectify instances of non-compliances.

The Company has developed comprehensive legal compliance scheduling and management

software by which specific compliance tasks are assigned to each individual. The softwareenables in planning and monitoring all compliance activities across the Company.


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Porters 5 forces model

Threat from the new players: Increasing

Most of the major global players are present in the Indian market; few more are expected toenter.

Financial strength assumes importance as high are required for building capacity andmaintaining adequacy of working capital.

Rivalry within the industry: High

There is keen competition in select segments. (compact and mid-size segments). New multinational players may enter the market.

Market strength of suppliers: Low

A large number of automotive components suppliers Automotive players are rationalizing their vendor base to achieve consistency in quality


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Market strength of consumers: Increasing

Increased awareness among consumers has increased expectations. Thus the ability toinnovate is critical

Product differentiation via new features, improved performance and after-sales support iscritical

Increased competitive intensity has limited the pricing power of manufacturers

Threat from substitutes : Low to medium

Consumer preference is changing (Mini cars are being replaced by compact or mid-sized cars) Setting up integrated manufacturing facilities may require higher capital investments than

establishing assembly facilities India is also likely to increasingly serve as the sourcing base for global automotive

companies, and automotive exports are likely to gain increasing importance over the mediumterm

competition is likely to intensify in the SUV segment in India following the launch of newmodels at competitive prices

Financial Performance

EBIDTA, PBT and PAT


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Balance Sheet Standalone


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Profit & Loss Account Standalone

ValuationThe purpose of Valuation is to determine a fair value range of an investment (or capital asset) usingone or more of several available techniques in order to assist buy/sell decisions for the purpose ofFinancial or Strategic Investment. The worth of an investment is determined by whether it is meantfor long term use to generate returns i.e. strategic investment or for resale when the right price or fairvalue is achieved.


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Price/Earnings Approach (Fundamental Analysis)

P/E multiple (the price per share divided by the earnings per share) or the P/CF multiple (price pershare divided by cash flow per share, which is the earnings per share plus the dividends per oshare) tovalue stocks. For example, we can use the average of P/E ratio of a sample of comparable firms and

call it a P/E multiple. By multiplying this average P/E ratio by the expected earnings of the companywe can get the estimate of its stock price. P/E is one of the most important ratio in valuation. We firstcalculated the average EPS growth over the past five years. Then we found the projected EPS bymultiplying the average EPS growth with the current EPS. Industry P/E was readily available. Bymultiplying the industry P/E with the projected EPS, we calculated the projected price of the stock.Since the industry has been very turbulent because of the recent norms and technologicaldevelopment, the earnings were very variable.

Ten Year Data to calculate Projected EPSDate Price Absolute Change % Change P/E EPS(TTM)04-09-2014 2901.35 1623.6 127 31.492 92.1304-09-2013 1277.75 105.1 9 16.135 79.1904-09-2012 1172.65 91.6 8 20.72 56.604-09-2011 1081.05 -191 -15 13.648 79.2104-09-2010 1272.05 -274.35 -18 14.714 86.4504-09-2009 1546.4 862.5 126 36.66 42.1804-09-2008 683.9 -210.05 -23 11.415 59.9104-09-2007 893.95 -9.45 -1 16.533 54.0704-09-2006 903.4 392.45 77 21.948 41.1604-09-2005 510.95 17.29 29.55

111 620.45Average 32.25 62.045

(Avg EPS grw*Avg EPS) Projected EPS 66.698375Given Industry P/E 11.42

Projected Price 761.6954425Actual Price 2901.35Discount -74

This is clear from the above calculations that stocks are overpriced and when calculated on the basisof industry P/E. Actual current market price of the stock is Rs 2901.35, whereas projected price ofthe stock is Rs 761.69. Hence, stocks are overpriced by approximately 74% giving a SELL signal.


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FCFE Valuation Method:

The free cash flow to equity model does not represent a radical departure from the traditionaldividend discount model. In fact, one way to describe a free cash flow to equity model is that itrepresents a model where we discount potential dividends rather than actual dividends. Consequently,the three versions of the FCFE valuation model presented in this section are simple variants on thedividend discount model, with one significant change free cash flows to equity replace dividends inthe models.

Underlying Principle

When we replace the dividends with FCFE to value equity, we are doing more than substituting onecash flow for another. We are implicitly assuming that the FCFE will be paid out to stockholders.

There are two consequences:1. There will be no future cash build up in the firm, since the cash that is available after debt

payments and reinvestment needs is assumed to be paid out to stockholders each period.

2. The expected growth in FCFE will include growth in income from operating assets and notgrowth in income from increases in marketable securities. This follows directly from the last

point.

How does discounting free cash flows to equity compare with the augmented dividend discountmodel, where stock buybacks are added back to dividends and discounted? You can consider stock

buybacks to be the return of excess cash accumulated largely as a consequence of not paying out theirFCFE as dividends. Thus, FCFE represents a smoothed-out measure of what companies can return totheir stockholders over time in the form of dividends and stock buybacks.

Estimating Growth in FCFE

Free cash flows to equity, like dividends, are cash flows to equity investors and you could use thesame approach that you used to estimate the fundamental growth rate in dividends per share:

Expected growth rate = Retention ratio Return on equity

The use of the retention ratio in this equation implies that whatever is not paid out as dividends isreinvested back into the firm. There is a strong argument to be made, though, that this is notconsistent with the assumption that free cash flows to equity are paid out to stockholders, whichunderlies FCFE models. It is far more consistent to replace the retention ratio with the equityreinvestment rate, which measures the percent of net income that is invested back into the firm.


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Cost of Equity Calculations Growth Rate ClaculationsRisk free Rate(Rf)=8.5% Year Sales Growth

2004 9,449.50Risk Premium =8.3% 2005 11,046.30 17%

2006 12,197.90 10%

Cost of capital= 0.240276 2007 14,806.40 21%

2008 18,066.80 22%2009 20,729.40 15%2010 29,317.70 41%2011 36,618.40 25%2012 35,587.10 -3%2013 43,587.90 22%

2014 43,700.60 0%

Avg Growth Rate= 17%

Cost of Debt has been calculated by using the value of Rm and Rf which are given in the above table.Avg Growth is been figured out by averaging out the growth in sales for last 10 years which comesout to be 17%.

Various figures has been calculated in above figure like capex,WC,NI.. as a percentage of sales so tocalculate what average % of share it constitute for last 11 years. This will help in to project same forfuture.


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Growth Rate after terminal value 0.06FCFE Calculations

Year 2014 2015 2016 2017 2018 2019 TV

Sales 43,700.60 51205.0022 59998.08 70301.14 82373.47 96518.9

NI 2,783.00 3744.550456 4387.576 5141.024 6023.857 7058.292(Net W.C) -2,015.00 199.494576 233.7524 273.8931 320.9269 376.0374Depreciation 2,084.40 1765.126666 2068.24 2423.404 2839.559 3327.176(CAPEX) 2,801.10 3180.371248 3726.514 4366.443 5116.262 5994.842Net Borrowings 295.90 251.1550642 294.2842 344.8196 404.0331 473.4149

FCFE 4,377.20 2,380.97 2,789.83 3,268.91 3,830.26 4,488.00 26388.94

PV(FCFE) 1919.707369 1813.601 1713.36 1618.659 10520.66

Total Value 17585.99Shares

Outstanding 30Value of share 586.1997

This is the projected figures of next 5 years we have calculated all the figures as a percentage of saleswhich have been calculated in above table. Terminal value of the firm is calculated by consideringthe growth to be 6%.Bringing all FCFE to present by discounting them by cost of debt as calculatedearlier and gives the total Value as Rs 17585.99 Cr and total share outstanding are 30 Cr, so projectedvalue of share from FCFE method is Rs 586.1997

As the value is less than the current market price i.e. Rs 2901.35 so the stock is overvalued. it gives asignal of SELL to investors.

So doing the valuation gives us that Maruti Suzuki is overvalued and it gives a SELL signal toinvestors.

Valuation Technique Projected Price(Buy/Sell Signal)

P/E Ratio Method Rs 761.69(Sell)

FCFE Method Rs 586.1997(Sell)

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