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Bullock Goes Karting

The heady response to Maruti's high-octane BSE entry owes much to it being a one-of-its-kind fish in the stormy scrip sea.

Bullock Goes Karting
Bullock Goes Karting
Last month, at a tea shop in Patna, one heard an animated discussion about the then-forthcoming IPO of Maruti Udyog. Sipping their tea, the customers debated whether a good investment opportunity was staring them in the face. The buzz reached its climax last Wednesday when the scrip zoomed 30 per cent on the first day it was quoted on the BSE. It seemed investors were vying to buy the shares as trading volumes crossed one million.

But, as the excitement grew, a few questions nagged investors. Was the high price justified? Is Maruti really a blue chip? Is the stock going up due to "speculative play" among the large buyers? And has the hype blinded the investors?

Take a look at some market-related figures to figure out why such doubts become important. At Rs 125 per share, which was the IPO price, Maruti's price-earning (PE) multiple comes to 23. At its current price, the multiple is over 30. Compare this with the multiple for Telco, which is 18. In addition, Maruti has reduced the prices of its high-end models, Baleno and Versa. Intense competition has forced it not to increase the prices of other models like Wagon R, Zen, and Alto. Finally, Maruti 800, which accounts for over 40 per cent of sales, remains India's cheapest car. In other words, its margins are wafer-thin.

But talk to some investors and you get a different take. "Although some of the (price) gains can be attributed to the bullishness in the market at large, it is supported by good fundamentals," says ask Raymond James MD Asit Koticha. An insider points out there's no benchmark to judge Maruti's PE, as it happens to be the only listed pure-car company. (Telco makes commercial vehicles, apart from cars.) Also, the company's prospects appear bright.

Five of the eight top-selling models in the below-Rs 4 lakh segment, which accounts for 80 per cent of total car sales, belong to the Maruti stable. And the potential for growth is immense since car penetration in India is a mere six per thousand households. Even if the figure rises to 12, as in Pakistan and Sri Lanka, one can safely expect robust growth. While Maruti hasn't been able to raise prices, its margins have improved due to reduced costs and higher productivity in the past one year. The company hopes that between 2002 and 2005, it will reduce costs by 30 per cent and increase productivity by 50 per cent.

One must also look at the sheer market muscle that the company enjoys by virtue of its annual sales of roughly 4 lakh vehicles. Even if it raises the prices of each car by Rs 1,000—an insignificant amount for consumers—it'll add a neat Rs 40 crore to its bottomline. Besides, the new businesses that Maruti has got into over the last year or so—car finance, insurance, lease and fleet management, used cars and spares—have been doing reasonably well. More importantly, they serve to keep a customer within the Maruti loop. "It makes sense to hold on to Maruti, as the stock hasn't exhausted its growth potential," says Nimish Shah, MD, Parag Parikh Investment Advisory Services.

Still, Maruti 800, the brightest jewel in its crown, also remains its Achilles heel. Its booming sales could well be hiding a potential bust as it is no longer the first choice of even first-time buyers. "Some day someone will crack that equation (making a car at a cost as low as that of the 800). The day that happens, poof! Maruti will be on the mat," says an executive of a rival car-maker. Adds another: "The day safety norms come in, out goes the 800."

Maruti's financial ratios, especially its low net profit to turnover ratio (Rs 146.4 crore to Rs 9,426 crore), will surely be compared to its rivals, who are all unlisted, other than Telco. For instance, says Motilal Oswal, CMD of the eponymous brokerage house: "Eicher Motors and Telco are better bets in the automobile sector." But right now, not too many investors agree.

Suveen K. Sinha and Himalee Bahl

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