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Maruti sale to draw eager buyers

India's plans to sell its stake in Maruti, the country's largest carmaker, are likely to attract a flock of eager bidders and could net the government as much as Rs 25 billion ($534.2 million), analysts say.

Maruti, an equal venture between the Indian government and Japan's Suzuki Motor Co, has dominated the country's car market for more than 15 years with its small, fuel-efficient cars.

And though its market share has slipped to 54 per cent from nearly 80 per cent two years ago, it still would be an attractive buy for any automobile firm.

"It is still a fantastic company. It makes ample sense for any company to buy into its equity," said an analyst at a European investment bank who declined to be identified.

Maruti's attractiveness lies in its dominant position, large dealership network, pool of component manufacturers and spare parts suppliers and the growth potential of the Indian market, analysts say.

Suggest ways

Last week, the government set up a panel of bureaucrats to suggest ways of divesting its nearly 50 per cent stake in Maruti.

Any buyer must receive Suzuki's consent.

Most analysts expect the sale to go through, even though the plans face anti-privatisation opposition from within the coalition government.

Among the potential suitors for the government's Maruti stake would be Suzuki itself or US car firm General Motors, which plans to double its equity in Suzuki to 20 per cent.

The government could also sell its stake to the public.

Former Maruti chairman R C Bhargava said that he believed Suzuki might well be satisfied with just the 50 per cent it now holds.

"Fifty per cent is a significant controlling interest in the firm, especially if the government sells its shares to the public," he said.

Analysts reckon Maruti could be worth anything between Rs 49.5 billion and Rs 66 billion.

Based on its latest profits, and a price earnings ratio of 20 -- a premium to the average of 18 of six large international automobile firms -- it could be worth about Rs 66 billion, analysts say. A price earnings ratio of 15 would value the firm at Rs 49.5 billion. Maruti reported net profits of Rs 3.3 billion in 1999-00 on total revenues of Rs 96.7 billion.

Its current book value of Rs 29.1 billion would also point to valuations in the same range.

Indian two-wheeler maker Hero Honda, a joint venture of Japan's Honda Motor Co, and similarly positioned in the Indian motorcycles market as Maruti is in cars, quotes at over seven times its book value.

Small but attractive

By global standards Maruti is actually rather small -- it sold just 406,272 vehicles in the year to March 2000, around the same that the General Motors group sells in a single month.

But it has clawed back market share recently from the Indian units of Hyundai, Daewoo and domestic firm TELCO.

This has been achieved through some bruising price cuts and reflecting this, the firm's operating profit margin declined to 9.5 per cent in 1999-00 from 13.8 per cent two years earlier.

But even with shrinking profitability, Maruti's large scale in a volume-sensitive business make it the industry's lowest cost producer. It sold 186,995 cars in the period from April to October, more than three times the 51,208 units of Hyundai, its nearest competitor.

And unlike some foreign car companies which have often been burned in India by bringing out the wrong product, Maruti's cheap, fuel efficient products are best suited to an Indian environment.

Analyst say, however, that the quicker a share sale is completed, the more money the government is likely to raise.

"Maruti is in the best position in the small car market and making money is going to be difficult there in the future," said Satish Ramanathan, vice-president at ICICI Securities.

Its valuations are already less now than they would have been if the government had sold two years ago.

One analyst said the actual value of Maruti will depend on who holds the stronger bargaining chips, particularly if the government were to make a straight sale to Suzuki.

The fact that Maruti still depends on Suzuki for key components like gear-boxes would be a crucial influence in this process, he said.

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