BOMBAY, 9 June 2003 — The arrival of the month of June heralds the arrival of two big “M’s” — one is the monsoon and the other is the Maruti Udyog’s initial public offering (IPO).
Friday saw the dark monsoon clouds over northeast India and very soon, rains are expected. bringing the much-needed succor to the sweltering Indian subcontinent.
June 12 will see the IPO of the largest car making company in India, Maruti Udyog Ltd. (MUL). This is a public sector unit and it is for the first time ever that the government is making its disinvestment through the IPO route to retail investors. So what is this MUL IPO all about? MUL is offering for sale 7,22,43,300 equity shares of face value Rs.5 each. It has fixed a floor price of Rs.115 per share to divest government’s 25 percent equity stake in the auto major through the book building route. The IPO is slated to open on June 12 and close on June 19. Although the IPO offer is for the sale of 72 million shares, the company has a green shoe option of retaining up to 10 percent in case there is an oversubscription — and in such a case, total sales could be for 79.5 million shares, each having a face value of Rs.5.
The proceeds are to be used mainly to develop the company as a R&D hub for Suzuki cars in Asia. The government currently holds 45 percent equity while Suzuki Motor Corporation, the joint venture partner holds 55 percent stake. Last year, the government ceded control of Maruti to its joint venture partner Suzuki following a Rs.4,000 million rights issue. Suzuki acquired about four percent equity in the company for a consideration of around Rs.14,000 million including a renunciation premium of Rs.10,000 million. What this means is that Suzuki paid Rs.164 per share in the rights issue and if one takes into consideration the Rs.10,000 million also, the total cost of the rights issue for Suzuki worked out to Rs.194 per share. The Japanese company has underwritten the entire IPO of June at Rs.115 which is also the floor price. The inference drawn from this is that in the eventuality of the IPO not finding sufficient subscribers, Suzuki will take away the difference, using this as an indirect route to increase its stake in the company. Post-IPO, Suzuki will have clear management control over the company, encouraging it to introduce more technologically advanced models frequently. Government’s exit from the company could well be the biggest factor in favor of the company’s future prospects as it will now be more professionally managed and is expected to enhance its profitability. Now the question which comes to mind is — Is the price of Rs.115 OK? Well, based on fundamentals alone, there is actually no comparison to MUL. Maruti produces 350,000 cars annually, with the “M-800” and other small cars like “Zen”, “Alto” and “WagonR” comprising the majority of its sales. It is the largest passenger car maker in India, with an overall market share of 58.6 percent which is three times that of second place Hyundai whose market share looks paltry at 18 percent.
In fact it would come as a shock for many to know that MUL has a 100 percent market share in the “cars priced below Rs.300,000” category which is known as Segment A, comprising 800 and Omni. This is despite the entry of 11 global players in the Indian auto sector. And regarding its financial performance, it posted a 40 percent rise in net profit during 2002-03 at Rs.1,464 million and increase in car sales since the second half of the last fiscal. It has been producing at over 100 percent capacity while the rest of the car industry was producing at an average of only 58 percent. But will MUL grow further or does this mean downward growth from this run in the high growth cycle? Analysts believe that Maruti’s share in the small car segment is not under any immediate threat. Despite competition from new entrants, the company remains the number one passenger car company in India. Yet there is no doubt that in the years to come, Maruti’s current position of dominance will diminish.
Moreover, Telco’s reported move to launch a Rs.100,000 four-seater car could result in more worries for the company. Then, competition could intensify in the near future at the upper end of the small car segment when Honda launches its small car. Now the question, is the IPO rightly priced at Rs.115? Some analysts believe that at Rs.115, Maruti will be among the highest priced automakers in the country.
At Rs.115 per share, the stock is offered at a P/E (price of the listed stock divided by the earnings per share) of 22.7 times its earnings of 2002 and at 15 times its projected earnings of 2004. Telco is currently traded at a P/E of 24, Mahindra & Mahindra of 12.5. This means that the stock is actually fully priced at the offer price of Rs.115 for a Rs.5 share, leaving little room for the primary market investors to benefit from. Yet there are some who feel that we have limited options for making investments in the car industry and once Hyundai also comes with its IPO offer, the premiums will automatically get adjusted.
Well, the stock market is most unpredictable and despite various logical reasonings, there is no telling how the stock will actually perform once listed. So if you apply for the IPO, apply for the sake of owning the stock of one of the best carmakers in India. And if you own a Maruti, why not own the stock as well?
