FUNDAMENTAL ANALYSIS

ON
MARUTI SUZUKI LIMITED

SUBMITTED BY
GHOUSE BAIG
6 B.COM C
08D0237
 COMPANY PROFILE
Maruti Suzuki India Limited (MSIL) is a passenger car company. The Company is engaged in
the business of manufacturing, purchase and sale of motor vehicles and spare parts
(automobiles).

The other activities of the Company include facilitation of pre-owned car sales, fleet
management and car financing. The Company is a subsidiary of Suzuki Motor Corporation,
Japan.

The Company has a portfolio of 13 brands and over 150 variants across Maruti 800, Omni,
international brands Alto, A-star, WagonR, Swift, Ritz and Estilo, off-roader Gypsy,
SUV Grand Vitara, sedans SX4 and Swift DZire and Eeco.

The Company's two manufacturing facilities are located at Gurgaon and Manesar, south of New
Delhi.

The Company's subsidiaries include Maruti Insurance Business Agency Limited, Maruti
Insurance Distribution Services Limited, Maruti Insurance Agency Solutions Limited, Maruti
Insurance Agency Network Limited and Maruti Insurance Agency Services Limited.

Maruti Suzuki India limited (MSIL) is the largest passenger car manufacturer in India with a
market share of over 50%. MSIL formerly Maruti Udyog Limited (MUL) was established in Feb
1981 through an act of parliament, as a government company with Suzuki Motor Corporation of
Japan holding 26 per cent stake. Its actual production commenced in 1983with the Maruti 800 car
based on the Suzuki Alto keicer, which was the only modern car available in India at that time; its
only competitors were Hindustan Ambassador and Premier Padmini. Till 2004, it remained
India’s largest selling compact car ever since its launch while MSIL remained the Indian car
market leader for over two decades. In 2002, Government of India (GOI) ceded majority control to
Suzuki through rights issue. The GOI subsequently sold 25.6% of its stake to investors in an IPO.
Now, Suzuki owns 54.21% of Maruti.
FUNDAMENTAL ANALYSIS

Fundamental analysis is the study of a company’s financial strength, based on historical data;
sector and industry position; management; dividend history; capitalization; and potential for
future growth. It is a stock valuation method that uses financial and economic analysis to predict
the movement of stock prices. The analysis attempts to find the intrinsic value of a security that
helps investors to make decisions.

The fundamental information that is analyzed can include a company's financial reports, and
non-financial information such as estimates of the growth of demand for products sold by the
company, industry comparisons, and economy-wide changes, changes in government policies
etc.

The various steps involved in the fundamental analysis are:

1. Macroeconomic analysis, which involves considering the overall health of the

economy and its future.

2. Industry analysis, which involves the analysis of the industry in which the
company is operating.

3. Situational analysis of the company, studying their business model, management,

products and services, its current position, its future, etc.

4. Financial analysis of the company, which involves analyzing the financial

statements like balance sheets, income statements, cash flows and ratios.

5. Valuation, which attempts to find the intrinsic value of the securities of the
company.

The approach to fundamental analysis is often referred to as E-I-C Approach. The E-I-C
denotes the three parts of the fundamental analysis. The three distinctive parts of fundamental
analysis are:

1. Economic Analysis
 2. Industry Analysis and

3. Company Analysis

ECONOMIC ANALYSIS
Economic analysis is the analysis of forces operating the overall economy a country. It is a
process whereby strengths and weaknesses of an economy are analyzed and is important in order
to understand exact condition of an economy. The various factors considered are:

The Economic Cycle

Countries go through the business or economic cycle and the stage of the cycle at which a
country is in has a direct impact both on industry and individual companies. It affects investment
decisions, employment, demand and the profitability of companies. It is very important to
determine the stage of the cycle into which the economy is passing through. The four stages of
economic cycle are depression, recovery, boom and recession.

BOOM

DISINVEST

RECESSIO
RECOVERY
N

INVEST

DEPRESSION
 Investors should attempt to determine the stage of the economic cycle the country is in. They
should invest at the end of a depression when the economy begins to recover, and at the end of a
recession. Investors should disinvest either just before or during the boom, or at the worst, just
after the boom. Investment and disinvestments made at these times will earn the investor the
greatest benefits.

The Political Equation

A stable political environment is necessary for steady, balanced growth. If a country is

ruled by a stable government which takes decisions for the long-term development of the
country, industry and companies will prosper.

Foreign Exchange Reserves

A country needs foreign exchange reserves to meet its commitments, pay for its imports
and service foreign debts. If the reserves are not managed properly it may pose foreign exchange
risks.

Foreign Debt and the Balance of Trade

Foreign debt, especially if it is very large, can be a tremendous burden on an economy.

India pays around $ 5 billion a year in principal repayments and interest payments.

Inflation

Inflation has an enormous effect in the economy. Within the country it erodes purchasing
power. As a consequence, demand falls. If the rate of inflation in the country from which a
company imports is high then the cost of production in that country will automatically go up.

Interest Rates

A low interest rate stimulates investment and industry. Conversely, high interest rates result
in higher cost of production and lower consumption.

Taxation
 The level of taxation in a country has a direct effect on the economy. If tax rates are low,
people have more disposable income.

Government Policy

Government policy has a direct impact on the economy. A government that is perceived
to be pro-industry will attract investment.

INDUSTRY ANALYSIS
The importance of industry analysis is now dawning on the Indian investor as never before. It
is very important to analyse the health of an industry because no company is operating in
isolation. Analysis of an industry can be performed using the tools like:

Industry Life Cycle

The first step in industry is to determine the cycle it is in, or the stage of maturity of the
industry. All industries evolve through the following stages:

1. Introduction
2. Growth
3. Maturity
4. Decline

Porter’s Five Forces Model

There are competitive forces and it is these competitive forces that determine the extent of
the inflow of funds, the return on investment and the ability of companies to sustain these
returns. Porter has identified five competitive forces that shape every industry and every market.

The five forces identified by Porter are:

1. Threat of new entrants

2. Threat fo substitutes
3. Baggaining power of the customers
4. Bargaining power of the suppliers
 5. Rivalry among competitors

SWOT Analysis

SWOT analysis of an industry gives an investor the overall picture about the industry. A scan of
the internal and external environment is an important part of the strategic planning process.
Environmental factors internal to the firm usually can be classified as strengths (S) or
weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats
(T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

Maruti Suzuki is an automobile industry which comes under the major classification of product
based industries.

SEGMENTATION OF INDUSTRY

PORTER’S FIVE FORCE MODEL ON MARUTI SUZUKI

Threat of New Entrants - Very Low
In order to enter the automotive market a huge amount of capital is required. In addition, an
entering firm would need to have a tremendous amount of tacit and explicit knowledge to design
and manufacture products.

Threat of Substitutes - Medium

Available substitutes include public transportation such as buses, trains, boats, and aircraft. In
addition, consumers can use other conventional means of transportation such as bicycling or
walking.

Power of Suppliers – Medium

Some suppliers are smaller and as such do not have that much power over the pricing and
distribution of their products. However, there are not that many small parts manufacturers in this
market and therefore, the majority of suppliers to major automotive makers are medium to large
businesses. As a result they have some flex in determining product pricing, delivery, and
distribution.

Power of Buyers - Low

While buyers are individuals and are not grouped together, they still have an immense amount of
information available to them regarding the pricing and cost to manufacture of Maruti Suzuki,
though this has a negligible impact on sales of Maruti. As a result, buyers don’t have any power
to negotiate the purchasing price with Maruti.

Competitive Rivalry – Extremely High

Any competitor in this market is generally a global company with billions of dollars in assets and
can compete on any level that Maruti can. Furthermore, there is intense competition on all fronts
in the car market in general, not to mention the luxury car market. Major manufacturers such as
Toyota, Honda & BMW are pinching Maruti with their luxury segments (Lexus, Acura, 7-Series)
in terms of quality product and reliability.

SWOT ANALYSIS
STRENGTHS WEAKNESS
Established distribution and after sales Lack of experience with foreign market
network Inexperience with foreign workforce
Brand image Heavy import tariffs
Experience and knowhow in technology
Ability to design product with different
features
Understanding the Indian market and
ability to liason with the government

OPPORTUNITIES THREATS
Increasing purchasing power of Indian
middleclass category Threats from Chinese car manufacturers
Govt. subsidies Indian as well as foreign competitors
Tax benefits
Foreign collaboration

COMPANY ANALYSIS

Company analysis is the final stage of fundamental analysis. The economy analysis provides the
investor a broad outline of the prospects of growth in the economy. The industry analysis helps
the investor to select the industry in which investment would be rewarding. Now he has to decide
in which company he has to invest. Company analysis provides the answer to this question.

In company analysis the investor tries to predict the future earnings of the company because
there is strong evidence that the earnings have a strong effect on the share prices. The level, trend
and safety of earnings of a company, however depend upon a number of factors concerning the
operations of the company.

The different issues regarding a company that should be examined are:

 The Management

 The Company

 The Annual Report

 Ratios

 Cash flow
 (Rs crores)
Profit loss account
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Income
Operating income 29,317.70 20,729.40 18,066.80 14,806.40 12,197.90
Expenses
Material consumed 22,435.40 16,339.80 13,622.00 11,063.70 9,223.70
Manufacturing expenses 1,278.20 909.70 670.60 489.80 359.60
Personnel expenses 545.60 471.10 356.20 288.40 228.70
Selling expenses 916.00 738.20 560.20 499.90 356.00
Administrative expenses 404.60 389.20 326.30 274.50 170.60
Expenses capitalized - -22.30 -19.80 -14.30 -6.70
Cost of sales 25,579.80 18,825.70 15,515.50 12,602.00 10,331.90
Operating profit 3,737.90 1,903.70 2,551.30 2,204.40 1,866.00
Other recurring income 617.70 547.60 456.10 361.10 268.10
Adjusted PBDIT 4,355.60 2,451.30 3,007.40 2,565.50 2,134.10
Financial expenses 33.50 51.00 59.60 37.60 20.40
Depreciation 825.00 706.50 568.20 271.40 285.40
Other write offs - - - - -
Adjusted PBT 3,497.10 1,693.80 2,379.60 2,256.50 1,828.30
Tax charges 1,094.90 457.10 763.30 705.30 560.90
Adjusted PAT 2,402.20 1,236.70 1,616.30 1,551.20 1,267.40
Non-recurring items 44.30 -55.90 37.90 -23.00 -83.70
Other non-cash adjustments 51.10 37.90 76.60 33.40 5.40
Reported net profit 2,497.60 1,218.70 1,730.80 1,561.60 1,189.10
Earnings before appropriation 10,501.80 8,244.40 7,368.10 5,947.10 4,631.20
Equity dividend 173.30 101.10 144.50 130.00 101.10
Preference dividend - - - - -
Dividend tax 28.80 17.20 24.80 21.90 14.20
Retained earnings 10,299.70 8,126.10 7,198.80 5,795.20 4,515.90

COMPANY AT A GLANCE
GRAPHS INDICATING THE GROWHT IN PROFIT OF MARUTI IN THE PAST FEW
YEARS

NET SALES AND PAT

PROFIT AND LOSS RATIOS

2001-2002 2002-2003
2003-2004 2004-2005

2005-2006 2006-2007
2007-2008 2008-2009

2009-2010
SALES VOLUMES
NETWORK DETAILS
FINANCIAL HIGHLIGHTS
The gross revenue (net of excise) of the Company for the year was Rs. 301,198 million as
against Rs.214, 538 million in the previous year showing growth of 40%. Sales of vehicles in the
domestic market increased to 870,790 as compared to 722,144 in the previous year showing a
growth of 21%. Exports of vehicles grew at an impressive rate of111% from 70,023 to 147,575
in the current year. The overall growth was 29%.
Earnings before depreciation, interest, tax and amortization (EBDITA) stood at Rs. 44,510
million against Rs. 24,333 million in the previous year.
Profit before tax (PBT) stood at Rs. 35,925 million against Rs. 16,758 million in the previous
year and profit after tax (PAT) stood at Rs. 24,976 million against Rs. 12,187million in the
previous year.

DIVIDEND
The board recommends a dividend of Rs. 6.00 per equity share of Rs. 5.00 each for the year
ended 31st March 2010 amounting to Rs. 1733 million.

CRISIL RATINGS
The Company has been awarded the highest financial credit rating of AAA/stable (long-term)
and P1+ (short term) on its bank facilities by CRISIL. The rating underscores the financial
strength of the Company in terms of the highest safety with regard to timely fulfillment of its
financial obligations.

QUALITY
The Company has again been awarded ISO: 27001 certification by STQC Directorate
(Standardization, Testing & Quality Certificate), Ministry of Communications and Information
Technology, and Government of India after reassessment. The Company is thus certified to meet
international standards for maintaining information security.
The Company's plants at Gurgaon and Manesar are ISO: 14001:2004 certified. During the year,
AIB-Vincotte International Ltd., Brussels, Belgium conducted surveillance audit and
recommended continuation of the certification.
The quality management system of the Company is certified against ISO 9001:2000standard. Re-
assessment of the quality systems are done at regular intervals by an accredited third party
agency.

HIGHLIGHTS OF OPERATIONS
The operations during the year are exhaustively discussed in the report on 'Management
Discussion and Analysis' which forms part of this annual report.
 Balance sheet
(Rs
crores)

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06
Sources of funds
Owner's fund
Equity share capital 144.50 144.50 144.50 144.50 144.50
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 11,690.6 9,200.40 8,270.90 6,709.40 5,308.10
0
Loan funds
Secured loans 26.50 0.10 0.10 63.50 71.70
Unsecured loans 794.90 698.80 900.10 567.30 -
Total 12,656.5 10,043.8 9,315.60 7,484.70 5,524.30
0 0
Uses of funds
Fixed assets
Gross block 10,406.7 8,720.60 7,285.30 6,146.80 4,954.60
0
Less : revaluation reserve - - - - -
Less : accumulated depreciation 5,382.00 4,649.80 3,988.80 3,487.10 3,259.40
Net block 5,024.70 4,070.80 3,296.50 2,659.70 1,695.20
Capital work-in-progress 387.60 861.30 736.30 238.90 92.00
Investments 7,176.60 3,173.30 5,180.70 3,409.20 2,051.20
Net current assets
Current assets, loans & advances 3,856.00 5,570.00 3,190.50 3,956.00 3,870.70
Less : current liabilities & provisions 3,788.40 3,631.60 3,088.40 2,779.10 2,184.80
Total net current assets 67.60 1,938.40 102.10 1,176.90 1,685.90
Miscellaneous expenses not written - - - - -
Total 12,656.5 10,043.8 9,315.60 7,484.70 5,524.30
0 0

Notes:
Book value of unquoted investments 11.10 3,162.20 5,169.60 3,398.10 2,040.10
Market value of quoted investments 215.10 108.70 219.50 270.40 289.80
Contingent liabilities 3,657.20 1,901.70 2,734.20 2,094.60 1,289.70
Number of equity shares outstanding 2889.10 2889.10 2889.10 2889.10 2889.10
(Lacs)
 Ratios
(Rs
crores)
Mar ' Mar ' Mar ' Mar ' Mar ' 06
10 09 08 07
Per share ratios
Adjusted EPS (Rs) 83.15 42.81 55.94 53.69 43.87
Adjusted cash EPS (Rs) 111.70 67.26 75.61 63.09 53.75
Reported EPS (Rs) 86.45 42.18 59.91 54.07 41.16
Reported cash EPS (Rs) 115.00 66.64 79.57 63.46 51.04
Dividend per share 6.00 3.50 5.00 4.50 3.50
Operating profit per share (Rs) 129.38 65.89 88.31 76.30 64.59
Book value (excl rev res) per share 409.65 323.45 291.28 237.23 188.73
(Rs)
Book value (incl rev res) per share 409.65 323.45 291.28 237.23 188.73
(Rs.)
Net operating income per share (Rs) 1,014.77 717.50 625.34 512.49 422.20
Free reserves per share (Rs) 403.82 318.45 286.28 231.89 183.18
Profitability ratios
Operating margin (%) 12.74 9.18 14.12 14.88 15.29
Gross profit margin (%) 9.93 5.77 10.97 13.05 12.95
Net profit margin (%) 8.34 5.72 9.34 10.29 9.53
Adjusted cash margin (%) 10.78 9.13 11.79 12.01 12.45
Adjusted return on net worth (%) 20.29 13.23 19.20 22.63 23.24
Reported return on net worth (%) 21.10 13.04 20.56 22.78 21.80
Return on long term funds (%) 28.80 17.48 27.35 30.74 33.47
Leverage ratios
Long term debt / Equity 0.03 0.06 0.05 0.08 0.01
Total debt/equity 0.06 0.07 0.10 0.09 0.01
Owners fund as % of total source 93.51 93.04 90.33 91.57 98.70
Fixed assets turnover ratio 2.82 2.38 2.48 2.41 2.46
Liquidity ratios
Current ratio 1.02 1.53 1.03 1.42 1.77
Current ratio (inc. st loans) 0.91 1.51 0.91 1.40 1.77
Quick ratio 0.67 1.26 0.66 1.13 1.31
Inventory turnover ratio 30.47 30.46 22.93 28.76 18.78
Payout ratios
Dividend payout ratio (net profit) 8.09 9.70 9.78 9.72 9.69
Dividend payout ratio (cash profit) 6.08 6.14 7.36 8.28 7.81
Earning retention ratio 91.59 90.44 89.53 90.21 90.91
Cash earnings retention ratio 93.74 93.92 92.25 91.67 92.58
Coverage ratios
Adjusted cash flow time total debt 0.25 0.35 0.41 0.34 0.04
Financial charges coverage ratio 130.02 48.06 50.46 68.23 104.61
Fin. charges cov.ratio (post tax) 100.18 38.75 39.57 49.76 73.28
Component ratios
Material cost component (% earnings) 77.21 77.10 77.25 73.36 77.25
Selling cost Component 3.12 3.56 3.10 3.37 2.91
Exports as percent of total sales 15.49 7.24 4.10 3.90 4.78
Import comp. in raw mat. consumed 12.89 11.70 10.84 12.62 18.75
Long term assets / total Assets 0.76 0.59 0.74 0.61 0.49
Bonus component in equity capital (%) - - - - -

INDICATION OF RATIOS

EPS Growth: Maruti has grown its net profits at a CAGR of 13.65 % in the past
three years. So in the coming years we expect it to grow further.

Return on capital invested (ROIC): ROIC is an important tool to assess a

company's potential to be a quality investment by determining how well the
management is able to allocate capital to its operations for future growth. A ROIC
of above 15% is considered decent for companies that are in an expansionary
phase. Maruti has an average ROIC of 29.83% over the last three years.

Dividend payout: A stable dividend history inspires confidence in the

management's intentions of rewarding shareholders. Maruti’s average payout ratio
has been as high as 75% over the past 3 fiscals.

Promoter holding: A larger share of promoter holding indicates the confidence of

the people who run it. We believe that a greater than 40% promoter holding
indicates safety for retail investors. Promoter shareholding in Maruti is 54.2 %
(Foreign Collaborators).

FII Holding: We believe that FII holding of greater than 14% can lead to high
volatility in the stock price. The FII holding in Maruti in 2008 stood at 14.8%.
P/E Ratio: This ratio indicates relationship between the no. of times the EPS is
covered by its market price. So higher the ratio indicates superior performance. In
case of Maruti, it shows a stable P/E ratio over the past few years.

PEG Ratio: It is a widely employed indicator of a stock’s possible true value. A

lower PEG means that the stock is undervalued more. Here, it is being improving
over the past few years.

Debt-Equity Ratio: The greater D/E ratio indicates greater risk to the
creditors/lenders. This ratio indicates long term solvency position of the Company.
Maruti has maintained a preferable ratio of 0.1.

Current Ratio: It shows the short-term solvency position of the firm. In case of
Maruti, the Current ratio is showing a deteriorating trend.

Interest coverage Ratio: It is used to determine how comfortably a company is

placed in terms of payment of interest on outstanding debt .The lower the ratio, the
greater is the risk. It is also showing a deteriorating trend.

Tobin-Q Ratio: It is a ratio comparing the market value of a company's stock with
the value of a company's equity book value. High Tobin's q values encourage
companies to invest more in capital because they are "worth" more than the price
they paid for them. Here it has been increasing, so it favorable for the company.

RATIOS FOR ANALYSIS

Profit before Tax to Total Income:

The ratio is calculated by dividing the Profit before Taxes by the total Income
earned. This income tells us that what percentage of total income is earned as
profits before paying taxes.
Interest Coverage Ratio:
A ratio used to determine how easily a company can pay interest on outstanding
debt. The interest coverage ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) of one period by the company's interest expenses
of the same period. The lower the ratio, the more the company is burdened by debt
expense. When a company's interest coverage ratio is 1.5 or lower, its ability to
meet interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy interest
expenses.
ICR = EBIT/ Interest Expense

Profit after tax to Total Income

This ratio analysis tells profitability of a firm after paying all the taxes to total
income.
Total Assets Turnover Ratios:
The total asset turnover ratio is measured as, Asset turnover = Net Income/ Total
assets
This ratio tells the turnover of the asset to generate income.

Return on Total asset (after Tax):

This ratio gives an idea of returning net profit generated by the bank in comparison
with assets.
Return on assets= Profit after tax / Total Assets
 Ea
rnings per Share:

Through this ratio it can be analyzed what percent of 1` share is earned.

Capital Adequacy Ratio:

Capital adequacy ratio informs lending up to a certain ratio of equity. It is a

measure of a bank's capital. It is expressed as a percentage of a bank's risk
weighted credit exposures.
It is also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
Return on Equity (Net worth):
The ROE is useful for comparing the profitability of a company to that of other
firms in the same industry. There are several variations on the formula that
investors may use:

1. Investors wishing to see the return on common equity may modify the formula
above by subtracting preferred dividends from net income and subtracting
preferred equity from shareholders' equity, giving the following: return on common
equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average

shareholders' equity. Average shareholders' equity is calculated by adding the
shareholders' equity at the beginning of a period to the shareholders' equity at
period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the
shareholders' equity figure from the beginning of a period as a denominator to
determine the beginning ROE. Then, the end-of-period shareholders' equity can be
used as the denominator to determine the ending ROE. Calculating both beginning
and ending ROEs allows an investor to determine the change in profitability over
the period.
Debt Equity Ratio:
It is a measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt
the company is using to finance its assets.

Sometimes only interest-bearing, long-term debt is used instead of total liabilities

in the calculation. A high debt/equity ratio generally means that a company has
been aggressive in financing its growth with debt. This can result in volatile
earnings as a result of the additional interest expense. If a lot of debt is used to
finance increased operations (high debt to equity), the company could potentially
generate more earnings than it would have without this outside financing. If this
were to increase earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the return that
the company generates on the debt through investment and business activities and
become too much for the company to handle. This can lead to bankruptcy, which
would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates.
 CONCLUSION
Indian Automobile industry

The industry has recovered from the global slowdown and started to make good returns and the
industry is expected to grow in the future years. So investment in the automobile companies is
good for long term.

Maruti Suzuki

From the fundamental analysis we can conclude that the company is strong in its fundamentals
and has a good future value. The risk factor involved is also moderate. Hence Maruti is
concluded to be favorable in terms of its activities.