My Valuation of Maruti Suzuki's Equity

In this post I deal with Maruti Suzuki's equity valuation. In the passenger vehicles sub-sector, Maruti Suzuki has been consistently gaining market share in the past three years, the only one in the top five by market share to do so. It has also grown its spare parts sales significantly. In the commercial vehicles sub-sector, Maruti Suzuki entered the LCV sub-segment in 2016, but has a negligible market share.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in millions of rupees, whereas the third is in percentage.

The data up to 2016 is taken from the annual reports and refers to the financial year data. In this time period, total revenue grew at a CAGR of 12.5%, while the total expenses grew at 10.8%, leading to an increase in profit before tax and profit after tax of 33% and 29% respectively. Within the total revenue, gross sale of products grew by 13%, but the excise tax on it grew by 18%, both on a CAGR basis. On the expense front, while cost of materials consumed, which is the largest expense item and constitutes 78% of the total expenses, grew only at a CAGR of 8%, employee benefits expenses and depreciation grew at high rates of 24% and 25% respectively. The rapidly increasing net income and depreciation contribute to a high FCFE (free cash flow to equity) growth rate, which is forecast to continue into the future.

Coming to the balance sheet, reserves and surplus constitutes 69% of the total liabilities. and has grown at a CAGR of 14% from 2012 to 2016. Though some other liability items have been growing at a much faster rate, their smaller contribution means that the total liabilities grows only at a CAGR of 16%. On the asset side, the largest components are tangible assets (31%) and non-current investments (43%), which have been growing at a CAGR of 21% and 62% respectively from 2012 to 2016. Almost all the non-current investments are in mutual funds. The high growth rate of these large components is balanced out by the significant decline in cash and bank balances from over 25 billion rupees in 2012 to under 500 million rupees in 2016, at a CAGR of 64%.

All forecasts have been done based on a linear trend.

The Valuation    

Finally, the FCFE grows to ₹179746 million in 2026 from ₹116058 million in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.81. Together, these yield a cost of equity of 12.49%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

          

The Price

The value finally arrived at is ₹4782, which is over 20% lower than the current price of around ₹6110. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.