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Original

PGDM 2014-2016
III
Corporate Finance
Puja Aggarwal Gulati
Maruti Suzuki India Limited
Original

or Revised Write-up:
Group Number:
02
Contact No. and email of Group 9643587821
Coordinator:
ft14dharnachauhan@imt.ac.in
Group Members:
Sl. Roll No.
Name
1
140103059 Dharna Chauhan
2
140101068 Isha Dwivedi
3
140101094 Manoj Kumar
4
140102038 Bohra Arihanth Jain
5
140102137 Tuhin Anand
6
140103030 Apoorv Misra
7
140103127 Pratyush Banka

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Contents:

Sl.no

Particulars

Page no.

1.

Introduction

2.

Dividend Policy

3.

Capital Structure

4.

Working capital

5.

Valuation using DDM

References

11

3
4
6
8

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Maruti Suzuki India Limited

Indias largest car manufacturer and one of the oldest, been the market leader in the
passenger vehicles segment since its inception except for the early years. The market
share of Maruti in domestic passenger vehicles for 2013-14 is 42.59% which is
commendable considering the fact that there is competition from both local and
international players.
Maruti Suzuki which has been known for the value for money cars and superior
service quality has been a consistent performer on the stock markets as well, with the
Indian stock markets in a bull run since early this year, the benchmark Sensex has
given more than 28% returns YTD and during the same period Maruti Suzuki
outperformed the index with 87.5% returns.
Chart no.1

*Source: bseindia.com
Table no.1

company

Volumes in units (domestic sales alone)

2014

market share 2014

market share 2013

Maruti Suzuki India limited

1053689

42.09

39.15

Hyundai motors India limited

380059

15.18

14.39

Mahindra & Mahindra

265140

10.59

11.65

Tata motors

198793

7.94

11.79

Honda

134198

5.36

4.5

Toyota

128689

5.14
5.9
*source: Siam india.com
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The year 2013-14 has not been a favourable year for the automobile industry as a
whole, even after getting many tax breaks from the government in form of excise
cuts and sops but the growth has been sluggish.
In a year when the industry shrank by 6.5% during the same period Maruti grew
marginally by 0.19% which resulted in the increase in the market share by 294 basis
points.

Dividend policy
MSIL has a very unique dividend policy with a very small pay-out ratio when
compared to many other companies in the industry. Being a company in which
majority stake holder is a foreign company it only has a pay-out ratio of 0.13. Out of
the Rs. 92 EPS it only pays a dividend of Rs.12 per share.
If we compare this with the peer companies, we can see striking differences in the
policy. It is advisable that the pay-out ratio should be lower but that is true only if
the management can justify the reason for higher retention of earnings. In the case of
MSIL the company has reserves & surpluses of more than Rs. 21,490 crores which
constitutes 65.32% of its balance sheet which is abnormally high.

Table no.2
company
MSIL
Mahindra & Mahindra
Tata motors
HUL#

figures in crores rupees

2014
Dividend EPS
Pay-out ratio
12
92
0.13
14
63.7
0.22
2
0.93**
2.15
13
17.88
0.73

Dividend
8
13
2
18.5

2013
EPS
Pay-out ratio
79
0.10
56.85
0.23
1.03
1.94
17.56
1.05

*source: annual reports of the respective companies

#because it is a similar foreign promoter dominated listed company
**standalone eps is taken into account without the JLR

As we can see that from the table.2 that MSIL has the lowest pay-out ratio and its
closest peer like the M&M and the Tata motors shell out large amounts out of their
PAT as dividend, the pay-out ratio is not usually above 1 but in the case of Tata
motors there has been balances carried forward from previous years that are added
to the profit for the year. HUL gave a special dividend for FY13.

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The market usually gets affected if the company doesnt pay good dividends but if
the company has some long term capital requirements for the capex investments,
instead of having to raise funds from outside it can retain a larger portion of profits.
A new plant is being set up in Gujarat which will be owned and run by Suzuki motor
corporation (SMC) the Japanese holding company of MSIL, but many analysts have
pointed out that the SMIL has large pools of internal sourcing available then why
does it need a CMA (Contract Manufacturing Agreement) with the Suzuki Motor
Gujarat private limited (SMG). The best part of this deal is that the SMG will be
operating at a no profit no loss and the agreement with MSIL will last for 30 years
without the possibility of termination in the meantime.

Table no.3

company

Dividen
d
MSIL
12
Mahindra & Mahindra
14
Tata motors
0.93
HUL
13

figures in crores rupees

2014
2013
Market
Dividend
Market
Dividend
price
yield
Dividend
price
yield
1602
0.75
8
1330
0.60
870
1.61
13
650
2.00
336
0.28
1.03
215
0.48
466.1
2.79
18.5
603.5
3.07
*source: annual reports of the respective companies

There is one more interesting observation that we came across while looking at the
profit & loss statement of MSIL, other expenses were substantially high component
in the total expenses 17.3%, the notes to the profit & loss statement said that the
royalty payments to SMC are more than Rs. 2486 crores which is close to 6% of the
total expenses and this is 87% of the PAT of Rs. 2831 crores for the FY14.
This is a trend that can be seen globally post 2008 recession where global companies
are looking at squeezing its profitable subsidiaries, this has become a big concern
because it is eating into the profits of the companies. 5% of royalty payments on the
sales is a good way for SMC to save the DDT, maybe this is the reason MSIL has no
robust dividend payment policy.

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Capital Structure
The capital structure of a company is very crucial to its profitability, it also has an
impact on the value of the firm but this hypothesis is negated by the Net Income &
Net operating Income Approach. Modigliani-Miller approach is in line with this
hypothesis.
Unlike its peers who carry huge debts on their books, the reason for this stark
difference is because the other Indian players are seriously looking at major M&A
activity across the globe. Post 2008 the automobile sector has seen unprecedented
buyouts leading the pack is the Indias largest Tata groups JLR & SsangYong by
M&M, when acquisitions of this quantum are done the firms take the route of
leverage and go for a leveraged buyout.
But MSIL is devoid of any of such activity may it be locally or internationally, maybe
this is one of the reasons why MSIL by only concentrating on its core competencies
has not only been able to sustain the market leadership instead is building on the
share yoy.

Table no.4

*source: http://www.bseindia.com/bseplus/AnnualReport

The lower D/E of MSIL although shuns it from the financial leverage that it could
have gained but at the same time the company has no pressures from the investors
like the other automobile companies are facing. MSIL unlike other players cannot go
for international acquisitions because that would create a conflict of interest.

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Chart.2

Capital Structure Trend

25000
21496
19078

20000

15674
15000

14308
12182
9565

10000
5000
847
0

2014

962
2013

271
2012

389
2011

905
2010

debt

Moving average (debt )

equity

Moving average (equity )

758
2009

The Equity component which includes the Equity share capital & Retained earnings
has seen a CAGR of 14.75% for the last 6 years which signifies that the company has
loads of internal sourcing for its capex.

Working Capital

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The working capital is nothing but anything excess of current assets over current
liabilities, the working capital is totally dependent on the business model the firm
adapts, if we assume a company has no credit purchases or sales and pays all the
expenses as and when they occur, in this scenario the firm will have the net working
capital as zero, but a business cannot operate in such a scenario, there will be trade
payables, receivables, inventories etc.,

Table no.5

figures in crores rupees

Current assets
2014
9005
1763
1489
648
1283
363
14551

2013
5250
1872
1535
814
1134
553
11158

2012
4754
1837
1006
2463
779
381
11220

2011
3996
1483
881
2530
703
195
9788

2010
5273
1227
849
162
1595
88
9194

2009
1168
921
978
1968
1654
98
6787

short term loan

trade payables
other current
(B)

1237
4999
1320
7556

868
4277
1088
6233

1092
3466
1593
6151

403
2692
996
4091

4
2346
683
3033

4
2592
597
3193

Net-working cap (A-B)

6995

4925

5069

5697

6161

3594

current investments
inventories
trade receivables
cash & equivalents
loans & advances
accrued income
gross working cap (A)
Current liabilities

From table no.5 we can conclude that the MSIL is in a relatively healthy position
when it comes to the working capital, if a firm has negative working capital then it
has to raise short term loans that are very costly to meet its needs, so it is very
essential for a firm to ensure that the cash conversion cycle is maintained in the
green zone.
The trend in the working capital changes over the years for MSIL can be understood
from the following line diagram.

Chart no.3
Page | 8

Working Capital Trends

16000
14000
12000
10000
8000
6000
4000
2000
0
2014

2013

2012

current assets

2011
current liabilities

2010

2009

Net WC

The company has always maintained a cushion while operating with minimal level
of doubtful debts and not raising too much loans, it never had a working capital
crisis like many of the airline companies today are facing, it also particularly can be
attributed to the industry here the operating cycle is smaller as compared to the
airline industry.

Valuation using DDM

This method of valuation of any company is possible only when the firm is paying
dividends regularly and MSIL has consistently paid dividends over the years, the
formula is
Dividend per share
DDM

=
r-g

To calculate the expected dividend per share we can use the dividend paid for FY14
and with the g we can ascertain the expected dividend. To find the growth rate the
pay-out ratio has to be used, g= ROE (1-payout ratio)

Page | 9

Net income preference dividend

ROE

2048
=

Equity (share cap + reserves)

=0.095
21496

The growth rate will be 0.095 (1-0.15), pay-out ratio of 0.15 is the average of the last 6
years, g is 0.0875.
To calculate the r, required rate of return, we can use the CAPM model
CAPM = Rf + (Rm Rf)
Rf here we are assuming the 10 year GOI bonds which have a yield of 7.79%
r will be 14.17% and the dividend paid last year was 12 with a g of 8.75% the
expected dividend will be 13.05

Value of the share using the DDM

13.05
DDM

Rs.450.65 per share

(0.141-0.112)

Using this model the value of the share comes down to Rs.450 per share which is not
even 15% of the market price of Rs. 3305 today, this is the disadvantage in this
method the companies having less dividend pay-out are valued lower, if we compare
the market value with the intrinsic value ascertained as per DDM using the growth
model the stock is over-valued.

Page | 10

References:

1.
2.
3.
4.
5.
6.

http://www.bseindia.com/bseplus/AnnualReport/532500/5325000314.pdf
http://www.marutisuzuki.com/GujaratProjectInfo.aspx
http://www.tatamotors.com/
http://www.bseindia.com/bseplus/AnnualReport/500570/5005700314.pdf
http://www.bseindia.com/
http://articles.economictimes.indiatimes.com/2014-0916/news/53983482_1_total-dividend-majors-tcs-and-infosys-et500-companies

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