The Hindu : A successful drive

Online edition of India's National Newspaper
Monday, Jun 16, 2003

Opinion

Opinion - Editorials

A successful drive

EVEN THOUGH VERY few had doubted the success of Maruti Udyog's share offer, the initial response has been particularly gratifying. The company has been India's largest car-maker, manufacturing and selling a little over 3,30,000 cars during fiscal 2003, around 54 out of every 100 vehicles sold in the country. Suzuki, the Japanese collaborator and the majority shareholder of the company, is a formidable force in the small car segment worldwide. Much of the action in India has been in the small car segment and Suzuki's enlarged association — the public issue is just one of the enabling routes — will give the company a special edge in meeting competition. Maruti has had a very good track record in a financial sense too. Last year, its net profit was Rs. 146 crores and its net worth stood at Rs. 3009 crores. These and many other positive factors automatically ensure the success of its share offer, an offer of sale by the Government of India of 72,243,300 equity shares of Rs.5 each at a minimum price of Rs. 115.

It would be a pity, however, if the evaluation of Maruti's success were restricted to narrow financial parameters. When viewed, as it ought to be, in a larger context, the share issue's success has important messages for public policy concerning economic reforms, the disinvestment process and of course the Indian automobile industry. Maruti, which, way back in 1986, gave India its first modern automobile (the 800), could discover its strengths in an even more meaningful way after the passenger car industry was deregulated in the early 1990s.The world's largest car-makers, GM, Ford, Daewoo, Hyundai, Daimler Chrysler and Skoda have all set up bases in India, some with full manufacturing facilities and others only assembly units. Collectively they have drawn into the country the largest foreign direct investment for any sector in the reform era. Equally profound has been the impact of such a large investment in all related sectors such as automobile ancillaries and components, tyres, auto dealerships and financing of vehicles. Although less clear at this stage, the spurt in the ownership of personal transportation vehicles (the two-wheeler segment has received a tremendous boost) has drawn attention to the failings of the road infrastructure and the urgent necessity of investing in mass urban transportation systems.

Specific to the disinvestment process, the Maruti experience, it has already been claimed, will help in the forthcoming sales of companies such as Nalco and BPCL. The capital market has indeed received a boost, with opportunities being thrown open, after a long time to invest in a well-run company, previously in the Government fold. Investors, whose appetite has thus been whetted, will hopefully view the forthcoming offerings more favourably. It is also likely that the presence of a strategic partner (who now assumes control) has enabled the company to get a much higher valuation. The company's public offer is the culmination of a process that saw the once squabbling equal promoters agreeing on a time-bound method of altering the capital structure. The Government's stake now at 45.8 per cent will come down to a little over 20 per cent after the public offer. Suzuki already has majority stake with over 52 per cent. It might be early to draw conclusions, but the success of future divestments will depend on how flexible the policy is going to be given that each case is going to be unique.

It is in the passenger car segment that Maruti has already left an indelible mark. Catering to all the segments — A (cars priced below Rs. 3 lakhs) to D (between Rs. 10 lakhs and Rs. 25 lakhs) — the company's success has been its dominance in the small car segment, till date the fastest growing. Given its early start and the important cost advantages emanating from depreciated plant and machinery and the established brand name, it is unlikely that there would be many more serious competitors in that segment. With the public issue, Maruti gets a chance to demonstrate that the appeal for its brand extends to the share market too.

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