On Thursday, the Indian initial public offering market will open to one of the most eagerly awaited public issues in recent times: the Maruti IPO.

The offering from India's largest passenger car manufacturer Maruti Udyog opens for subscription on June 12 and closes on June 19. The Indian government is putting on sale 72,243,300 equity shares of Rs 5 each at a floor price of Rs 115 per share.

Following the completion of the issue, the government's stake in the joint venture company with Suzuki Motor Company will drop from 45.8 per cent to 20.8 per cent, while Japan's largest mini-car manufacturer Suzuki will hold management control with a 54.2 per cent stake.

The IPO is through a book-building route, wherein 60 per cent of the offer will be made to qualified institutional buyers on a discretionary basis, 15 per cent will be allocated to non-institutional bidders, and the balance 25 per cent will be allocated to retail investors.

How is Maruti faring?

But before we get into the dynamics of whether to invest in the Maruti Udyog IPO or not, it would be prudent to see how the overall passenger car segment and Maruti itself are faring.

Despite the fact that most Indian roads are buzzing with various Maruti models and variants since over a decade-and-a-half, the truth is that the passenger car segment has witnessed radical changes in demand, style/preferences, utility and competition. In this scenario, Maruti, though still the market leader, has since 1997-98 gradually lost share to other car manufacturing giants like Telco, Hyundai, Ford, Honda and General Motors.

So should you invest in Maruti, or hang on?

Investing in Maruti: The positives

• Despite growing competition, Maruti Udyog remains the market leader and thus for both institutional and retail investors it would appear the right time to hold equity in the company at this stage.
• Some auto analysts see a 10-12 per cent rise in sales in the current fiscal for Maruti. Sales for the flagship car have risen in recent months.
• Suzuki's expertise in the small car segment will be used effectively.
• Maruti has the largest sales and servicing network amongst all car manufacturers in the country.

Investing in Maruti: The negatives

• Even while the government's stake in Maruti will come down, the interference will not decrease as seen with other institutions like VSNL and MTNL.
• Its most popular car, Maruti 800, is outdated in technological terms.
• Competition in the compact and mid-sized car segments is stiff and with profitability poor in recent years, Maruti will need to overhaul its technological, marketing and business strategy to remain the leader.

Pricing too high, feel analysts

Most of the automobile analysts say that the offering is probably priced on the higher end.

The critical element which makes the Maruti issue different from other public offerings (which came in 2000-02), is that it is a strategic value sale.

The purpose of the offering is to list the shares, with the money flowing back to the government and none of the proceeds will go to Maruti Udyog.

"This could be seen as a deal between the government and Suzuki. There will be an element of control premium incorporated in the pricing of the issue. Investors will have to look closely at the pricing, particularly post-listing," says Jayesh Shah, head analyst, KJMC Capital Market, a Bombay Stock Exchange and National Stock Exchange brokerage firm.

"While the government is assured of its booty, considering that Suzuki has underwritten the offer, there's nothing much in the IPO for the general investor," a dealer with the investment arm of a state development bank said, on condition of anonymity.

A report by Mumbai-based brokerage Alchemy Share and Stockbrokers says that the IPO is aggressively priced.

The report says the offering does not leave much on the table for investors, viewed from an investment horizon of three to six months.

Some fund managers with a longer-term view feel that the price must be seen against future prospects, and not only the recent P/E (price to equity ratio).

Media reports say that there are other mega offerings in the pipeline, like the Hyundai issue, for instance. If exposure to the automobile sector is what investors are looking for, there could be others on the way.

"Considering Hyundai's emerging status in the Indian market and the lack of government involvement, it could turn out to be a better pick than Maruti," say analysts.

The competition linked to the compact car segment notwithstanding, Maruti could face problems linked to its higher end mid-sized (segment C) models.

The company will need to strengthen its position in this segment, where it has a much smaller penetration. Maruti's share in this segment has fallen from 30 per cent in 1999-00 to 16 per cent in 2002-03.

Maruti currently has three cars in segment C -- Esteem, Versa and the Baleno, of which the latter two have still to make a mark.

Analysts also say that Maruti's real value as an investment would be seen only in the long term.

"Maruti is the market leader and the large institutions and funds realize that the public offering will be their best bet to get into this company," said Avinash Gorakshekhar, automobile analyst with leading domestic brokerage Emkay Securities Ltd in a recent report.

The industry overview

• The Indian passenger car segment is set to grow by 9.5 per cent CAGR (compounded annual growth rate) between fiscal 2002-2007, the Maruti Udyog prospectus states.
• Figures from the Society of Indian Automobile Manufacturers show that cars have outpaced other segments in the automobile industry by a considerable margin for the period April 2002-03. Cars recorded a growth rate of 28 per cent compared to an overall industry growth rate of 0.78 per cent in this period.
• The mini/compact car segment (which Maruti Udyog focuses on) has constituted 85 per cent of the total passenger cars sold in the Indian market in April 02-03. Maruti is the sole manufacturer of cars in Segment A and has a nearly 39 per cent market share in segment B.
• Segment A is expected to grow at a CAGR of 2.7 per cent while segment B would see annual growth of 12.5 per cent. In FY2003, there were eight models in this segment.
• The higher end large premier cars in segment C, D and E constitute 15 per cent of the car market, with 11 manufacturers and 24 models. This segment would see higher growth rates between 12-35 per cent between FY 2002-2007.

The Maruti story: A backgrounder

Maruti Udyog sold 330,000 cars in India in fiscal year 2003 and as stated earlier, is India's largest car manufacturer with a 54.6 per cent market share in 2002-03. It has however in recent years been consistently been losing out to other players like Hyundai and Telco in the compact car segment. (See table).

In terms of pure financials, Maruti achieved consolidated sales of Rs 9,420 crore (Rs 94.20 billion) for the year ended March 31, 2003 with total expenditure at Rs 9,140 crore (Rs 91.40 billion).

The company's profit after tax stood at Rs 146.4 crore (Rs 1.464 billion), up by 40 per cent over Rs 104.5 crore (Rs 1.045 billion) year-on-year and it declared a 30 per cent dividend for the fiscal year ended 2003.

The company's net worth stands at Rs 3,009 crore (Rs 30.09 billion) and its total reserves and surplus are at Rs 2,953 crore (Rs 29.53 billion), its offer document states.

Maruti Udyog sees its strengths as having expertise in the small car technology and providing quality products in an extensive range. However the same could be said for some of the recent global car manufacturers in India.

Maruti has an extensive sales, dealership and servicing network, an integrated manufacturing facility and strong capital resources.

Its business strategy and outlook will be based on the past, focussing on the small car segment and try to enhance its product range through Suzuki's expertise.

The company's thrust towards penetration of the market will continue to boost pure volumes.

But key to the survival strategy in the future will be cost competitiveness, particularly the Segment B, where the players and consumer demand will be higher in coming years.

Conclusion

The issue is priced on the higher side, but investors with a higher risk-reward appetite could subscribe to the offering. In those terms, it would be the right time to get into the company.

There will be concerns which investors will have post-listing. There is a possibility that the price could fall marginally post-listing, so retail investors should not panic.

The book-running lead managers to the issue, Kotak Mahindra Capital Company, will of course make sure that investor interest and commitment is not lost post-listing.

The market grapevine is that two foreign institutional investors Merrill Lynch Investment Managers and Barings Asset Management Company are showing interest in the offering, besides foreign funds like Schroders, Capital International and Templeton.

The Indian IPO market has really not been tested in recent times. Only five issues (three from the banking sector) hit the market in 2002 and just four in 2001.

Data collated shows that 21 of the 24 IPOs listed over the past four years are trading below their issue price.