Maruti Udyog: Racing ahead

With substantial capex plans, Maruti Udyog is revving up to take on competition head on.

Maruti Udyog has upped its capital expenditure by Rs 3,000 crore to Rs 9,000 crore to be completed by 2010.

The additional funds will be spent on enhancing the car capacity at its new engine and transmission plant in Manesar from 1 lakh to 3 lakh units a year by FY08.

In the next five years, Maruti is planning around five new models in addition to variants and upgrades. And, in about four years, its production capacity will almost double.

The Indian passenger car market should grow at around 10 per cent a year, given the strong consumption demand.

Thus, the diesel engine for its Swift model will help Maruti compete with other diesel cars in the market, especially now that Tata Motors has tied up with Fiat for the same diesel technology.

However, the diesel Swift may partly cannibalise sales of the petrol Swift. Moreover, the competitive environment for small cars is becoming somewhat difficult with Toyota and Honda talking of small cars too.

The additional capacity being built for exports to Nissan and Suzuki would help Maruti scale up its operations and make tremendous strategic sense, given its expertise in making small cars.

Indeed the export potential is huge and assured offtake from a big player like Nissan cannot but be a plus point.

While the additional capex will mean some pressure on cash flows, most of it will be financed through internal accruals, revenues from the additional investments should flow in sometime after FY08.

With positive news flow, the stock has been a big outperformer, gaining 15 per cent in the last month compared with the Sensex move of just 3 per cent.

At the current price of Rs 917, the stock, excluding Rs 88 worth of cash, trades at nearly 21 times estimated FY08 core earnings. That is somewhat expensive unless investors are willing to wait for a while to see returns.