MUL is worth too much for any partner to buy out the other
SUPPOSE either the government or Suzuki wanted to buy out the other partner's stake, how much would they have to shell out? Going merely by the popular parameters—the price to earnings multiple, and the price to book value—that have been embraced by Dalal Street following their popularisation at Wall Street, the market price of Maruti Udyog Ltd (MUL) should be at least Rs 367 for a Rs 10 share.
There is no company in India that can match Maruti's strengths in its market. The closest benchmarking can be done with truck manufacturer Telco, which has a PE multiple of 11.2, and a PB value of 2.5. Extending these to Maruti, which has an EPS of Rs 39 and a book value of Rs 118, we get a price band of between Rs 295 and Rs 437. The figure of Rs 367 is an average of the two.
But when you look at the non-numerical parameters—massive marketshare, unmatched brand equity, growth prospects, and the like—the valuation should be much higher. Maruti should command a PE of more than 20 (the lowest its net profits grew in the last three years was by 25 per cent), which should take its price to Rs 780 and its market capitalisation to Rs 10,319 crore. That would rank it 10th among all Indian companies, and fourth among all private sector companies, after Reliance Industries, Hindustan Lever and ITC.
Half of that is Rs 5,160 crore: what either partner would have to pay the other, if at all the other agreed to sell. That's five times Suzuki's worldwide profits in 1996, and half its current equity base. As for the government, Rs 5,160 crore is approximately the amount that the government is hoping—rather optimistically—to raise through the disinvestment process in this financial year. In short, it's a hell of a lot of money for either.