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With the automobile industry witnessing strong growth on account of increasing demand for four-wheelers, urbanisation, a shift towards electric vehicles (EVs), and strong government support, the Hyundai IPO couldn’t have come at a better time.
Maruti Suzuki and Hyundai Motors are leading players in India’s automobile market, but which is the better investment? Let’s see how they compare on various parameters.
Business overview
# Hyundai Motor India
Hyundai Motor India is part of the Hyundai Motor Group, the world’s third-largest automaker based on passenger vehicle sales, and has been the second-largest automaker in India’s passenger vehicle market for more than a decade. It has also been India’s largest exporter of passenger vehicles for almost two decades. Since 1998 it has sold and exported nearly 12 million vehicles in India.
The company has a wide service network with more than 1,377 sales outlets and 1,561 service outlets covering 957 cities and towns across India.
It has a broad portfolio of vehicles including sedans, hatchbacks and SUVs. It is also expanding its presence in the EV segment.
# Maruti Suzuki India
Maruti Suzuki, a subsidiary of Suzuki Motor Corporation, Japan, is India’s largest passenger vehicle company in terms of production and sales. It offers a wide range of vehicles, from hatchbacks to compact SUVs and premium sedans.
In the past few decades, the company has expanded its operations beyond India and exports vehicles to several markets including Nepal, Bangladesh, Bhutan, Africa, Egypt, Europe and Australia.
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Maruti Suzuki India is known for manufacturing fuel-efficient vehicles and selling them at affordable prices. It has a strong after-sales network with more than 4,000 touch points covering 1,989 towns and cities.
Although the company hasn’t introduced an EV, it has a presence in the hybrid car segment. It has also partnered with Toyota to leverage its expertise in EV technology and manufacture EVs in India. It’s also one of the largest players in pre-owned cars and has a pan-India reach.
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Source: Equitymaster
Maruti Suzuki India’s market cap of ₹3.82 trillion is higher than Hyundai Motor India’s ₹1.59 trillion. Maruti Suzuki also has a larger market share (41.7%) in passenger vehicles than Hyundai Motors India (14.6%). Affordable pricing and fuel efficiency have helped Maruti Suzuki gain popularity among the masses, though Hyundai Motors India has had its fair share of successes, including Santro and Creta.
# Revenue
Both Hyundai Motor India and Maruti Suzuki India earn the majority of their revenue from passenger vehicles, followed by after-sales services and spares.
In the past four years, Maruti Suzuki India’s sales have grown at a compound annual growth rate (CAGR) of 14.3%, primarily on account of high sales volume, which has grown at a CAGR of 8.4% in the past three years due to the relaunch of existing models such as Baleno, Swift, Ertiga and Wagon R. The launch of compressed natural gas (CNG) variants has also helped the company dominate the market.
For Hyundai, sales grew at a CAGR of 14.3% over the past four years, driven by domestic sales. Sales volume grew at a CAGR of 8.4% on account of improved semiconductor activity, new launches including facelifts of existing models, and a material order backlog.
Clearly, Maruti Suzuki leads in terms of revenue, revenue growth and sales volume. However, in terms of volume growth, Hyundai Motors is right behind it.
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Source: Equitymaster and annual reports
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Source: Annual reports
# Profitability
To assess profitability, we must look at earnings before interest, tax, depreciation and amortisation (Ebitda) and net profit growth.
In the past four years, Hyundai Motor India’s Ebitda and net profit grew at a CAGR of 21.1% and 34%, respectively. Profit growth was on account of price hikes and better operating leverage.
For Maruti Suzuki India, Ebitda and net profit grew at a CAGR of 28.5% and 32.4%, respectively, on account of higher price realisations, price hikes, and an increasing product mix in favour of compact cars and utility vehicles.
In terms of profitability, Maruti Suzuki India is clearly way ahead of Hyundai Motor India.
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Source: Equitymaster and annual reports
# Debt management
Having debt on the books isn’t always a bad thing. However, not managing it well can prove fatal.
Maruti Suzuki India is a debt-free company with strong cash flows. It is currently undertaking huge capex to increase its production capacity to almost four million units by 2030. For this, the company plans to invest ₹1.25 trillion in phases. The first phase is expected to be operational by 2025 and the second in 2028. The company also plans to add customer touch points across the country.
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Hyundai Motor India, on the other hand, has minimal debt on its books and strong cash flows to support its business. The company has plans for ₹1,000-3,000 crore of capex a year for the next few years to expand its EV offerings, expand its production capacity, and build a strong after-sales network.
It is also developing its EV supply chain and has invested in a battery assembly plant with a capacity of around 75,000 battery packs, which is expected to be operational in 2025.
# Financial efficiency
Return ratios help assess how efficiently a company runs its business. The two ratios that are most widely used are return on capital employed (RoCE) and return on equity (RoE).
The RoCE of Hyundai Motor India and Maruti Suzuki averaged 35.7% and 14.5%, respectively, in the past three years, while the RoE averaged 32.5% and 11.3%, respectively.
Clearly, Hyundai Motor India leads in terms of financial efficiency.
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Source: Equitymaster and annual reports
#Dividends
Companies sometimes share a part of their profits with shareholders through dividends. A high and consistently growing dividend is considered a good sign as it indicates that the company’s profits are stable.
Hyundai Motor and Maruti Suzuki have consistently paid dividends to their shareholders. In the past three years, the dividend per share of Hyundai Motors grew by a CAGR of 93.3%, while Maruti Suzuki’s grew at a CAGR of 29.4%. Maruti’s dividend yield averaged 1% and the dividend payout averaged 36.7% over the past three years.
Clearly, Hyundai Motor pays larger dividends to its shareholders. However, now that the company has been listed, it remains to be seen if this trend will continue.
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Source: Equitymaster and annual reports
# Valuation
Valuation ratios tell us whether a company is overvalued or undervalued. The two most widely used ones are price to earnings (P/E) and price to book value (P/B). The P/E of Hyundai Motor and Maruti Suzuki are 26.3 and 26.5, respectively, while the P/B of Maruti Suzuki is 4.3.
Clearly, both companies are trading at a similar valuation. The industry P/E is also at around 26x, indicating that the companies are trading at the industry average.
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Source: Equitymaster and annual reports
So, which auto stock is better?
Maruti Suzuki leads on revenue growth, profit growth and debt management. However, in terms of financial efficiency and dividend payment, Hyundai Motor is ahead.
Hyundai Motor India is focussing on ramping up its production targets and building a strong after-sales network. It also plans to launch its first locally produced EV in India by 2025 and aims to produce five more models by 2030. It’s also expected to leverage its extensive sales network to expand the number of charging stations to 485 by 2030. It is developing an EV supply chain and has invested in a battery assembly plant.
Maruti India, on the other hand, is India’s largest passenger vehicle player. It relies heavily on affordable cars to dominate the market. However, it is slowly changing its strategy by introducing cars in the premium segment. It also has plans for huge capex to expand its production capacity to four million units by 2030, and has entered into an agreement with Toyota to manufacture EVs for Indian roads.
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Both companies are set to join the EV revolution and it remains to be seen which one will win the race.
However, it is important to remember that the automobile industry has significant risks, including cyclicality, so one must be cautious before investing in such companies.
Make sure to conduct thorough research before making any investment decisions, and ensure that your investments align with your financial objectives and your tolerance for risk.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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