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How Maruti Suzuki profited from privatisation

Though the government made handsome gains when it exited Maruti Suzuki, the company has proved to be a multibagger even from there

How Maruti Suzuki profited from privatisation

In the 1980s, streets in Indian cities were being ruled by the likes of Hindustan Motors' tank-like Ambassador car and Premier Motors' uninspiring Padmini. Issues like licence raj, an inferior technology, lack of local infrastructure were bottlenecks in the development of a robust automobile sector in India.

During that time, the Indian government contemplated reviving Maruti and building a small car for Indian masses. In 1981, it formed a JV with Japan's Suzuki Motor and gave the new entity, Maruti Suzuki, a 14-month time period to launch a new car. In the JV, Suzuki invested only about Rs 20 crore for its 26 per cent stake and the company was valued at around Rs 77 crore. Maruti Suzuki proved to be a rare public-sector undertaking, as within five years of its inception, the company sold over 1,00,000 cars and turned profitable.

The divestment
Several factors contributed to the government losing control over Maruti and the eventual disinvestment. Over the years, Suzuki raised its stake in the JV - first from 26 to 40 per cent in 1987 and then, to 50 per cent by 1992 - which made it an equal partner alongside the government. However, the control of the company still mostly remained with the government. By the late 90s, relations between the two owners turned sour over who would head the company. Once Suzuki's appeal to Delhi High Court against management appointments by the government was turned down, the company went ahead to seek international arbitration against the government.

The Vajpayee government in 1999 started turning the tables. Driven by its disinvestment focus, the government started pushing for privatisation. The government first sold the controlling rights in Maruti to Suzuki for around Rs 1,000 crore. Next came the IPO in 2003. Maruti's IPO was a runaway success, with the issue being oversubscribed at 13 times its size. The government raised another Rs 1,000 crore approximately by divesting its 27.5 per cent stake through the IPO.

The outcome
One may think that if Suzuki weren't allowed to take over Maruti, the company would have suffered the same fate as the likes of Hindustan Motors and Premier Motors. Although these companies had a foreign partner, the management control largely remained with the Indian owners. The reforms of the 90s opened the Indian market to global competition, with Korean, Japanese, European auto companies entering the country. As the competition increased, the market share of Maruti did dwindle from a peak of 80 per cent in the 1980s. However, cars became more affordable and the overall automobile market got a much-needed fillip. In 2007-08, the government completely sold out of Maruti, selling its 10.3 per cent stake. Overall, the government managed to raise around Rs 6,000 crore through various stake sales in Maruti. That's a neat return for roughly Rs 57 crore investment in JV in 1981-82.

However, as the numbers in the tables show, Maruti Suzuki has continued to do well. As against a market cap of around Rs 24,000 crore in 2007, the company's current market cap stands at about Rs 2.15 lakh crore.