Indian Institute of Management Kozhikode

Corporate Valuation

Professor Abhilash S Nair

Final Project

Maruti Suzuki India Limited - Valuation

Index

1. Introduction
2. Industry analysis
3. About Maruti
4. Why Maruti
5. Competitor analysis
6. Literature review
7. Methodology
8. Discounted Cash Flow method
9. Relative Valuation – Multiples approach
10. Real options pricing method
11. Conclusion
1. Introduction:

The automobile industry at large, has been faced with many challenges and disruptions -
electric mobility, rise of ridesharing, autonomous vehicles and increasing automation in
plants to name a few. Along with this, 2020 posed a distinct challenge with the advent of
COVID-19 and strict travel restrictions. With all this, this group is curious to understand what
is the new normal for the automobile industry in the context of India. Maruti Suzuki has been
a leading player in the automobile industry in India. They have the largest network of
dealerships in India. Keeping up with the trend of rise in electric mobility, Maruti partnered
with Toyota to build electric vehicle technology. This group, thus, seeks to understand the
trends in the automobile industry in the short and long term. The company Maruti Suzuki
would also be valued and benchmarked against its competitors. Ultimately, we would
benchmark the intrinsic value with the market value of the stock and recommend our
investment outlook.

Objective:

The objective of this project report is to conduct a comprehensive analysis of the automotive
industry in India, including its current state, trends, opportunities, and challenges. The report
aims to provide insights into the industry's growth potential, market dynamics, and
competitive landscape, which will help stakeholders and investors in making informed
decisions. Further the objective is to perform a comprehensive financial analysis of Maruti
Suzuki India Limited (MSIL) and to determine its intrinsic value using various valuation
techniques. The report aims to provide insights into the company's financial health,
performance, and future prospects, which will help investors and stakeholders in making
informed investment decisions.

Scope of the Report:

The report will cover an in-depth analysis of the Indian automotive industry, including
passenger vehicles, commercial vehicles, two-wheelers, and three-wheelers. It will examine
the industry's current market size, growth rate, and drivers of growth, including demographic
changes, urbanization, and economic development.

Furthermore, the report will analyse the industry's competitive landscape by examining the
major players, their market share, product portfolio, and strategies. It will also assess the
regulatory environment and government policies that impact the industry's growth, including
emission norms, taxation, and trade policies.

In addition, the report will explore emerging trends in the industry, such as electric vehicles,
connected cars, and autonomous driving, and assess their potential impact on the industry's
future growth. The company in focus for the analysis would be Maruti Suzuki and the report
will perform analysis of MSIL's financial statements, including its income statement, balance
sheet, and cash flow statement for the past three years.

Furthermore, the report will evaluate MSIL's growth prospects by analyzing its historical and
projected revenue growth rates, profitability margins, and capital expenditures. It will also
assess the company's competitive position in the automobile industry by examining its market
share, product portfolio, and brand recognition.

2. Industry analysis –

Global Automotive Industry

Introduction:

The automotive industry is a vital part of the global economy, with a massive influence on
employment, trade, and economic growth. The industry has experienced significant changes
in recent years, including the shift towards electric and autonomous vehicles, increasing
competition, and changing consumer preferences. This report provides a detailed analysis of
the global automotive industry, including its current state, future prospects, opportunities, and
challenges.

Industry Overview:
The global automotive industry is a vast and complex industry that encompasses the
production, design, development, and sale of motor vehicles, including passenger cars,
commercial vehicles, and motorcycles. The industry has a significant impact on the global
economy, with a wide range of stakeholders, including automakers, suppliers, dealerships,
and customers. This report provides a detailed overview of the global automotive industry,
including its history, current state, and future prospects.

History:

The automotive industry has a long and rich history, dating back to the late 1800s when the
first gasoline-powered automobile was invented. The industry saw significant growth in the
early 1900s, with the mass production of vehicles, including the famous Ford Model T. The
industry continued to evolve throughout the 20th century, with the introduction of new
technologies, such as fuel injection, air conditioning, and electronic systems.

Current State:

The global automotive industry is one of the largest industries in the world, with a market
size of around USD 4.1 trillion in 2020. The industry comprises several segments, including
passenger vehicles, commercial vehicles, and two and three-wheelers. The industry is highly
competitive, with a large number of automakers and suppliers operating globally.

The Asia-Pacific region is the largest market for the automotive industry, accounting for
around 50% of global vehicle sales in 2020. Europe and North America are the other
significant markets, accounting for around 20% and 17% of global vehicle sales, respectively.

The automotive industry is experiencing significant changes, driven by technological

advancements, changing consumer preferences, and government regulations. One of the most
significant trends in the industry is the shift towards electric and autonomous vehicles. The
adoption of electric vehicles is driven by the need to reduce greenhouse gas emissions, while
autonomous vehicles aim to increase safety and reduce traffic congestion.

Current Trends:

The automotive industry is experiencing significant changes due to technological

advancements, changing consumer preferences, and government regulations. One of the most
significant trends in the industry is the shift towards electric and autonomous vehicles. The
adoption of electric vehicles is driven by the need to reduce greenhouse gas emissions, while
autonomous vehicles aim to increase safety and reduce traffic congestion.

Another trend in the industry is the increasing use of technology in vehicles, such as driver
assistance systems, infotainment systems, and connectivity features. These technologies
enhance the driving experience and provide new revenue opportunities for automakers.

Opportunities:

The global automotive industry presents several opportunities for growth, including the
adoption of electric and autonomous vehicles, increased demand for luxury and premium
vehicles, and the expansion of emerging markets. The growth of emerging markets, including
China, India, and Southeast Asia, presents a significant opportunity for automakers to expand
their customer base and increase their market share.

Challenges:

Despite the opportunities, the global automotive industry also faces several challenges,
including increasing competition, changing consumer preferences, and government
regulations. The increasing competition from new entrants, including tech companies and
startups, poses a threat to established automakers.

Furthermore, changing consumer preferences towards ride-sharing and electric vehicles could
disrupt traditional sales models and impact the industry's revenue streams. Government
regulations, including emission norms and safety standards, can also increase costs for
automakers and affect their profitability.

The global automotive industry is undergoing significant changes, driven by technological

advancements, changing consumer preferences, and government regulations. While the
industry presents several opportunities for growth, automakers need to navigate the
challenges of increasing competition, changing consumer preferences, and regulatory
compliance. By adopting new technologies, developing innovative products, and expanding
into emerging markets, automakers can continue to thrive in the global automotive industry.
Indian Automotive Industry

The Indian automotive industry has been one of the fastest-growing industries in the world. It
is the fourth-largest automotive market in the world, after China, the United States, and
Japan. The industry is a key contributor to the Indian economy, accounting for 7.5% of the
country's GDP and 49% of its manufacturing GDP.

Market Size and Trends:

The Indian automotive industry has witnessed a significant growth trajectory in the last few
years, with sales volume increasing from 20.4 million units in FY16 to 23.3 million units in
FY20. The industry is expected to grow at a CAGR of 15.8% during 2021-2026, driven by
rising disposable incomes, urbanization, and the government's push for electric vehicles
(EVs).

Segment-wise Analysis:

The Indian automotive industry can be broadly categorized into two segments: two-wheelers
and four-wheelers.

Two-Wheelers:

Two-wheelers dominate the Indian automotive market, accounting for more than 80% of the
total sales. The segment includes motorcycles, scooters, and mopeds. The market leader in
this segment is Hero MotoCorp, followed by Honda Motorcycle and Scooter India (HMSI),
TVS Motors, and Bajaj Auto.

Four-Wheelers:

The four-wheeler segment includes passenger cars, commercial vehicles, and three-wheelers.
The market leader in the passenger car segment is Maruti Suzuki, followed by Hyundai, Tata
Motors, and Mahindra & Mahindra. In the commercial vehicle segment, Tata Motors is the
market leader, followed by Ashok Leyland, Mahindra & Mahindra, and Eicher Motors.

Electric Vehicles:

The government of India has set an ambitious target of having 30% of all vehicles sold in the
country to be electric by 2030. To achieve this target, the government has introduced various
measures such as the FAME (Faster Adoption and Manufacturing of Electric Vehicles)
scheme, which provides subsidies for EV buyers, and the National Electric Mobility Mission
Plan (NEMMP), which aims to promote the manufacturing and adoption of EVs.

Challenges:

The Indian automotive industry is facing various challenges, including increasing

competition from international players, rising raw material prices, and a slowdown in the
economy due to the COVID-19 pandemic. In addition, the industry is also facing regulatory
challenges such as higher emission norms and safety regulations.

The Indian automotive industry has shown tremendous growth in the past few years, with a
promising future ahead. The government's push for electric vehicles, rising disposable
incomes, and urbanization are expected to drive growth in the industry. However, the
industry needs to address the challenges to sustain its growth momentum.

Key statistics:

 6th Four-Wheel Motor Vehicle Producer Globally

 22.4mn units Motor Vehicle Production
 81.8% Share of Two Wheelers in Motor Vehicle Production
  No.5 Four-Wheel Motor Vehicle Market Globally
 18.4mn units Domestic Motor Vehicle Sales
 82.2% Share of Two Wheelers in Motor Vehicle Domestic Sales
 USD 13.9bn Motor Vehicle Trade Surplus
 4.1mn units Motor Vehicle Export Volume
 USD 0.9bn Auto Component Trade Deficit

Current Situation:

The Indian automobile sector had record output and domestic sales in FY2019. However, the
industry's growth was curtailed in FY2020 due to the global economic downturn. However,
the decline was largely offset by a new record high in export volume. Rapid COVID-19
pandemic growth interrupted motor vehicle manufacturing, domestic sales, and exports in
FY2021, resulting in double-digit yearly declines (production and domestic sales fell for the
second consecutive year). This is the lowest amount of output since FY2014 when it was
21.50 million units; domestic sales were 18.39 million units, the lowest level since FY2013
when it was 17.79 million units; and exports were 4.12 million units, the highest level since
FY2014 (the lowest volume since FY2018 with 4.04mn units).

Sector numbers:

Production: 22.4mn units

Two-Wheelers: 18.3mn units
Three-Wheelers: 0.6mn units
Passenger Vehicles: 2.8mn units
Commercial Vehicles: 0.6mn units

EXPORTS
USD 14.1bn Motor Vehicle Export Value
4.1mn units Motor Vehicle Export Volume
USD 14.5bn Auto Component Exports (FY2020)

IMPORTS
USD 194.5mn Motor Vehicle Import Value
USD 15.4bn Auto Component Imports (FY2020)
DOMESTIC MARKET: 18.4mn units
Two-Wheelers: 15.1mn units
Three-Wheelers: 0.2mn units
Passenger Vehicles: 2.5mn units
Commercial Vehicles: 0.6mn units

Key Players:

Drivers:

 Low car penetration & Rising family income: There are just 20 automobiles per 1000
people in India, but this number is anticipated to climb as household incomes
improve. According to preliminary estimates, the per capita income in FY2020-21
will be Rs. 1,28,829, an increase of 11.7% from FY2017-18. Passenger vehicles
should become more affordable for local buyers as domestic income rises.
 Industrial and Infrastructure growth: The expansion of the commercial vehicle sector
goes hand in hand with the expansion of the economy's industries and infrastructure.
India's industrial and infrastructure growth is expected to pick up even as private
investments remain sluggish, thanks to the government's increased spending on
infrastructure projects like roads, irrigation, and affordable housing, as well as its
ambitious Make in India programme supported by advantageous schemes like the
Production Linked Incentive scheme.
 Growth in rural income and Urbanization: There is a large percentage of India's
consumer demand that comes from the rural population, which accounts for more than
60 percent of the country's overall population. Monsoons, the government's focus on
 boosting farm income, an increase in the minimum support price, and statements
about farm debt waivers by various states all have an influence on rural residents'
income levels and rural consumers' spending. The rural market is a major
development driver for the light commercial vehicle market. As a result of
urbanisation, India's economy has grown at a faster rate. This increasing urbanisation
will increase the need for automobiles.
 Availability of finance at competitive rates: All nationalised and scheduled banks
provide competitively priced loans for the acquisition of new automobiles. Bank loans
is the preferred method of financing new car purchases in India. Financial inclusion
and access to lower-cost, simpler financing are therefore important demand drivers for
vehicle expansion.
 Exports: Commercial cars are a popular export from India to several nations across
the world. These countries and regions are among the most important for Bangladeshi
exports. Exports are an important source of demand for this industry, accounting for
about 8% of total sales in FY21.
 Technology Improvements: Domestic OEMs are spending significantly in creating
new and sophisticated platforms to compete more effectively with foreign OEMs due
to changing regulatory requirements (such as emission norms and safety laws) and the
entrance of multinational OEMs.

Challenges or Barriers:

 Cyclical Nature of industry: With its prospects directly connected to major areas of
the economy including industrial development, infrastructure investments, and
construction space, the domestic CV displays substantial cyclicality. As the economic
cycle improves, freight rates will rise, prompting operators to add more vehicles to the
system. As a result, capacity expansion tends to outpace underlying demand. The CV
sector has been hit hard by the recent economic downturn.
 Rising Operational Costs: The cost of gasoline accounts for 50-60% of the freight
rate, making it the carriers' single greatest expense item. The operational costs have
risen as a result of the recent increase in diesel prices.
 Covid-19 pandemic: The pandemic has had a negative influence on the country's
industrial activity and economic growth, both of which are bad for the resume writing
business. In addition to affecting demand, the absence of essential components such
 as semiconductors disrupted supply. Covid-19's second wave will have a greater
influence on the CV sector.
 Transition from BS-IV to BS-VI norms: Because of extra exhaust management
components required by BS-VI regulations, the weight and complexity of MHCVs
have grown, while their prices have risen as a result.
 Impact of alternate fuels and EV’s: There has been an increased push by the Indian
government to use environmentally friendly alternative fuels like Electric Vehicles
(EVs) and CNG. The majority of automakers have announced plans to introduce
electric vehicles (EVs) in India, with Tata Motors and Mahindra among those that
have actually done so. Vehicles without diesel engines will be difficult to conceive, at
least in the foreseeable future, despite the increasing adaptability of these in the light-
duty truck and bus segments.
 Inadequate infrastructure development: The growth of the automobile sector requires
comprehensive infrastructural development. India's infrastructure, particularly in
ports, power, and road transportation, has lagged behind total demand. These
deficiencies have harmed India's auto industry's ability to compete internationally.
 Steep rise in ownership cost of vehicles: By the end of September 2018, the Insurance
Regulatory and Development Authority (IRDA) had changed the insurance standards.
Two-wheelers and photovoltaics (PVs) saw an increase in insurance costs as a result
of the change. This occurred at the same time as the price of gasoline and diesel rose.
About 7% of the cost of PVs went up due to insurance and fuel price increases,
respectively.
 Congestion and pollution: PVs and two-wheelers account for more than half of all
sales in India's Tier 1 and Tier 2 cities. There is a dearth of city planning and
infrastructure development in a number of cities throughout the world. In addition, as
the population grows in all cities, traffic congestion and pollution levels rise
alarmingly. Congestion and pollution have a negative influence on customer
preferences for buying new cars, while encouraging people to choose public transit.
 Safety norms increases vehicle cost: PVs and two-wheelers account for more than half
of all sales in India's Tier 1 and Tier 2 cities. There is a dearth of city planning and
infrastructure development in a number of cities throughout the world. In addition, as
the population grows in all cities, traffic congestion and pollution levels rise
alarmingly. Congestion and pollution have a negative influence on customer
preferences for buying new cars, while encouraging people to choose public transit.
 All these norms increase the vehicle cost and adversely impact the demand.

3. About Maruti

Maruti Suzuki India Limited was established in 1981. A joint venture agreement was signed
between the Government of India and Suzuki Motor Corporation (SMC), Japan in 1982. The
Company became a subsidiary of SMC in 2002. In terms of production volume and sales, the
Company is now SMC’s largest subsidiary. SMC currently holds 56.37% of its equity stake.
It is a public limited company and its shares are traded at the National Stock Exchange (NSE)
and the Bombay Stock Exchange (BSE).

Product mix:

Key events:

1992: Suzuki Motor Corporation, Japan increased their stake in the company to 50%

2008: Signed an agreement with the Adani Group for exporting 200,000 units annually

2015: Maruti launched a successful sedan, Ciaz model cars. The S-Cross created a new
market segment

2016: Baleno and Brezza exceeded the expectations of demand and hatchback Baleno sales
crossed 1 Lakh unit sales
2017: Its two Smart Hybrid vehicles - Ciaz SHVS and Ertiga SHVS have crossed sales of 1
Lakh units

2020: Registered an overall volume decline of 16.1% due to weak demand environment in
both demand, export markets

Sales:

Sales volume (FY2022):

 4. Why Maruti?

We selected Maruti because of the following reasons

 Leading Automobile Company:

Market leader in passenger vehicle in India with cumulative production of 24 mn and

yearly sales of 14,57,862 and Exports to 90+ Countries. It also Offers a wide variety
of supportive products and services like insurance, rewards, driving school, genuine
parts, accessories etc

 Launch of New Models:

Maruti Suzuki has launched several new models in recent years, including the Vitara
Brezza, Baleno, and the Ignis. These models have been well-received by consumers
and have helped the company maintain its dominant position in the Indian automotive
market.

 Focus on Electric Vehicles:

Maruti Suzuki has been focusing on the development of electric vehicles (EVs) and
has announced plans to launch its first EV in 2022. The company has also set a target
of selling 1 million green vehicles (including hybrid and electric) by 2030. High
growth prospects: In the recent year, overall sales of the Company in domestic market
declined by ~8% while the sales of CNG vehicles grew by ~50%. Clearly indicating
growing interest in CNG Vehicles the Company has a well laid out plan in
electrification of its powertrain ranging from smart hybrids to strong hybrids to
electric vehicles Suzuki Motor Corporation is also developing the battery
manufacturing ecosystem in India

 Partnership with Toyota:

 Maruti Suzuki has entered into a partnership with Toyota to share technology and
development costs. The partnership is expected to help Maruti Suzuki reduce costs
and accelerate the development of new products.

 Expansion of Production Capacity:

Maruti Suzuki has been expanding its production capacity in India to meet the
growing demand for its products. The company has set up new manufacturing
facilities in Gujarat and has also increased the capacity of its existing plants.

 Introduction of New Technologies:

Maruti Suzuki has been introducing new technologies in its products to improve fuel
efficiency and reduce emissions. The company has introduced the Smart Hybrid
Technology in some of its models, which combines an electric motor with a petrol
engine to improve fuel efficiency.

 Online Sales Platform:

Maruti Suzuki has launched an online sales platform called “Maruti Suzuki Arena” to
offer customers a more convenient way to buy cars. The platform allows customers to
choose their car model, select their preferred variant, and configure the car as per their
requirements.

 In conclusion, Maruti Suzuki has been constantly innovating and introducing new
products to stay ahead of the competition in the Indian automotive market. The
company's focus on electric vehicles, partnership with Toyota, expansion of
production capacity, introduction of new technologies, and online sales platform are
some of the recent developments that have helped the company maintain its dominant
position in the Indian automotive industry.

5. Competitor Analysis
6. Literature review
 Financing India’s Transition to Electric Vehicles:
 Assessment of market and investment opportunity created by the anticipated
adoption of electric vehicles in India
 Expected post COVID-19 economic recovery on the back of rise in electric
vehicles through the generation of jobs and creation of new sectors
 Identification of a USD 180 billion opportunity in vehicle production and
charging infrastructure deployment

Future scope: Given the strides towards electric vehicles manufacturing by

Maruti and their partnership with Toyota for EV technology, we seek to
identify its impact on the valuation of the company.

 Investment Outlook for the Automotive Industry

  Assessment of impact of advanced driver-assistance systems, ridesharing and
electric mobility on the automotive industry
 Identification of factors that influence portfolio positioning for investors
 Discussion on:
o Sustainable value creation vs transitory opportunities
o Developed markets vs emerging markets
o Growth vs substitution effects
o Isolated developments vs grand unified theory

Future Scope: Benchmarking Maruti Suzuki with its peers on the identified
factors and understanding investor sentiment because of the disruptions in the
automotive industry in India

 Reimagining the Auto Industry’s Future: It’s now or never

 Impact of COVID-19 on the automotive industry
 Opportunity for companies to overhaul organisation structures and operations
in the changing environment
 Suggested moves for the companies:
o Increased focus on digital channels
o Move to recurring revenue streams
o Optimisation of asset development
o Zero-based budgeting
o Resilience of supply chain

Future Scope: Assessing the impact of COVID-19 on Maruti Suzuki and

expected performance both in the short and long term while also analysing the
resilience of the company based on above suggested moves.

 The Impact of Electric Vehicles on Investments: Assessment of the impact of

electric vehicles on investments:
o Identification of winners and losers in the automobile industry due to the rise
in electric mobility
o Consideration of implications on energy sector
o Evaluating the impact of EVs on country exposure
 Future Scope: Identifying the winners and losers in the context of India and
assessment of the impact of EVs on Maruti Suzuki relative to its peers

 Equity Research Report:

o Weak results in Q1FY22 due to disruptions caused by the pandemic leading to
lower capacity utilization and negative operating leverage
o Growth expected to be driven by lower dealer inventory levels and revival of
demand in urban and rural areas
o Shortage of semiconductor and increase in raw material prices
o increase and competition intensity

Future Scope: Valuation of the company based on the future estimates, capex
guidance and other takeaways from earnings overall.

7. Methodology

We initiated with understanding the automobile industry in India, and MSIL’s peers to have a
broader understanding of the industry as a whole and Maruti’s position in the market vis-à-vis
its peers, to come with fair valuation of MSIL using DCF, relative valuations and real
options.

8. Discounted Cash Flow method

The Primary approach to value MSIL was to use Discounted Cash Flow (DCF) method.

The first crucial step was to calculate unlevered Free Cash Flow to the Firm, i.e., FCFFs
for the for the next 10 years.

· We first projected the revenues for the next 10 years, the first 2-year revenue came
broker consensus while the other 7 years we projected the revenues based on the India’s
Long Term GDP growth rate of 6% as per Statista and Damodaran’s website, we tapered
down the growth rate from the last broker consensus to the 10th year to be 6%

 EBITDA margin was kept as constant per last year of broker consensus
  Depreciation was projected as a percentage of Capex and was tapered down to
98% (2% accounted for inflation) in the 10th year
 Capex was projected as a percentage of the sales and was kept constant percentage
from the broker consensus last year to the 10th year
 Change in NWC was calculated as percentage of change in sales and the
percentage was then kept constant from the broker consensus last year to the 10 th
year
 Tax Rate was calculated as weighted effective tax rate over the last years
 ITS was calculated accordingly keeping the EBT margin constant as percentage of
sales

FCFF was then calculated as NOPAT – Capex + D&A – Change in NWC

The first crucial step was to calculate various discount rates; Ka, Ke, Kd WACC and K* to
calculate the firm value using APV, WACC and M/E.

 Ke and Ka= Estimated using CAPM

 Equity Risk Premium = As per NYU Stern data
 Risk-Free Rate (Rf) = 10 Year GOI Bond Yield
 Beta = Used MSIL’s Sensex unlevered and levered Beta, also recalculated using
industry’s Beta and unlevering it
 Cost of Debt (Kd) = Weighted average cost of debt derived from company annual
report
 L (Long Term D/V) = As per NYU Stern data, automobile industry average
 Tax Rate: Weighted effective tax rate over the last years

Firm Value

1. Using APV with int ITS@Kd Perp ITS@Ka and Vul i.e., int CFs @ Ka and
Perp CF @ Ka = 1,251,995 mn (INR)
2. Using WACC = 766,883 mn (INR)
3. ME based valuation.. Intermittent ITS @ Kd, Perpetual ITS@Kme and Vul
i.e., intermittent CFs @Ka and Perp CF @ Ka = 1,036,412 mn (INR)
Interestingly at firm value of 1,251,995 mn the intrinsic value per share comes out to be
INR 4,118 which is in line with per share intrinsic price in Thomson eikon, and implies
that the MSIL’s stock is currently trading at a premium of ~107% to DCF valuation.
10. Real Option Valuation

A real option is a flexibility that is owned by any entity to undertake or abandon a future
investment. This provides economic value to that company and hence should be considered
as a part of the enterprise value.

In the automobile industry in India, and specifically, in the passenger vehicle segment, the
option to launch different products can be taken into consideration. For Maruti, there are
three options that can be explored, on the basis of the current disruption trends in the
automobile industry globally. The options that can be explored are:
 1. Expansion of electric vehicles segment
2. Development of autonomous vehicles
3. Expansion of online channels

Electric Vehicles

With the rise in environmental awareness and the imposition of regulations, as a result, there
has been significant development in the electric vehicles segment globally. Many countries
like UK, Norway and Germany have planned to ban the sales of non-electric vehicles by
2025. Globally, the electric vehicles market is expected to grow at a CAGR of 26.8%.
Manufacturing of electric vehicles and their components is expected to raise the contribution
of manufacturing to 25% in India’s GDP. Further, a total of $60 billion could be saved on oil
imports by 2030. In addition, the government has launched various initiatives like FAME and
reducing the GST on electric vehicles. The entry of Tesla in India is another signal of India
becoming the next electric vehicles hub.

Maruti has already partnered with Toyota to develop electric vehicles technology. Given all
this, it can be anticipated that MSIL has a number of real options to expand their electric
vehicles segment. For different project, different times to maturity can be estimated. For
instance, for some projects time to maturity can be taken to be approximately 9 years because
the government of India aims 100% electrification by 2030 and according to some reports
30% of the new vehicles will be electric by 2030. The sale of total vehicles can be estimated
using the growth in population and the historical growth in sales of vehicles. The trend of
shared mobility should also be kept in mind while estimating the sales of vehicles. With this
and the estimated price of cars, the revenue can be calculated. The initial investment, capital
expenditure and other costs should be estimated along with the depreciation and amortization.
Further, the source of funds should be planned to arrive at the free cash flows. Using all this,
the NPV of the project can be calculated. Using, Black Scholes, option valuation can be done
by taking a call option and estimating the free cash flows, the investment required, volatility,
time to maturity and the risk-free rate.

Autonomous vehicles

For India, the manufacturing and adoption of autonomous vehicles is still a distant dream.
This is because of the lack of employment, traffic and roads in India and the high R&D
investment requirement. Having said that, the world is making great strides towards
autonomous vehicles and India cannot overlook the advantages completely. Further, electric
vehicles bring with them the opportunity to develop autonomous vehicles. Thus, in the future
MSIL might look towards this option and hence, this may further impact the valuation of
MSIL.

Expansion of online channels

Customers today explore vehicles online. According to Google Auto Gear Shift India 2020
study, “95% of new car buys and 94% of used car buyers research online”. Automakers can
take advantage of the expanding online channels adoption by:

1. Influencing buying decisions through brand awareness

2. Building digital presence and a digital store for a holistic customer experience
leveraging augmented reality
3. Provide a seamless and unified marketing, sales and after-sales support
4. KPI measurement for product improvement and understanding consumer needs
5. Anticipating future trends and staying ahead of the competition

While there is no doubt that an online presence is indispensable for companies to grow, the
extent of digitisation would vary from company to company. Given this, MSIL has the option
to expand into online channels and choose what all they want to offer digitally.

Again, the valuation can be done using Black Scholes by estimating the free cash flows, the
investment required, volatility, time to maturity and the risk-free rate.

11. Conclusion

Based on DCF using APV, we have arrived at a share price of Rs 4,118.

Appendix
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