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Joy Tuscano

With revenues of Rs 763.33 crore, Swaraj Mazda (NSE:SWARAJMAZD) is the smallest player by volume in the medium and heavy commercial vehicle market (M&HCV) and light commercial vehicle market (LCV). It has a market share of 5.41% in passenger carriers market and 1.58% in goods carrier market of M&HCV.^[1] In case of LCV market it has a market share of 8.07% in case of passenger carriers and 1.39% in case of goods carriers.^[1] Over the past five years the revenues and net profit have grown at average annual growth rate of 10% and 5% respectively.^{[2] [3]} The Raw material costs fluctuations affect the net profit and operating margin of Swaraj Mazda as the Raw material costs comprises of about 84.46% of the price of the finished products as compared to the industry average of 70% to 74%.^[4]

Business Overview

Swaraj Mazda Limited is a light commercial vehicle and medium and heavy commercial vehicle manufacturer in India. The Company's product portfolio caters to specialized sub-segments for cargo and passenger applications.^[5] In the passenger segment, the Company's products include ambulances, dumper placers, water tankers and troop carriers.^[5] It had also developed four wheel drive and compressed natural gas (CNG) vehicles plus airbrake versions.^[5] The company operates through its associates Punjab Tractors Limited, Swaraj Engines Limited, Swaraj Automotives Limited, Mazda Motor Corporation and Sumitomo Corporation.^[5]The company exports its products to various countries like Bangladesh, Kenya, Tanzania, Nepal, Zambia, Ghana, Ivory Coast, Rwanda, Seychelles Syria and Jordan^[6] Its plant is located at village Asron, Nawanshahar district in the state of Punjab.^[7]

Business and Financial Metrics

Swaraj Mazda debt to equity and inventory turnover ratio^[8]

Swaraj Mazda revenues and net profit^[2]

Swaraj Mazda operating margin and net profit margin^[9]

From FY2004 to FY 2008, sales revenues have grown from Rs 545.35 crore to Rs 763.33 crore, at average annual rate of around 10%.^[2][3] In the same period, net profit grew from Rs 21 crore to Rs 25.2 crore by over 5% average annual growth rate.^[2][3] In FY2006 and FY2007 the net profit had declined and stagnated at around Rs 16 crore. In FY2008, the company reported a 56% growth in net profit.^[10]But in the later half of 2008, due to general economic slowdown, the sales of Swaraj Mazda in the quarter ending December fell by 74% as compared to the same quarter in FY2007.^[9] With the fall in sales, the operating margin fell from 8% to -18.2% and the net profit margin fell from 3.8% to -24.5%.^[9] The debt to equity ratio has gone down from 1.52 to 0.17.^[8] Further on 19th March 2009,a rights issue of Rs 80 crore was announced to infuse more equity in to the business.^[11] The company has taken steps to infuse efficiency in to the business. The inventory turnover ratio has gone up to 9.11 from 6.63 over the four years.^[8]

Share holding pattern: The foreign promoters namely,Sumitomo owns 39.49% of Swaraj Mazda, whereas the Indian promoters namely, Mahindra & Mahindra Ltd through its subsidiary,Punjab tractors owns another 14.04% of the company.^[12] On Dec 31 2008, Mahindra & Mahindra Ltd announced that it would pull out of Swaraj Mazda as it has a ‘no-compete’ clause with ITEC in its LCV market.^[13] Sumitomo Corporation has agreed to purchase the entire Punjab tractors stake.^[14] FII's own another 9.31%. No mutual fund has any ownership of the company, on the other hand PE firms like Actis, CDC and Reliance Capital are invested in the company.^[13]Banks and Financial Institutions own only about 0.06% share in the company.^[12]

Business segments

Swaraj Mazda business is involved in the manufacture of medium and heavy commercial vehicle and light commercial vehicle. Both of these two segments can be subdivided in to passenger carriers and goods carriers.

Passenger Carriers: In case of passenger carriers in manufacture of medium and heavy commercial vehicle, Swaraj Mazda sold 2,090 vehicles in FY2008 as compared to 1,422 in FY2007, showing a growth of 47%.^[1] The market share increased from 4.96% to 5.41% within the year in this category.^[1] In case of light commercial vehicles passenger carriers, Swaraj Mazda sales dropped by 10% taking the vehicles produced in FY2008 to 2,234 as compared to 2,492 in FY2007.^[1] The market share decreased from 10.5% to 8.07% within the year in this category. Since inception, Swaraj Mazda has sold a total of 42,300 passenger vehicles.^[1]

Goods Carriers: In case of goods carriers in manufacture of medium and heavy commercial vehicle, Swaraj Mazda sold 3,663 vehicles in FY2008 as compared to 4,300 in FY2007, showing a decrease in volumes sold by 15% as compared to industry average of only 6%.^[1] The market share decreased from 1.74% to 1.58% within the year in this category.^[1] In case of light commercial vehiclesgoods carriers, Swaraj Mazda sales increased by 28% taking the vehicles produced in FY2008 to 2,610 as compared to 2,047 in FY2007.^[1] The market share increased from 1.22% to 1.39% within the year in this category.^[1] Since inception, Swaraj Mazda has sold a total of 78,000 trucks.^[1]

Key Trends and Forces

Economic slowdown resulting in adverse impact on the sales

Automobile industry is a cyclical industry. It is substantially affected by general economic conditions. The demand is influenced by factors including the growth rate of the economy, easy availability of credit, increase in disposable income, interest rates, freight rates and oil prices.^[15] Lack of vehicle finance availability, lower growth on GDP and/or increases in fuel prices lead to a decline in the demand for automobiles. The Indian economy has shown a sharp decline in GDP from 7.1% in the 2nd quarter of FY2008-09 to 5.3% in 3rd quarter of FY2008-09.^[16] The decrease in freight rates due to slowdown of economy also leads to decrease in demand for commercial vehicles as expansion of fleet size is stopped. The freight rates dropped by 9.4% in 2008.^[17] Despite the 62% decline in the international gasoline prices, the gasoline prices have dropped by only 10% in India.^[18] All this factors have affected the sales of The Company's product portfolio caters to specialized sub-segments for cargo and passenger applications.^[5]. In Feb 2009, the sales in commercial vehicles segment showed a decline of 53% as compared to that of Feb 2008.^[19]

Raw material price fluctuations directly affect the operating margin and net profit margin

World steel prices in USD/tonne^[20]

Rubber Prices in sen/Kg^[21]

Raw material costs comprises of about 84.46% of the price of the finished products.^[4] Any price increase of the raw materials have a direct bearing on the overall operating margin. As can be seen from the Amex steel index and the world steel price index, there is high degree of volatility in the steel prices. This volatility not only affects the operating margin but also the inventory management of the steel required for production.^[22] In August 2008 steel prices peaked to over 1100$/tonne 40% higher then the steel price in January 2008.^[23] Whereas on the other hand in March 2009, the steel prices have fallen to 4 year low of $473/tonne.^[24] Tyres are also an important part of the raw material required for manufacturing. Tyre prices are correlated to the rubber prices. The chart above shows the volatility present in the rubber market. The rubber volatility also affects the operating margin and consequently the net profit margin.

Development of the rail network resulting in adverse impact on the sales

Development of Indian rail network and the freight rates has a direct impact on the sales of Medium and heavy commercial vehicles used for long haul. On October 5, 2006 Indian railways began the work of the Railway Freight Corridor.^[25] The project plan is to connect all the major cities in India with special track capable of carrying double decker wagon freight trains with greater axle load of 30 tonnes per wagon, each train having around 200 wagons and a speed of 150 km/hr.^[26] Successful completion of the project would increase the freight carrying capacity of Indian railways by 78%^[27] This would adversely affect the sales of medium and heavy commercial vehicles. On 10th February, 2009 the work on the first phase of eastern freight corridor commenced. The work on the western freight corridor is planned to start in March 2009.^[28] The entire project is planned to be completed by Dec 2014.^[29]

Competition

• Tata Motors -Based in Mumbai, India, Tata Motors Limited is a part of Tata Group. It manufactures commercial and passenger vehicles primarily in India. It offers passenger cars, multi-utility vehicles, and pick-ups; medium and heavy commercial vehicles, such as rigid trucks, tractor trailers, and tippers; intermediate, light, and small commercial trucks; buses; and defense related vehicles. The company, through its subsidiaries, also provide engineering and automotive products; manufacture of construction equipment; automotive vehicle components manufacturing and supply chain activities; and provision of machine tools and factory automation products, as well as offers high-precision tooling, and plastic and electronic components for automotive and computer applications. In addition, it provides automotive retailing and services, as well as financing for the vehicles sold by the company. The company markets its products in Europe, Africa, the Middle East, south Asia, south east Asia, and Australia.^[30]

• Mahindra & Mahindra Ltd - The company manufactures a range of automotive vehicles, agricultural tractors, implements, and industrial engines. It is also involved in property development and construction activities. The company offers various multi utility vehicles, light commercial vehicles, three-wheelers, and tractors as well as spare parts and related services. It also provides various services related to financing, leasing, and hire purchase of automobiles and tractors. In addition it also offers design and engineering services to the automotive, aerospace, and general engineering industries; and produces automotive components, as well as forgings, gears, steel, stampings, and special polymers. It is headquartered in Mumbai, India.^[31]

• Eicher Motors (EICHERMOT.EQ-IN) -Headquartered in New Delhi, Eicher Motors Limited manufactures and markets trucks, buses, motorcycles, automotive gears, and components in India. It operates in four segments: Commercial Vehicles, Two Wheelers, Components, and Others. The Commercial Vehicles segment offers CNG trucks, cruiser buses, buses on HCB platform, and tippers. The Two Wheelers segment provides motorcycles and bikes. The Components segment offers gears, gear boxes, construction and earthmoving equipment, and forklifts. The Others segment provides engineering products to automotive, aerospace, heavy engineering, consumer durables, power generation, and other segments. Eicher Motors has a joint venture agreement with Volvo AB.^[32]

• Force Motors (FORCEMOT-BY) -The Group's principal activity is to manufacture and market utility and light commercial vehicles, agricultural tractors and diesel engines. Its plant are located at Bombay Pune road, Akurdi, Pune and Pithampur, District Dhar, Madhya Pradesh.^[33] With technical collaboration of MAN AG, Germany, Force Motors has a range of heavy commercial vehicles with a payload capacity ranging from 16 to 50 tonnes.^[34]

Financial Comparison of the competitors:

Market share

Market share of Light commercial vehicles in India^[40]

Market share of Medium and Heavy Commercial Vehicles in India^[41]

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10} Scribd, DBS chalomandalam securities,Indian auto sector
2. ↑ ^{2.0 2.1 2.2 2.3} moneycontrol,Swaraj Mazda, annual result, P&L
3. ↑ ^{3.0 3.1 3.2} [Average Annual Growth is calculated by dividing the past four years revenue increase by the number of years]
4. ↑ ^{4.0 4.1} Rediff money, Swaraj Mazda, Ratios, Component ratios
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} reuters, Swaraj Mazda Ltd (Bombay Stock Exchange), company overview
6. ↑ auto india mart, Swaraj Mazda Limited
7. ↑ corporate information snapshot,swaraj mazda limited
8. ↑ ^{8.0 8.1 8.2} rediff money,Swaraj Mazda, Ratios
9. ↑ ^{9.0 9.1 9.2} moneycontrol,Swaraj Mazda, quaterly result, P&L
10. ↑ Financial express, Punjab Tractors to sell 51% in Swaraj Mazda
11. ↑ Business standard, Swaraj Mazda to have Rs 80 crore rights issue
12. ↑ ^{12.0 12.1 12.2} Swaraj Mazda share holding pattern, rediff Money wiz
13. ↑ ^{13.0 13.1} Cyber steering, news, M&M set to drive out of Swaraj Mazda
14. ↑ Mechanist, Punjab Tractors to sell stake in Swaraj Mazda to Sumitomo-Corporation, Japan
15. ↑ Tata Motors, SEC filing, Risk associated with Our Business and the Automotive Industry, Page 10
16. ↑ Times of India, GDP growth at 6-year low
17. ↑ Freight rates begin to fall for World Merchant fleet
18. ↑ Indian express, Petrol to go cheaper by Rs 5 from Wednesday
19. ↑ Wheels un plugged, commercial vehicles sales decline
20. ↑ steel on the net, MEPS Steel Product Price Levels across 2007 - 2008, Current prices & historic pricing levels.
21. ↑ Malaysian rubber board, monthly average prices
22. ↑ One steel, steel and tube holdings limited,chairman's address
23. ↑ High Beam, Builders Feel Squeeze as Steel Prices Jump
24. ↑ Purchasing, Steel-market prices reflect lack of demand at OEM, service center levels
25. ↑ PM lays the foundation stone for the Western Rail Freight Corridor
26. ↑ Vedic Instincts, Aspirations : The Indian Railway Freight Corridor
27. ↑ Business line, Low-profile Lalu, Speech on Railway Budget
28. ↑ Trade chakra, Railway Budget
29. ↑ Freight corridor, choice of traction, Motive Power Directorate
30. ↑ Linkedin company profile, tata motors
31. ↑ Linkedin, Manendar and manendra
32. ↑ Linkedin company profile, Eicher Motors
33. ↑ Wright reports, company profile, Force motors
34. ↑ Linkedin company profile, force motors
35. ↑ rediff money, maruti suzuki profile
36. ↑ Ashok Leyland rediff moneyt
37. ↑ Eicher motors rediff moneyt
38. ↑ Mahendra & Mahendra, Presentation
39. ↑ rediff money, force motors
40. ↑ Indian auto sector, Light commercial vehicles market
41. ↑ Indian auto sector, Medium and Heavy Commercial Vehicles market