ABOUT MARUTI UDYOG LTD.

MUL INFO

Maruti Udyog Limited, a subsidiary of Suzuki Motor Corporation of Japan, has been the leader of the Indian car market for about two decades. Its manufacturing plant, located some 25 km south of New Delhi in Gurgaon, has an installed capacity of 3,50,000 units per annum, with a capability to produce about half a million vehicles.

The company has a portfolio of 11 brands, including Maruti 800, Omni, premium small car Zen, international brands Alto and WagonR, off-roader Gypsy, mid size Esteem, luxury car Baleno, the MPV, Versa, Swift and Luxury SUV Grand Vitara XL7.

In recent years, Maruti has made major strides towards its goal of becoming Suzuki Motor Corporation's R and D hub for Asia. It has introduced upgraded versions of WagonR Zen and Esteem, completely designed and styled in-house.

Maruti's contribution as the engine of growth of the Indian auto industry, indeed its impact on the lifestyle and psyche of an entire generation of Indian middle class, is widely acknowledged. Its emotional connect with the customer continues.

Maruti tops customer satisfaction again for sixth year in a row according to the J.D. Power Asia Pacific 2005 India Customer Satisfaction Index (CSI) Study. The company has also ranked highest in India Sales Satisfaction Study. The company's quality systems and practices have been rated as a "benchmark for the automotive industry world-wide" by A V Belgium, global auditors for International Organisation for Standardisation.

In keeping with its leadership position, Maruti supports safe driving and traffic management through mass media messages and a state-of-the art driving training and research institute that it manages for the Delhi Government.The company's service businesses including sale and purchase of pre owned cars (TrueValue), lease and fleet management service for corporates (N2N), Maruti Insurance and Maruti Finance are now fully operational.. These initiatives, besides providing total mobility solutions to customers in a convenient and transparent manner, have helped improve economic viability of The Companys dealerships. The company is listed on Bombay Stock Exchange and National Stock Exchange.

MARUTI -DRIVING A NATION

One might imagine that a car brand that redefines the meaning of personal transport in a country of a billion people must be pretty powerful. And yet the unassuming people's car, the Maruti 800 (always referred to by its cubic capacity), has ruled the Indian roads for almost two decades and keeps the cash registers ringing for its manufacturer the Suzuki Motor Corporation, acclaimed for its small car ingenuity worldwide.

Not surprisingly, the name Maruti has become generic for "small car" in India, since it is invariably most Indian's first car. It is probably also the world's cheapest car, priced at US$ 5,000. Considering the car's accessibility, Maruti's tagline "Realize your dreams" seems especially apt.

The car's humble beginning dates back to the year 1982 when Suzuki Motor Corporation entered into a joint venture with the Government of India to manufacture fuel-efficient passenger cars under the brand name Maruti (a winged Hindu deity) at its plant outside Delhi. The company was christened Maruti Udyog Limited (MUL), and the first car rolled off the lot in December 1983 with a 796cc 3-cylinder engine that delivered 39.5 bhp at a very affordable price of US$ 960. Additionally the car ushered in a work culture and Japanese philosophy for super-efficient manufacturing. It was a formula that brought about the renaissance of the Indian components industry, rebuilding it from scratch over 20 years.

Doubting Thomases wrote the car off as a "matchbox" for its diminutive proportions and pronounced it likely to cave in at the slightest bump. But the seemingly innocuous-looking car proved that looks are deceptive when it debuted on the Indian roads. For its tiny dimensions the car was surprisingly spacious enough to carry four adults. It did its job with great lan and proved a delight to drive in start-stop city traffic. Suzuki's precision technology coupled with Maruti's sheer determination and will to attain high levels of indigenousness have enabled a value-for-money pricing strategy for its vehicles.

Buoyed by the 800's success, MUL launched the car's van avatar, the Omni, in 1984. The van was an instant hit among large families and taxi operators who took to its sheer functionality and economy. Between 1973 and 1983, the year Maruti 800 made its advent, the Indian car market had stagnated at a total volume of 35,000 cars. Maruti 800 was the change agent, reaching a total production of 1 million vehicles in March 1994. It crossed the 2 million mark in 1997. Together, 2.5 million units of the two models (Omni) have been sold so far, representing a staggering 50 percent of all cars sold in India in the last 18 years.

Over its lifetime the Maruti 800 has been put to the test on the most severest of Indian terrain (known for its inhospitable nature) by the most insensitive Indian drivers, but the car's excellent maneuverability assisted by a lightweight body structure weighing all of 665kgs with an efficient small capacity engine makes it extremely drivable, leaving its critics behind. There have been numerous instances where the Maruti 800 has registered six digit mileage measurements on the speedometer without an engine overhaul. The car's versatility can be gauged from the fact that it has assumed every role for which it was not originally conceived. But the USP of this car, which makes it all the more invincible and enviable, is its unmatched fuel efficiency of 16-18 kilometers per liter under any circumstances coupled with ridiculously cheap spares backed by a nationwide strong sales and service support. No other car on Indian roads is more economical to own and run, with spare parts available on virtually every corner of the sub-continent.

The road to fame was not easy for Maruti. For over a decade, MUL's focus had been churning out as many 800s as possible, rather than doing anything to the car itself. The only major facelifts given to the car were in 1986 and 1997 with the body exteriors. When competition arrived in 1999 from the Korean carmakers Hyundai and Daewoo in the form of flagship brands Santro and Matiz, Maruti 800's near ten-year monopoly came under fire.

Maruti became further waylaid when India's second largest automaker, Telco, challenged the automaker for non-compliance with Euro2 emission norms. Suzuki responded aggressively by transplanting the car's engine with a modern MPFI unit and improved the car's breathing characteristics through a 4-valve-per-cylinder head; a new 5-speed gearbox further complemented the engine. The result was a zippier Maruti 800, which delivered 47 horses from the same 800cc displacement and achieved a top speed of 140kph. The car was widely acclaimed as a wolf in sheep's clothing.

Over the years, Maruti has quietly set the stage for the successful launch of Suzuki's international range in the Indian car market by way of the Zen, Alto, Wagon R, Gypsy, Esteem/Swift, Versa and the Baleno, all backed by the inherent value proposition of high on quality, fuel efficient, and compared with the competition, low in cost. This formula has been largely responsible for a new generation of Indian car users swearing by the Maruti brand name.

Maruti 800 also holds the distinction of being the first "made in India" car to be exported to select European and South American markets. In 2000, MUL was the lead in its home market and in the JD Power Customer Satisfaction study.

However, today the Indian car market is in a transition phase with the Maruti 800 steadily losing market share to bigger hatchbacks. Although the car retains its numero uno status, its market share has declined from 49.5 percent in 1991 to a modest 21.7 percent now. Realizing that the 800 is toward the end of its product lifecycle, Suzuki has conceived the AltoLX as its replacement. The AltoLX has Marutis 800cc engine bolted on to a contemporary chassis, which conforms to the latest safety norms.

Despite the passing of the torch, for now Maruti 800 remains the best-selling car in India since its launch two decades ago. Its low cost structure remains unmatched even today. No manufacturer, not even MUL itself, would be able to make a car like the 800 today, at the same price. The very fact that Maruti 800 still adorns the porch of millions of Indian houses is itself a tribute to the inherent strength of the car. As foreign automakers make a beeline for the still virgin Indian automobile market, Maruti 800 continues to gratify the basic commuter needs for the common Indian. It will go down in automotive history as a car that put a nation on wheels.1. BRANDING

There is so much that has been read, said and written about brands. A brand is a name, term, sign, symbol, design or a combination of these intended to identify the goods and services of one seller to distinguish them from those of another. A brand is like a human being and passes through successive stages, right from its birth, growth, maturity and aging. A brand is like a baby when it is born. In its lifecycle its grows and makes friends and bond with people and the real test of its friendship lies in the loyalty of its friends (customers) who stick by it through the highs and lows of the brand. If the brand is indeed a person, then he or she will communicate with others through a distinct style of dressing, appearance, personality, values and ideologies. However, if the communication from various aspects does not tie up with the persons identity then the person will be considered a split personality. In such a case friends and others will misunderstand him or her. It should be remembered that positioning is more a reflection of a product and that it stifles the rich meaning of the brand without taking into account all its potentialities.To understand the modernization of Indian Automobile Industry its very important to have fuel efficient vehicles that can save the resources. Maruti Udyog Limited was established in February 1981 through and Act of Parliament to meet the growing demand of a personal mode of transport caused by the lack of an efficient public transport system. A license and joint venture agreement was signed between govt of India and Suzuki motor company in October 1982. Maruti Suzuki has a sales network of 307 state if the art showrooms across 189 cities with a workforce of over 6000 trained sales personnel to guide the customers in finding the right car. Tata Motors(Telco) established in 1945 entered into collaboration with Daimler Benz of Germany in 1954 to manufacture commercial vehicles. The collaboration ended in 1969. Tata Motors has since grown from strength to strength. The company has spread its manufacturing facilities across India by setting up plants at Jameshpur, Pune and Lucknow. This is coupled with nation wide sales, services and spare parts network. The company enjoys a significant demand in export markets like Europe, Australia, South East Asia and Africa.

2. IMPROVING CUSTOMER SATISFACTION

Customer satisfaction research is not an end unto itself. The purpose, of study, in measuring customer satisfaction, with Indian cars brands, is to see which cars company stands in this regard in the eyes of its customers, thereby enabling service and product improvements, which will lead to higher satisfaction levels. The research is just one component in the quest to improve customer satisfaction. There are many others, including:

a. Top Management Commitment: Top management, through its actions, must show that customer satisfaction is important to it. This can be done in several ways. Acknowledging areas where the company needs to improve, Allocating appropriate resources to the improvement of customer satisfaction, Involvement of management and employees in the development of plans for customer satisfaction improvement, Linking management bonuses to satisfaction scores, Clear and frequent communication of what is being done to improve customer satisfaction.

b. Linking of Customer Satisfaction Scores With Employee and Management Monetary Incentives: This really is just a case of having management put its money where its mouth is. Monetary incentives for improving customer satisfaction scores should reach all levels of the organization, from top management to front-line employees and suppliers. Incentive programs can be structured so that all employees in an organizational unit receive compensation if the unit's customer satisfaction goals are met. Additionally, exemplary service on the part of individual employees can be rewarded on an ad hoc basis. Management incentives do not have to result in incremental expenditures; a reallocation of current incentives will suffice. For example, if 100% of a manager's bonus is dependent upon meeting operational and sales goals, the mix could be changed to include customer satisfaction goals.

c. Recognition of Employees Who Contribute to Customers' Satisfaction: This is an inexpensive way to foster customer satisfaction. The keys to success are: Making sure that all employees are aware of why a particular employee is being recognized, Making sure that each employee being recognized is worthy of recognition.

d. Identification, Measurement, and Tracking of Operational Variables Which Drive Satisfaction Scores: The results of a customer satisfaction survey need to be evaluated to determine what needs to be improved. For example, a survey may find that customer-waiting times need to be reduced. The next step should be to quantify actual customer waiting times, and to set goals and strategies for reducing them. Goals should be as specific as possible. It is better to say "we want to reduce wait times during peak periods from an average of twenty minutes to fifteen minutes by the end of June," than to say "we need to reduce customer waiting times."

e. Customer-Based Improvement Goals: This tie directly to the previous point. Once you have identified what needs to be improved, you need to develop a plan for improving each identified area. Such plans need to be based on what customers really need, rather than what management believes to be a good goal. Using the previous example, if customers really desire wait times of ten minutes or less, having management dictate that wait times must be reduced to fifteen minutes will have limited appeal with customers. You may need to do a separate survey with customers to actually set appropriate goals. If this is not economically feasible, at least talk to a number of customers and gain their input before setting a goal.

f. Plans for Improving Operational Variables: Once you have established what needs to be improved, and how much it needs to be improved, plans need to be developed to make improvement happen. The keys to successful planning are to: Involve front-line employees and management in the planning process, Make sure plans are specific, and evaluate the success of plans once they have been put into place. Measuring actual improvement in operations and customer satisfaction does this. g. Incorporation of Customer Satisfaction Skills into Employee Training Programs: Employee training programs should be modified to include: A description of the importance of customer satisfaction to the company, Descriptions of what keeps customers satisfied, A description of customer satisfaction measurement programs, recognition programs, and incentive programs, Specific employee-performance expectations with regard to keeping customers satisfied.

h. Measurement of And Plans for Improvement of Employee Satisfaction: Unhappy employees will have difficulty in keeping customers happy. You should consider measuring the satisfaction levels of employees, and then developing action plans to improve employee satisfaction.

i. Changes in Corporate Hiring Practices: Certain types of people will do a better job of satisfying customers than will other types of people, regardless of the quality of training, reward, and recognition programs. Once you have determined the types of employee behaviors are important to customers, you should incorporate this knowledge into your hiring practices.

5. REAL FACT ABOUT MARUTI

Incorporated on February 24, 1981.

MOU signed on April 4, 1982.

License and JV agreement signed on Oct 2,1982.

Plants located at Gurgaon, Haryana.

Head office located at New Delhi.

Ownership - GOI 49.74%, SMC 50%,MEMBF 0.26%.

Rapid Expansion of Capacity: From 20,000 units (one plant) in 1983 to 3,50,000 units (three plants) in 1999 Total Number of Employees : 5838 (as of March 2000) Productivity: Vehicles per employee increased from 15 in 1984-85 to 70 in 1999-2000 Highest value added per employee in 1998-99 at Rs.23.6 lakhs 95.3% attendance 2.5 days of Average Inventory Suggestions Scheme & Quality circles: Cost savings of Rs. 131.69 Cr. through 52,054 Suggestions in 1999-2000 Innovative use of IT for increased efficiency, effectiveness of communication and reduction of costs6. SOME SUCCESS STORIESVISION The leader in the Indian Automobile Industry, creating customer delight and shareholders wealth; A pride of India.

VALUES CUSTOMER OBSESSION

FAST, FLEXIBLE & FAST MOVER

INNOVATION AND CREATIVITY

NETWORKING AND PARTNERSHIP

OPENNESS AND LEARNING

HR VISION Lead and Facilitate continuous change towards organizational excellence; create a learning and vibrant organisation with high sense of pride amongst its members.CULTURE BUILDING INITIATIVES SINCE INCEPTION Japanese Management philosophy of Team Spirit Common uniform

Open office

Common Canteen

Open Office Easy accessibility, Speedy

Communication and decision making

Morning Meetings

Morning Exercises

Management Committee Meetings every Tuesday

Single unaffiliated Union Excellent Industrial Relations scenario no loss of mandays due to strike/lockout etc. in past 5 yrs.

Maruti Udyog Sahyog Samiti a forum for Non-Unionised Staff Delayered Organisation Structure Workers (Techn. / Asst.), Supervisors, Executives, Managers

FOCUS OF EFFECTIVE MANAGEMENT PROCESS SINCE INCEPTION Top Driven HR MD is also Director HR

HRs role of a facilitator

Line managers as HR Managers

Year of the Customer HR Internal Customer Focus

Focus on Internal & External Customer

HR INITIATIVES Prepare MUL Strategic Business Plan-2000-2005; to achieve the Vision & Goal Improve the performance Appraisal system - its process, skill & usage introduce a Potential Appraisal System

Improvements in internal & external Training & its effective utilisation. Training need identification Systematic career planning; Job Rotation; Empowerment; Job enrichment

Periodic communication meeting at various levels; Roll out of Vision

Raise cost consciousness for cost control and reduction

Exposure on Brand Strategy to all non-Marketing staff

Retention of Talent

INDUCTION & SUCCESSION Transparent Recruitment & Selection process

Recruitment on an All India Basis no sectoral or region specific

Recruitment of Best available Talent in the Country

- Engineers CAMPUS - IITs/RECs/Rorkee/HBTI

- ALL-INDIA TEST

- MBAs IIMs/XLRI

- CAs - Rank Holders

- Technicians - ITIs diploma holders after All

India Exam & Apprenticeship In MUL

Lateral Entry for Experienced Professionals

SUCCESSION PLANNING Potential & Performance

Vacancy - based

TRAINING & DEVELOPMENT Annual Training Plan - All Levels

Training customised to meet Organisational Objectives

Topics selected based on Vision, Values & Departmental

Feedback of Company-wide Managers

Competency Mapping to identify Individual Training Needs

Technical Training on latest Technologies abroad at SMC, Japan

STRONG FOCUS ON TRAINING INITIATIVES- Build a Learning Organisation- Continuous Value Additions to Professional Skills- Customised Training- Training to the personnel of Business PartnersOVERSEAS TRAINING Training held in co-ordination with SMC, Japan and AOTS (Assoc. for Overseas Tech. Scholarship) (Covered 1600 employees under the various schemes) 6 months SMC Training for Technicians - OJT in SMC, Japan (2 batches/yr of 50 each)

9 months Javada Training for Press, Tool & Die Specialists - Design & Maintenance

AOTS Managerial Training (4-10weeks) for Manager & above - Managerial Best Practices

AOTS Technical Training (3.5 to 6 months) for Supervisors & above - Technological Knowhow

R & D Training (2 yrs.) - Research on new Technologies

APPRAISAL & REWARDAppraisal New Appraisal System based on KRAs & Targets

Review of Targets at regular Intervals

People Development an important KRA

Reward Promotions based on Performance

Productivity & Profit-linked Incentive

Schemes

Training including Long-term SMC Japan Trg.

Highest paid workforce in the Industry, if not the Country

LEADERSHIP Vision, Value & Team Building Workshops for Top Management

CFT (Cross Functional Teams) of Managers for Major Thrust Areas

Managers sent to Joint Ventures to upgrade their practices to MUL standards

CAREER DESIGN Performance & Potential based Appraisals

Fast Track Option for High-performers

Promotions after Managers Vacancy based

Interviews for promotions above Managers

Selection of Supervisors:

Performance / Attendance / Discipline record

Written Test & Interview

Job Rotation - including Inter-functional

OUTSOURCING HR Part of our Long-term Strategic Plan

Currently Trainers hired from outside

RETENTION & EMPLOYEE WELFAREEmployee Welfare Residential Colonies for Employees Chakkarpur & Bhondsi

Hospitalisation Reimbursement on actuals without Ceiling

Vehicle Loans

Household Equipment Loans

House Building Advance

Annual Advance

MUL PF Trust for better Mgt., Service & speedy redress Proposed MUL Pension Scheme Learning Opportunity - Benchmark in Auto Technology Professional Value addition through Training Opportunity for foreign training at SMC, Japan Job Rotation & Job enrichment

EMPLOYEE ENGAGEMENT - Maruti Udyog Ltd. Employees Mutual

Benefit Fund Scheme

Managed by a 10-member Trust

Fixed Equity of 0.26%

Lock-in period of 3 years

Transferable Internally

SUGGESTION SCHEME & QUALITY CIRCLES For better quality and productivity

Through involvement of all employees and teamwork

During the year 1999-2000 :-

i) Suggestions Implemented - 52,054ii) Cost Saving (in crores) - Rs. 131.69 Croresiii) Number of QC Groups - 510iv) QC Meetings held - 7189 Target for SS & QC Suggestions Implemented - Prod. & VI - 1implmented/employee/month Other areas - 8.4 implemented/employee/month Cost Saving Rs. 165 crores (25%)increase for the Company QC Meeting - 13 meetings/QC Gp./ Year Target - 34 marks / suggestion

Company-wide QC Groups (8-15 members per group)

Monthly QC Meetings on the First Wednesday each Month

Company-wide QC Competitions - Best Team sent to SMC

MDs lunch with Best QC Team & Best Suggestion Winner

SUGGESTION MERIT EVALUATION: 5 LEVELS (A to E) Criteria - Cost Saving (per annum/one time)

- Ingenuity of Suggestion (depth of study)

- Applicability (in work area/entire plant)

SUGGESTIONS: Monetary Reward Criteria - Idea

- Efforts

- Result : Cost reduction / Q Improvement / Productivity

Improvement

FUTURE CHALLENGES- HR INITIATIVES Realigning Organization Culture Based On New Vision & Values Objective Performance Management & Development System Transparent Job Rotation & Job Enrichment Performance Linked Reward And Recognition System Career Planning & Promotion Policy Revised Recruitment Policy Competency Mapping Strong Focus On Training Initiatives Build A Learning Organization Continuous Value Addition To Professional Skill Customized Training Training To The Personnel Of Business Partners Internal Communication Union Alignment Employee Involvement & ParticipationINDIAN AUTOMOBILES INDUSTRY & MUL INDIAN AUTOMOBILES INDUSTRY & MULPassenger car penetration in India expected to increase

The penetration level of passenger cars in India is just 7 cars per 1,000 Indians compared to 12 in Sri Lanka / Pakistan and over 100 in Europe / US. We believe there is a good case for this to improve going forward. Strong GDP growth of 8% in past 3 years has lead to higher disposable incomes and new job opportunities in the high paying service segments like IT, BPO/ITES. Increased competition in the financial sector and sharp decline in interest rates, have increased car affordability. The demand for personal transport is very much there, with 25m two wheelers sold in India over the last 5 years. Upgrades to entry level cars by this segment itself can unleash a demand explosion.

Figure 1: Low car penetration in India

Excise duty cuts in compact segment

Prior to liberalization, cars were considered as a luxury item. It has taken 15 years for successive governments to reduce the excise duty from 40% initially to the present 16%. We believe that the excise duty cuts announced in the last budget will provide the incremental boost to the models in Mini and Compact segment, a stronghold of MUL.

Table 2: Excise duty cuts in compact segment

Leader in passenger car segment

MUL is the market leader in the passenger car segment in India. Inspite of extreme competition in the passenger car segment, MULs share has always hovered between 45-50% over the last 5 years.

Table 3: Market share for MUL

It is even a stronger player in the Mini and Compact sub-segments of the passenger car segment with its key brands- M800 (Mini) and Alto, Zen, WagonR and Swift (Compact) with a combined market share of ~54% (as of end August 2006).

Table 4: Leader in Mini and Compact subsegment

Every second car in the Mini and Compact segment taken together is a MUL vehicle. A strong dealership network comprising 390 dealer outlets and 2096 service workshops have been the chief reason for this recognition. Further MULs tie-up with several financial institutions has also fuelled this growth. For e.g. it has a tie-up with SBI and Mahindra Finance which helps it to tap rural markets, tie-up with Magma and Cholamandalam to tap the eastern and southern part of India respectively.

Lowest wage ratio in the industry

MUL has successfully reduced the wage bill in the last 3 years. Its wage bill as a % of sales fell from ~3.3% in FY04 to ~1.9% in FY06. This was achieved through VRS schemes (2001 and 2004) and linking of the compensation of workers with the productivity. Further, the productivity has also improved in terms of hours required to produce a vehicle as can be seen below:

Figure 2: Index of hours required to produce a vehicle

A comparison of wage bill as a % of net sales reveals that it has the lowest ratio in the industry.

Table 5: Lowest wage ratio in the industry (%)

Indigenization of parts

MUL has laid great emphasis on localization of components. It has a set up a plant which is called Suzuki Power Train. Items like the foundry unit and the transmission unit which were being imported from Japan earlier, are now are being made in India. New components are being added every few months and the process of localization begins. The higher the localization, the cost goes down because these are much cheaper than the imported components.

Most of its key models have reached nearly 100% localization levels.

Table 6: High localization level

Involvement of suppliers

The development of the auto-ancillary units in India was primarily initiated by MUL since its inception in 1981. MUL has traditionally worked in close association with its vendors to continuously localize imported parts. Along with its major vendors, MUL has now moved to tier-2 vendors. MULs entire focus is to help them in cutting down their costs, helping them in better layouts, productivity and improving productivity. MUL clubs the commodity purchases of its tier-1 and tier-2 suppliers with itself, thereby reducing their commodity cost. Streamlining its supplier base, MUL has cut down its suppliers from 400 to ~225.

Highest margins in the auto industry

MUL has been continuously working to improve operational efficiencies since 2002-03. Between FY02 and FY05 it successfully completed Challenge-30 and Challenge-50 programs whereby the target was 30% cost reduction and 50% productivity improvement by focusing on waste reduction, inventory management, and use of techniques like Kaizenetc. Also, MUL also improved its product mix in favor of higher priced models in the last few years. It has succeeded to a large extent in marketing the higher priced Alto as an entry point vehicle for new car buyers rather than the lower priced M800.

Table 7: Improving product mix

Except for MUL all the other competitors have shown a margin drop in the last few years. Further, margins of MUL are the highest in the industry

Table 8: Highest margin in the passenger car industry

MUL tops customer satisfaction surveys

MUL models have a high level of customer satisfaction. This is borne by the 7th consecutive years award from JD Power Survey for being the best in customer satisfaction. Even in the Total Customer Satisfaction 2004 (TCS) study by TNS, MUL models were ranked highest; M800 for entry compact; Zen for premium compact and Esteem for entry midsize. One important factor contributing to this, is the large 2,100 Service centers spread across the breath of India along with minute attention paid to quality by the company.

MUL has been constantly changing the looks of its cars to keep their appeal value intact. It has also been very aggressive in taking price reductions and offering incentives to push sales. Such high degree of customer satisfaction results in repeat purchases whereby an existing MUL owner prefers to go back to MUL for his second purchase or upgrade of existing one.

The importance given to quality can also be seen in drop in warranty claims over the last 5 years.

Figure 3: Warranty claims ratio

Targeting international markets

MUL has shown a very strong growth in exports with the exports growing at a CAGR of ~30% both in volume as well as value terms. The top 5 export markets were Algeria, Sri Lanka, UK, Chile and Denmark. These countries together contributed 67.3% of the total export sales during FY06.The company proposes to expand its export markets and is currently exploring the feasibility of a foray into countries like Oman, Sudan and Nicaragua. In revenue terms as well, the export revenues have increased from Rs.1,995m in FY02 to Rs.5,734m in FY06 which is a CAGR of ~30%.

Table 9: High growth in exports

Capacity expansion at just the correct time

New car manufacturing plant

The new plant Manesar commencing operations in Q3FY07 has an initial capacity of 100,000 cars, to be scaled up to 300,000 in three years, being set up with an investment of Rs.25bn. The plant is being set up by a subsidiary company, Maruti Suzuki Automobiles India Ltd (MSAL) in which MUL held 70% stake and the rest by Suzuki Motor Corporation (SMC). However, in a recent development (April 2006), Maruti has approved the purchasing of the entire shareholding

of SMC and accordingly MUL now owns 100% in MSAL.

We believe that setting up a green field plant provides the opportunity for MUL to bring in state-of-the-art manufacturing facilities. Any expansion at its existing plant would have resulted in disruption in production along with lower flexibility in setting up the new shop floor. Also, we believe that buying out the stake of SMC eliminates the issue of transfer pricing and inter-company transactions.

The key product segments in the new plant are:

Initially the plant will manufacture 100,000 Swifts (including the Diesel one).

The new car to be manufactured for the joint-venture between Nissan and Suzuki would also be produced in this new plant. Half of the 100,000 cars will be manufactured for Nissan, the rest sold locally.

New engine and transmission facility

A new plant manufacturing engines and transmission assemblies for cars would be set up with an investment of Rs.25bn. The initial annual capacity of this facility will be 100,000 diesel engines, 20,000 petrol engines and 140,000 transmission assemblies. It would be gradually expanded in line with the market demand. This facility will be under a joint venture company, renamed Suzuki Powertrain India Ltd. (earlier called Suzuki Metal India Ltd. or SMIL). Suzuki Motor Corporation holds 70% stake in Suzuki Powertrain India Ltd. while MUL holds the remaining 30%. This too will come on stream from early 2007. We believe that MUL would treat this joint-venture company as any other existing supplier to it but with a greater control over the production schedules and quality (since MUL has a stake of 30%).

New product launches (including a Diesel Swift) to further propel growth

MUL has consistently launched new models along with variants of its existing models in the past.

A phenomenon witnessed in the automobile industry is that a new model launch by a renowned player like MUL results in spurt in sales for that model thereby resulting in incremental income. For e.g. Swift has sold ~ 61,000 units in the first year of its launch. Going forward MUL will be launching 5 new models in the next five years which principally would be in the Compact segment. MUL is expected to launch the diesel version of its Swift in Q3FY07. We believe that given the technological capability and enormous brand name enjoyed by MUL, the new models would help in improving or at least maintaining market share and stay one step ahead of competition.

To manufacture cars for Nissan-Suzuki joint-venture

MULs parent company viz. Suzuki and Nissan have entered into a tie-up whereby Nissan would source cars manufactured at Maruti for exports to Europe. We believe that this is an expression of confidence in MULs manufacturing competence made by 2 global giants. The new car would be manufactured in the plant at Manesar. The car would be sold in export market under the Nissan badge and volumes of ~50,000 units are expected initially in 2008-09.

Overall a very strong financial profile

The capex of Rs.65bn over FY07-10 will be funded mainly through internal accruals. We have factored in a capex of Rs.34bn over the next 2 years. Of this, Rs.40bn is to be invested in replacement of dies/fixtures, upgradation of its existing facilities at Gurgaon. Remaining Rs.25bn are to be invested in the new plant at Manesar.

Table 10: Capex program

Debt-equity position is comfortable, a large proportion of investments are non-strategic in nature (93% for FY 06) i.e. Rs.19bn providing additional financial flexibility.

Table 11: Strong financial profile

Valuation

The final valuation of MUL comes to ~Rs.1,068/share. According to our estimates, MUL likely to achieve earning growth of 16.5% and 10.9% in FY07 and FY08, respectively. Our DCF values MUL at Rs.1,068 on a standalone basis. We expect that the company would deliver basic EPS of Rs.48.0 and Rs.53.2 in FY07 and FY08, a compounded growth of ~13.7% for the next two years. At the current price of Rs.972, the stock is quoting at 20.3x FY07E EPS of Rs.48.0 and 18.3x FY08E EPS of Rs.53.2.

Table 12: Discounted cash flow (Per Share)

Sensitivity analysis

Table 13: Sensitivity analysis

Relative valuation

On a P/E basis, MUL commands a premium over Mahindra & Mahindra as well as Tata Motors. The reason could be on account of leadership in passenger car industry, highest operating margins and the MUL brand.

Table 14: Relative valuation

Relative valuation also gives a price range for MUL between Rs.858-Rs.1,015/share. We have used Mahindra & Mahindra and Tata Motors as MULs key competitors. Based on latest Trial Twelve Months (TTM), we have tried to use relative valuation ratios like P/E, EV/EBITDA and EV/Sales.

Passenger cars segment extremely competitive

The passenger car segment in India is extremely competitive. Along with MUL, the other strong players are TML, Hyundai, Ford India, Honda Siel cars, General Motors India etc. The table below gives a snapshot of the key models of MUL and the competitive models of its competitors.

Table 15: Extreme competition

The cheapest Indian car planned for launch in 2008

MULs key competitor Tata Motors is planning to launch the cheapest car in India, expected launched targeted in 2008.

Priced at around Rs.100,000 it is expected to be extremely attractive to the Indian consumer particularly the younger families. The styling and design of the car have been completed and prototypes are being tested within the plant. It will be a rear-engine, 4-5 seat, 4-door car with about a 30 horsepower engine.

MUL currently has its M800 which is the lone offering in the Mini segment with no competitor for the last 25 years.

We believe that the competitive car from TML would create a newer segment at a price point which is lower than M800.

Further, the new car from TML would be a diesel offering which would be a further upside for the new car. We believe that this car would pull away volumes from the motorcycle segment (which is a total market of ~8m) and also the first time car buyer which principally go to MUL as of today.

Absence of a successful product on the Diesel side

Out of the total cars sold in India, around 20-22% runs on diesel. This proportion is expected to increase in the future as the petroleum prices keep on increasing everyday. However, the inherent cost benefit of around Rs.14/litre between petrol and diesel coupled with the fact that diesel cars generally give higher mileage has resulted in some of the new car buyers being attracted to diesel.

MUL traditionally has been extremely strong in the petrol technology (due to its association with Suzuki). It did have a few models with diesel option Zen and Esteem in the past. However, they have not been that successful and currently MUL does not sell any diesel vehicle.Rising raw material pricesThe principal raw materials for the company are steel, non-ferrous metals, rubber and engineering plastics. These prices have increased in the last 12-18 months as reflected by the rising raw material to sales revenue ratio trend in the last 2 years.

Table 16: Rising raw material prices

The proportion of domestic and imported steel was 20:80. As of date, this proportion has become 50:50. This proportion is expected to increase in the future in favor of domestic steel.

Company profile

Maruti Udyog Ltd. (MUL), a subsidiary of Suzuki Motor Corporation of Japan, has been the leader of the Indian car market for about two decades. Its manufacturing plant, located some 25 Km south of New Delhi in Gurgaon, has an installed capacity of 3,50,000 units per annum, with a capability to produce about half a million vehicles. The company has a portfolio of 11 brands, including Maruti 800, premium small car Zen, Swift, international brands Alto and WagonR, off-roader Gypsy, mid-size Esteem, luxury car Baleno, the MPV Omni, Versa and Luxury SUV Grand Vitara XL7.

In recent years, MUL has made major strides towards its goal of becoming Suzuki Motor Corporations R and D hub for Asia.It has introduced upgraded versions of WagonR, Zen and Esteem, completely designed and styled in-house.

Table 17: Milestones

Passenger car industry in India

The passenger vehicle industry in India is sub-divided into passenger cars, utility vehicles and multi-purpose vehicles.

The passenger car segment dominates the passenger vehicle industry with ~77% share (for FY06). The overall industry has grown by ~14% CAGR for the last 4 years.

Table 18: Sub segment in passenger vehicle industry

The passenger car industry in India can be divided into 6 sub-segments based on the length of the car Mini (Upto 3,400mm), Compact (3,401-4,000mm), Mid-size (4,001-4,500mm), Executive (4,501-4,700mm), Premium (4,701-5,000mm) and Luxury (5,001mm and above). Compact and Mid-size sub-segments dominate the passenger car industry by contributing to around 88% of the total domestic sales (cumulative figures between April to August 2006).

Figure 4: Compact and mid-size dominate the passeneger car industry in India

The top 2 players in each of the sub-segments along with their key brands and market share (as of end August 2006).

Table 19: Key players in the passenger vehicle industry

FINANCIALS OF MULThe top line (revenues) has increased by 15.5% for H1FY07 vis--vis H1FY06. This growth has been led by volume growth principally in the Compact sub-segment of the passenger car segment. While exports showed a decline, multi-purpose vehicles showed a good growth of ~16%. The overall volume growth for the company in H1FY07 stood at 15.3% vis--vis H1FY06.

The operating profit (EBITDA) for H1FY07 showed a jump of 35.7% vis--vis same period of the earlier year. The EBITDA margins for H1FY07 have expanded to 18.3% as compared to 15.6% for H1FY06. Average vehicle realization of the Company was flat at around Rs2.15 lac during H1FY07 vis--vis H1FY06. However, the margins showed improvement due to tighter control over the raw material costs. Lower interest and depreciation costs resulted in net margins for H1FY07 standing at 11.3% vis--vis 8.6% for H1FY06.

Table 20: H1FY07 volume numbers and financial discussion

Table 21: Quarter history

MULS MANAGEMENT

MULS MANAGEMENTMULs inputs primarily comprise raw materials and purchased components. Only a small amount of raw material and components consumed are imported and a much larger portion is purchased from the sources within India.

Raw Material Suppliers

The raw materials used in the manufacturing process primarily comprise steel coils and paints. In recent years, MUL is increasingly trying to localize the purchases of steel coils with a view to reduce cost. Earlier MUL used to follow the tender system for the purchase of steel. Under this system, specifications were advertised and accept the lowest price offered by a supplier who could meet the specifications. In 2001 MUL moved to the quotation system which gives them the flexibility to renegotiate the prices once an offer is submitted. Standard purchase orders are issued covering a period of six months for purchase of steel from foreign suppliers for Indian supplier the period extends up to one year. .

At MUL the role of the vendors has gradually evolved from tactical to strategically where the vendors work in close coordination with MUL to meet our long-term goals in terms of:

Component development;

Quality;

Delivery; and

Cost control.

In order to improve quality and generate economies of scale, MUL has reduced the number of vendors of components in India from 370 as of March 31, 2000 to about 100 as in 2005.

In case of repair and replacements, costs of defective components supplied are borne by the vendor.

Delivery by Vendors

MUL has a delivery instruction system that provides details of the component requirements for every 15 days, across the different variants of the various models, to the vendors. Vendors are linked to the MUL through the Internet-based information network, which maintains online information regarding order status and delivery instructions. These has helped in reducing both inventory levels and lead times required for the supply of various components and sub-assemblies, and enable the vendors to more efficiently plan and dispatch their products.

Vendors located within a radius of 100 kilometers from the manufacturing facility supply the majority of the components. This has enabled the vendors to eliminate packaging and supply components directly to the assembly line.

Reduction of Vendor Costs

In some of the major vendors MUL has implemented the MPS, which focuses on the elimination of wasteful activities in their manufacturing processes. Vendors are helped in areas such as improving their productivity, reducing the number of their components that are rejected, reducing materials handling, improving their yield from materials, and reducing their inventories. This helps reduce their costs of production, and also reduces the costs of the components required.

In addition the work is going on to integrate the vendors into the worldwide purchase system, or WWP, whereby a vendor may become the sole supplier for a Suzuki product in several countries including India. This would generate economies of scale for the vendor that will also result in the reduction of the costs.

Vendor Quality Control

Quality management system such as ISO 9000/ QS 9000 forms the basis for producing a quality product. To assist small and medium vendors in achieving ISO 9000 certification, in 1995 MUL adopted a cluster approach wherein vendors are grouped together, are trained in quality management and are assisted in obtaining ISO 9000 certification. This cluster approach was extended to helping vendors attain QS 9000 certification. Periodic vendor quality system audits are conduct in order to ensure that quality standards are sustained.

Imported components

Imported components are mainly purchase from Suzuki

Sales network

Dealers: MUL has the largest network of dealers amongst car manufacturers in India. As of March 31, 2003, dealers had employed more than 3,500 sales executives. Sales network is linked with the MUL through the secure extranet-based information network. The sales of spares, accessories and Automobile-related services such as insurance and finance serve as additional sources of revenue for the dealers. The availability of these related products and services at sales outlets also helps to attract customers to the outlets and promotes sales of the cars.

Agreements with our dealers MUL dealers provide services to customers such as pre-delivery inspection of vehicles, sales of cars, after sales service, supply of spare parts and other services that promote sales of cars within

the territory for which they are appointed. Dealers are required to maintain their outlets in accordance with thespecifications and employ well-trained sales staff. Agreements with the dealers are usually of five years. These agreements are generally renewable for successive terms of three years, by mutual agreement.

Enhancing dealer performance: The performance of the dealers is followed and improvements are suggested frequently. In order to assist the dealers in enhancing their performance and capabilities, MUL has introduced a concept of Balanced Scorecard. Using this tool, the performance of a dealership in several areas of operations, including sales, service, spares and accessories, financial management and management systems is measured.

Dealers who perform well on the Balanced Scorecard are reward with a cash payment at the end of the fiscal year. The Balanced Scorecard serves as an effective incentive for dealers to enhance their performance.

After-sales Service Network

There are more than 400 Maruti dealer workshops and more than 1,500 Maruti Authorized Service Stations, or MASSs, covering more than 900 cities in India. In addition, 24-hour mobile service is also offered under the brand Maruti On-road Service. As a benchmark for dealers with respect to service quality and infrastructure facilities, MUL has launched service stations under the brand Maruti Service Masters, or MSMs. MUL also has service stations on highways in India under the brand Express Service Stations. To promote sales of spare parts and the availability of high quality, reliable spare parts for its products, spares are sold under the brand name Maruti Genuine Parts, or MGP. These are distributed through the dealer network and through the authorized sellers of the spare parts. Many of the MASSs are at remote locations where MUL do not have dealers. In order to increase the penetration, in terms of sales volumes, of its products in these remote areas, some of the MASSs are integrate into the sales process in order to increase sales of the cars and related products and services such as spares and accessories, insurance and financing

Information Technology

The largest automobile manufacturer in India, Maruti Udtog Ltd. (a division of Maruti Suzuki) produces half a million cars annually. But in the late 1990s, the company was facing rapid technological obsolescence; spiraling IT and support costs; increased pressure on recruiting skilled manpower and reducing high turnover; non-standard operational IT service levels and an unstructured approach to problem management.

Maruti Udyog, at that time, was performing all IT support services in-house; Because of the turnover, service levels were poor and not cost-effective. Maintaining people resources for so many different things -- hardware,

software, networking, and systems software was the greatest problem for the MUL.

Outsourcing IT support and management to Compaq Computer Corporation (now known as HP) turned the troubled situation into a highly successful operation. Compaq, at that time, had a strong presence in India with a wealth of IT skilled employees

Today, Maruti Udyog possesses 51 percent of market share in its domestic market, uses world-class best practices and program management, has greatly improved customer satisfaction and achieves a higher return on investment (ROI) on its IT investments.

Lesson: Manufacturing companies often need a wide range of software and hardware skilled IT personnel to manage and support their infrastructure. Outsourcing IT processes is the most cost-effective means of handling the costly turnover.

Until 1993, MUL's IS environment was predominantly mainframe centric. In that year, the company decided to move to an open environment. It drew up a plan that detailed the new infrastructure and the applications to be run on the network. At the very outset, it decided to go for fiber optic cabling, even though fiber was just introduced in India at that time. This gives them the fiber's reliability and scalability. They now have an infrastructure that can scale to support applications which can be added in future.

Before a car is produced, the systems at the shop floor connect to a central database and query it about the car model that needs to be manufactured. The response from the database takes less than a few seconds, so that the assembly line can start running. For this, two critical issues taken care of are : Reliability and throughput.

To ensure reliability, MUL chose a meshed network, so that if one link goes down, the shop floor and the data center can still communicate through an alternative route. The entire infrastructure is geared towards ensuring that the shop floor can run in real time.

MUL has also implemented an enterprise management system, called Unicenter TNG." The software monitors all links. If something goes down, an automatic complaint is logged into MUL's internal call center.

The IT applications MUL runs are mostly enterprise wide. Some of the critical or major applications include materials for making and dispatching cars and spares to distributors. MUL distributors, who interact with the company daily, also use a Web-based application to log in their requirements for new cars, spares and accessories.

They can also track the status of their order. In fact, the system is being expanded to offer finance, insurance and other intangibles to customers. All these applications run on the Internet and connect to the databases in Gurgaon.

Dealer Management System (DMS)

Very recently Maruti Udyog Limited has joined hands with Wipro Infotech, the Asia Pacific and Middle East information technology arm of Wipro Limited, for a nationwide Dealer Management System (DMS), which is the first of its kind information network system implementation in India.

The system will enable the 450 dealerships of Maruti across India to access updated information from the car manufacturer and a real time view of their operational processes for better efficiencies.

The system will assist dealerships in customer retention and help build lasting relationships. As far as the customers are concerned, they will benefit from the single face of Maruti irrespective of the dealership. It will help raise customer service levels and enhance the quality of management at dealerships, a company release said.

The system, apart from dealer integration with a central database, will also serve as a knowledge repository from where dealerships can access information on customer schemes, product features and price lists. Wipro, as the core IT partner with Maruti, would be responsible for implementation, networking, training and sustenance of the dealer management system. The system aims at issuing alerts to dealerships whenever they are falling short of performance norms in various areas like level of customer complaints, handling and sales.

Maruti Computes

MUL's desktop applications run on the Citrix MetaFrame platform A need to replace old PCs regularly was the key reason behind choosing MetaFrame. Most PCs in Maruti were bought during the grand systems overhaul in 1993. Gradually, need arises for more memory and faster processors.

As a result demands for replacements and upgrades were there. That's when MUL started evaluating the need for thin client technology for desktop applications. Another factor that influenced the deployment of Citrix's technology was the need to control users' access to desktops. In a normal PC environment, users tend to install many unauthorized applications via CD-ROMs, floppies and even Internet downloads. Maruti faced a similar problem.

All these factors led to the MetaFrame deployment. The MetaFrame environment also enables: An executive to sit on any PC and access her/his personal desktop with all her/his necessary applications.

However, not all applications in MUL are supported on the MetaFrame platform like HR applications for salary, reimbursements and the like, which are hosted in a client-server environment. All these applications are ported onto the NFuse server . Even the developers' team accesses its applications through NFuse.

The data story

MUL sure takes its business data seriously. The total data today hovers around the 2-Terabyte mark. The storage infrastructure is based partly on SAN (Storage Area Network) and partly on DAS (Direct Attached Storage). The company has a very good DR (Disaster Recovery) strategy. There are two DR sites. The first one is 1.5 km from the central site and is connected through a direct fiber link. MUL has a regular tape library backup at this site, managed by software from Veritas. Plus, backups taken are randomly checked to ensure the data is readable off the tapes.

For mission-critical applications, like shop floor and dispatch applications, MUL has another DR site in a separate location where there are full-fledged hot servers in place and the data is kept synchronized using logs. So in case of a disaster, the data can be recovered up to the last log applied. This way users don't suffer a long downtime.

Internet Approach:

For MUL the Internet link is highly critical. The entire business depends on transactions made with distributors and suppliers. If MUL losse connectivity, the entire business would grind to a halt because of the absence of a manual ordering system. This is why MUL has invested in fully redundant connectivity solution, which consists of a copper link (leased line) from BSNL, and an RF (Radio Frequency) link from VSNL.

The key to security

MUL has a comprehensive corporate IT security policy in place. For example, if a new server were to be installed, it would go through specified security checks and audits. The company has already put major security components, including firewalls, virus scanners, etc in place.

One key aspect of the security policy is the provision for a security audit done by a third party.

This involves two key steps. First, the outside agency runs surprise checks on users' desktops, checking for adherence to the security policy or instances of illegal software installed in violation of the policy. The second step constitutes attack and penetration tests.

Engineers from the external agency sit outsides the MUL network. Armed with a few IP addresses of the servers lying inside, they try to penetrate the network. This exercise helps them in detecting the loopholes.

Customer Relationship Management

MUL has a comprehensive database of customers, the Customer Relationship Management, which provides centralized access to dealers and MASSs and enables more efficient and integrated management of sales and service network.

The future

Since the time Suzuki took a majority stake in the company, the IT divisions in MUL and the Japanese auto major have been brought in greater alignment with each other.

MUL has always benchmarked itself against Suzuki across various corporate parameters, like basic frameworks and goals and the IT system is no exception. Hence continuous improvements are going on taking the best of the facilities as the benchmark.

Marketing

Marutis marketing objective is to continually offer the customer new products and services that:

reduce the customers cost of ownership of our cars; and

Anticipate and address the customers needs and preferences in all aspects and stages of car ownership, to provide what MUL refer to as the 360 degree customer experience.

MUL has been aggressively cutting prices of its models since the beginning of the year. It began the year by slashing the price of Esteem's diesel version followed by a by the reduction on the premium segment Baleno.

Then the mid sized Versa's price was slashed, Alto's price tag was then pruned putting its base variant at par with the AC version of M800.

The rationale behind the price cuts is the focus on offering new upgraded vehicles at a low price.

Warranty and Extended Warranty Program

MUL offer a two-year warranty on all the vehicles at the time of sale. The dealers are required to address any claim made by a customer, in accordance with practices and procedures prescribed by MUL, under the provisions of the warranty in force at that time. The dealers subsequently claim the warranty cost from MUL.MUL analyze warranty claims from dealers and either claim the cost from the vendors, in the case of defective components, or bear the cost ourselves, in the case of manufacturing defects.

MUL also offers an extended paid-warranty program marketed under the brand, Forever Yours for the third and fourth year after purchase. The extended warranty program is intended to maintain the dealers contact with the customer and increase the revenue generated from sale of spares, accessories, and automobile-related services. An effort is made during the period of the extended warranty to encourage the customer to exchange his existing Maruti car for a new Maruti car, or upgrade to a new Maruti car.

True Value Solutions Limited (TVSL)

TVSL was incorporated on January 14, 2002 as a wholly owned subsidiary of Maruti with an authorized capital of Rs. 5 million. It obtained the certificate to commence business on May 1, 2002 in NCT of Delhi and Haryana. TVSL provides value-added services to owners and users of motor vehicles on matters relating to manpower services with regard to recruitment, training and development. The company also intends to promote the business in the areas of pre-owned cars, lease and fleet management, finance and insurance. These services include compliance with predefined business processes at the dealership, continuous training of dealer staff in order to ensure quality of operation to ultimately achieve the business objectives of TVSL.

Research and Development

R&D activities of Maruti have the twin objectives of reducing product costs by developing capabilities of local vendors and becoming a regional R&D hub for all Suzuki operations.

The company has adopted a focused model cost reduction technique. Maruti has been continuously engaging in Value Analysis/Value Engineering (VA/VE) activities across its operations. Some areas in which MUL carry out research and development are localization and development of components, cost reduction measures such as VA/VE, development of alternate fuel (CNG and LPG) vehicles, performance-benchmarking to certain parameters such as noise, ride handling and braking and development of power-steering for certain models. MUL regularly upgrade its models and also launch variants by adding features developed through research and development.

All this has resulted in significant reduction in the investment required for the modifications.

As part of Suzukis plans to make Maruti its research and development center for cars in Asia (outside Japan), it is expected to have full model change capability by fiscal 2007.

Manufacturing

The core focus areas of Marutis manufacturing division are:

Benchmarking against global standards so as to efficiently manufacture quality products.

Building a strong and motivated work force by emphasizing safety, education and continuous improvement of the manufacturing capabilities and those of the vendors.

MUL Manufacturing Facility and Process

Facility

Marutis manufacturing facility comprises three integrated plants with flexible assembly lines located at Gurgaon in the northern state of Haryana. The first plant was set up in fiscal 1984 with an initial installed capacity to produce 20,000 vehicles per annum, which was augmented to 130,000 by fiscal 1991. Installed capacity was further increased with the second plant becoming operational in fiscal 1995 to 200,000 vehicles per year. In fiscal 1996, with capacity increases in each plant, installed capacity increased to 250,000. With the third plant becoming operational in March 1999, installed capacity increased to 350,000 vehicles per year, which is the highest among passenger car manufacturers in India and among the passenger car manufacturing facilities of Suzukis subsidiaries outside Japan. 24 September 2004, Suzuki Motors and Maruti decided to invest 32.7 billion rupees over the next five years to set up a new car assembly unit, a diesel engine manufacturing unit and for increasing automation and efficiencies in Maruti's current facilities. Maruti Udyog would hold a 70 per cent stake in the new joint venture, under which a car assembly unit is being set up; Suzuki would hold the balance. The new unit, which would make high-end cars, is being set up in Manesar, Gurgaon, and would have a capacity to produce 250,000 units a year. This plant will receive an investment of 15.2 billion rupees, which is expected to begin its production by the end of 2006. The proposed diesel engine unit would be set up under Suzuki Metals India, an existing 49:51 joint venture between Maruti and Suzuki, respectively. The engine plant will have a capacity of 300,000 diesel engines and 20,000 petrol engines. It will also make up to 140,000 transmission assemblies. The plant will supply diesel engines to Maruti as well as export engines to Suzuki subsidiaries in Europe and Asia. This plant, which will be set up at a cost of 17.5 billion rupees, will begin production by the end of 2006. Suzuki would undertake a feasibility study to set up a gearbox production unit in India. This unit would be set up under Suzuki Metals India, which is would be renamed as Suzuki Engineering India. Marutis facility has advanced engineering capability and is upgraded on an ongoing basis to improve productivity and quality. Maruti have 17 manufacturing shops and are capable of producing more than 50 variants of the nine basic models manufactured, with different specifications, within the same day. This is possible due to our information technology-enabled vehicle build sequence system and vehicle tracking system.

Under the vehicle build sequence system, at the production planning stage, requirements are communicated via our intranet (internally) and our extranet (to vendors) in advance as to the time and place for delivery of components and other production inputs in order to fulfill production targets. Our vehicle tracking system monitors and records the implementation of the planning during production.

Utilities

Maruti do not have to rely on outside sources of power as they have a 60-megawatt gas turbine captive power plant, which has multi-fuel capability. They also have our own reverse osmosis water treatment plant and effluent and sewage treatment plant.

Marutis Manufacturing Paradigm

Maruti has adopted a target control and PDCA approach as the underlying theme of all its processes.

PDCA Constitutes:

Planning by setting a target and time-line, dividing into action plan with value to each factor/element.

Doing the standardized operation as decided.

Hecking through gap analysis to check whether the operation is really giving the desired results

Acting to freeze if effective or correct.

Productivity

Improving productivity is an ongoing effort at Maruti, through the Maruti production system, or MPS, which is derived from the Suzuki production system, and focuses on elimination of wasteful activities taking place during manufacturing processes. In addition to MPS activities, in-house automation, increasing utilization of production lines, outsourcing of low value-addition jobs and reduction in materials handling have contributed to improvements in the productivity of there employees and the efficiency of there operations. As shown in the table below, Marutis employee productivity, measured as the ratio of production volume in a

fiscal year to the number of its permanent employees at the end of the fiscal year, increased by approximately 79% from fiscal 1995 to fiscal 2002.

Conservation of energy

Maurti had followed the three principles of Reduce, Reuse and Recycle for conserving energy. Between fiscal 1997 and fiscal 2004, they had reduced the consumption of electricity measured as the ratio of kilowatt hours of power consumed to the number of vehicles produced, by approximately 35%. This was achieved by using energy saving lights and natural light, and also the efficient usage of other electrical appliances, thus reducing wastage. In the same period, reducing the consumption of water, measured as the ratio of the volume of water consumed to the number of vehicles manufactured, by approximately 70%. This is achieved through the recycling of waste water in their water treatment plant and effluent and sewage treatment plant.

Fiscal YearNo. of Permanent EmployeesProduction VolumeProduction Vol Per Employee

1995484020633043

2001577035037661

2007662745810877

Quality

They had produce high quality products, some of which Maruti had been exporting to various countries including the Netherlands, Italy, Germany, the United Kingdom and Switzerland.

Maruti was certified with ISO: 9001:2000 in 2001 and aim to achieve the TS-16949 certification. In addition, they had made the following improvements in terms of producing defect-free products:

DFC OK: Their Direct Final Check OK, or DFC OK percentage, which signifies the percentage of vehicles that pass through the inspection stages as defect-free, improved from approximately 77% in March 2002 to approximately 90% in March2004.

Reduction in rejection: Their in-process rejection cost per vehicle, computed as the ratio of (1) the cost of components rejected due to defects arising during our production process, to (2) the number of vehicles sold, declined by approximately 65% from fiscal 2002 to fiscal 2004.

In house warranty: Their in-house warranty costs per vehicle, computed as the ratio of (1) the aggregate cost of components incurred by us to service warranty claims arising from operational defects in our manufacturing lines, to (2) the numbers of vehicles sold in the fiscal year, declined by approximately 85% between fiscal 2002 and fiscal 2004.

A new feather was added recently in Marutis cap in the field of quality when the Quality Management System of its Press Shop & associated functions got certification for conformance to the requirements of TS16949:2002 standard.

Suzuki Quality Management System

Based on a method adopted by Suzuki at its manufacturing facilities, the quality of a vehicle dispatched from their facility is measured through a quality index audit on a daily basis. The quality index is a relative measure of quality based on evaluation of vehicles selected at random on a daily basis. In addition, Maruti had recently adopted Suzukis global customer audit index, in order to provide a more customer-oriented focus to the entire organization, and channel resources towards customer complaints for rapid response.

Quality Improvement Initiatives

For quality control Maruti had recently introduced:

Tracking surveys and direct customer contact in order to better understand customer satisfaction levels and customers problems.

Full-time task forces for improvement in initial quality study problems and departmental cross-functional teams to work on defined problems with challenging targets.

Quality gates at various stages in order to raise alarms for correction and immediate action on defects;

Fool-proofing, or Pokayoke in Japanese, which comprises checks conducted in order to prevent defects arising from human error during the manufacturing process; A real-time feedback system, cross-linked with overall targets.

The Pica Pica system, which aligns the sequence of components and vehicles in order to prevent incorrect fitting of components.

Kaizen

Maruti had adopted the Japanese management concept of Kaizen, or continuous improvement. The Kaizen activities had resulted in the improvement of the in house capabilities. For example, they had manufactured 25 multi-axis robots and 16 multi-spot welders. Group discussions among employees in different departments are conducted on a monthly basis in order to discuss and resolve problems relating to their areas of operation, an activity referred as quality circle activity. Based on the belief that individuals contribute to improvement in growth, there has been a suggestion scheme in which they promote participation of all employees at all levels. The average number of suggestions made per employee has improved by approximately 35% in fiscal 2004, when suggestion received were more than 80,000, as compared to fiscal 2002. Some of the other improvements as a result of the Kaizen process have been increased automation through automated material transport system.

Manufacturing ProcessThe manufacturing process at Maruti facility is depicted below:

The production of a car at Maruti facility occurs in the following stages:

Press Shop: Press shop has five transfer presses and two blanking lines. In the press shop, steel coils are cut to the required size and panels are prepared by pressing them between various die sets such as doors, roofs and bonnet.

An anti-rust coat is applied at this stage.

Weld Shop: There are three welding shops with 122 six-axis robots and 25 in-house manufactured two-to-four axis robots. In this shop, various press metal components manufactured in the previous stage are spot-welded together to form the body shell. Various parts such as the floor panel, side panel, doors and bonnet are subassembled in this shop. Subsequently, the assembled parts undergo final welding. The welded body is sent to the paint shop through a conveyor.

Paint Shop: There are three paint shops, within one of which the final outer body is fully painted by robots. In the paint shop, the body undergoes various pre-treatment and electro deposition painting processes to provide a high corrosion resistance to the body. The car body is given an intermediate or primer coat before applying the storing topcoat paint. The intermediate and the final coat are applied by using automatic electrostatic spray-painting machines (micro bells) and robots, followed by a baking process.Assembly Shop: Maruti has highly flexible assembly lines, which can simultaneously handle a large number of variants as well as adapt to sequence changes. The painted bodies proceed for final assembly in three stages. The first stage is the trim line wherein various components such as roof head lining, windshield glass and interior trim components are fitted. Thereafter, the car is transferred to an overhead conveyor, the chassis line, wherein components such as the engine, gearbox and front and rear axles are assembled on the underbody. The vehicle is then lowered to the final line on its own wheels and here components and parts such as seats, the steering wheel and the battery are fitted. The completely assembled vehicle finally rolls out of the assembly lines to the final inspection stages.

Machine and engine shops: Assembling and testing of engines takes place at engine shops and carry out precision machining of engine components in our machine shops.

License agreements with Suzuki

Suzuki has several license agreements with Maruti under which it has, since Marutis inception:

Provides with technical know-how, assistance and information for the manufacture, sale and after-sales service of various products and parts.

Supplied components to Marutis passenger cars.

Deputed technical personnel to their facility;

Help them to develop manufacturing processes and integrate certain Japanese management practices such as kaizen, which is Japanese for continuous improvement, in various plants.

Training of personnel.

Help them to develop and manage the supply chain for their products. Maruti in return had agreed with Suzuki that amongst other things:

Maruti will not manufacture in, or export products covered by agreements with Suzuki to, any territory except those permitted by Suzuki.

Maruti will not enter into agreements with any other manufacturer to sell any product or part that competes with any product or part covered by the license agreements with Suzuki.

Maruti will not otherwise sell, distribute or promote the sale of any product that competes with products covered by the license agreements with Suzuki. Suzuki will not be liable to Maruti for damages arising from the use of the licensed information and disclaims responsibility for all representations and warranties made by them with respect to the licensed products.FINANCIAL POLICIES OF MUL

The company`s performance during the 2007 year as compared with that during the previous year is summarized below.

Gross Total income 151,823 137,271 Profit Before Tax 17,500 13,049 Provision for Taxation 5,609 4,513 Profit After Tax 11,891 8,536 Balance brought forward 34,421 27,574 Profit Available for Appropriation 46,312 36,110 Appropriations: Debenture Redemption Reserve 31 175 General Reserve 1,189 854 Proposed Dividend 1,011 578 Corporate Dividend Tax 142 82 Balance carried forward to Balance Sheet 43,939 34,421.

FINANCIAL HIGHLIGHTS

The gross sales revenue (net of excise) of your company for the year was Rs. 124,814 million as against Rs. 113,465 million in the previous year showing an impressive growth of 10 per cent. Profit before tax (PBT) stood at Rs. 17,500 million against Rs. 13,049 million in the previous year recording a jump of 34.1 per cent. Profit after tax (PAT) of Rs. 11,891 million showed a growth of 39.3 per cent over the previous year figure of Rs. 8,536 million. DIVIDEND The board recommends a dividend of 70% (i.e. Rs. 3.50 per equity share of Rs. 5 each) for the year ended 31st March, 2006, amounting to Rs. 1,011 million as against a dividend of 40% amounting to Rs. 578 million paid for the year ended 31st March, 2005.

HIGHLIGHTS OF OPERATIONS

Vehicle Business

For the year 2005-06, your company achieved highest ever sales of 5,27,038 vehicles in passenger cars (including MPV) category and grew by 8.4% over 2004-05, which is higher than the passenger car industry growth of 7.2%. In 2005-06, Maruti strengthened its leadership position by increasing its market share to 55.1% from 54.5% in 2004-05. Maruti further consolidated its position in highly competitive A 2 (premium compact) segment with the introduction of the Swift.The Swift received an overwhelming response and sold over 61,200 units in the first year of its launch. In the A2 segment, Maruti achieved a growth of 23.5% as against the industry growth of 15.5% resulting in an increase in its market share in this segment from 54.7% to 58.5%. Alto, another model in A2 segment continued to be India`s largest selling passenger car model and grew by 26% in 2005-06. In the A3 segment, Baleno grew by 30% in 2005-06.

Exports In 2005-06 we exported 34,781 vehicles to 45 countries. The top five export markets were Algeria with 6,638 units, Sri Lanka with 6,028 units, UK with 4,421 units, Chile with 3,115 units and Denmark with 3,193 units. In October 2005, we crossed the cumulative export volume of 4,00,000 vehicles. In 2005-06, Maruti made efforts to develop new export markets such as Sudan, Oman and Nicaragua.

Spares and Accessories Business

The Spare Parts and Accessories Business witnessed a growth of approximately 26% in 2005-06. New initiatives were taken for improving the material flow in the Spare Parts Warehouse to efficiently manage the operations in view of the continuous growth in business. Spare Parts operations at the company were rated as the best amongst all Suzuki Motor Corporation`s overseas subsidiaries. Efficient management of the spare parts operations in the dealer network continued to be a focus area and actions were taken for optimizing the spare parts inventory at dealerships.The range of Maruti Genuine Accessories was also increased substantially during the year.

NETWORK The record sales performance was effected through Maruti`s vast dealership network.The new car sales network grew from 325 outlets to 375 during the year. These outlets cover 227 cities across the country. In addition to this, there are 187 Maruti True Value outlets spread across 131 cities, which are engaged in the sale, purchase and exchange of pre-owned cars. Maruti True Value is the largest organised pre-owned car sales network in India. The service network has a total of 2,096 service outlets, covering 1092 cities.EXPANSION OF MANUFACTURING FACILITIES

New Car Manufacturing Plant:

Maruti`s new car manufacturing plant at Manesar, with a total investment of Rs. 1,542 crores and capacity of 1,00,000 units with scope to scale it up to 2,50,000 units, is planned to be ready for commercial production by the end of September, 2006.The civil and utilities work in the plant is currently under progress and all major plant & machinery has been ordered. The plant was being set up by a subsidiary company Maruti Suzuki Automobiles India Ltd. (MSAIL), in which Maruti held 70% equity stake, the balance 30% being held by Suzuki Motor Corporation (SMC). The board of directors of Maruti in their meeting held on 13th April, 2006, approved the proposal for purchasing the entire shareholding of SMC in the subsidiary and merging it with Maruti with effect from 1st April, 2006. Maruti accordingly now own MSAIL 100% and the process of merger has been initiated. New Engine and Transmission Facility

The project is being implemented in an existing joint venture company, viz. Suzuki Powertrain India Limited. The total capacity will be 3,00,000 diesel engines per annum to be developed in phases.The initial annual capacity will be 1,00,000 diesel engines, 20,000 petrol engines and 1,40,000 transmission assemblies, for which the investment is expected to be Rs. 17,477 million.The commercial production is likely to begin in October, 2006.SUBSIDIARY COMPANIES

A brief note on the profile of the subsidiary companies and their financial performance for 2005-06 is provided below:

a) Maruti Insurance Brokers Limited : The company is engaged in the business of selling insurance policies to Maruti owners in a tie-up with National Insurance Company Ltd.The company, in its fourth year of operation, i.e. year ended 31st March, 2006 recorded total revenue of Rs. 506.50 million, profit before tax of Rs. 142.62 million and profit after tax of Rs. 92.38 million.The year saw a substantial growth in the number of policies issued - both new and renewals.

b) Maruti Insurance Distribution Services Limited : The company is engaged in the business of selling insurance policies to Maruti owners in a tie-up with Bajaj Allianz General Insurance Company Ltd. The company, in its third year of operation, i.e. year ended 31` March, 2006 recorded total revenue of Rs. 90.62 million, profit before tax of Rs. 27.20 million and profit after tax of Rs. 18.03 million.

c) True Value Solutions Limited: The company has contributed towards smooth operation of the business processes at the Maruti True Value outlets and supported the dealerships in enhancing the sale of certified pre-owned cars under the brand `Maruti True Value`. It has earned an income of Rs. 28.81 million with an expenditure of Rs. 28.42 million and profit before tax of Rs. 0.39 million in the financial year 2005-06.The board hopes that the company shall continue its high standard of service in the financial year 2006-07.d) Maruti Insurance Agency Solutions Limited: The company is engaged in the business of selling insurance polices to Maruti owners in a tie-up with New India Assurance Limited. In the second year of operation i.e. year ended 31st March, 2006 the company has recorded a total revenue of Rs. 92.64 million, profit before tax of Rs. 27.68 million and profit after tax of Rs. 18.28 million.

e) Maruti Insurance Agency Network Limited: The Company is engaged in the business of selling insurance policies to Maruti owners in a tie-up with Royal Sundaram Alliance General Insurance Company Limited. In the second year of operation the company has recorded a total revenue of Rs. 107.5 million, profit before tax of Rs. 32.14 million and profit after tax of Rs. 21.24 million. In the current year, the above companies are focusing further on customer retention and enhancing volume through renewals. Along with enhancing volumes, the endeavour to improve the service levels to dealers and customers through a process driven approach and effective use of information technology systems will continue.

f) Maruti Suzuki Automobiles India Limited: The Company was incorporated on 13th April, 2005, in collaboration with Suzuki Motor Corporation (SMC) for setting up a new manufacturing plant at Manesar, Haryana. During the year the construction activities for the car manufacturing plant were under progress and hence there was no revenue from operations. During the year the company incurred a loss before tax of Rs. 43.64 million and loss after tax of Rs.84.08 million.

CORPORATE SOCIAL RESPONSIBILITY

As a responsible corporate citizen Maruti is well conscious of its social commitments and believes in partnerships for pursuing activities related to Corporate Social Responsibility. The initiatives such as Institute of Driving Training and Research (IDTR), Driving Training Schools and adoption of Industrial Training Institutes (ITIs) in Haryana are taken in partnership with State/Central governments, Maruti dealers and suppliers. Detailed discussion on these initiatives is presented in the Management Discussion and Analysis section of this report.

DIRECTORS As per the Articles of Association of the company and relevant provisions of the Companies Act, 1956, Mr. ShinichiTakeuchi, Mr. Hirofumi Nagao and Mr. Manvinder Singh Banga are liable to retire by rotation at the ensuing Annual General Meeting and, being eligible, offer themselves for re-appointment. Mr. Kinji Saito ceased to be a director of the company with effect from 12th April, 2006.The board had recorded its appreciation of the invaluable contribution made by him during his tenure. At the meeting of the board of directors held on 13th April, 2006, Mr. Shuji Oishi was appointed a director designated as Director (Marketing & Sales) liable to retire by rotation in the casual vacancy caused by the resignation of Mr. Kinji Saito. In accordance with the relevant provisions of the Articles of Association of the company and the Companies Act, 1956, Mr. Shuji Oishi holds office till the ensuing Annual General Meeting.The company has received a notice in respect of Mr. Shuji Oishi, from a member under Section 257 of the Companies Act, 1956 proposing his appointment as director liable to retire by rotation. Mr. Amal Ganguli had resigned with effect from 24th December, 2005, and Mr. Kalyan Bose was appointed as a non-executive independent director in his place. Mr. Amal Ganguli was re-appointed in place of Mr. Kalyan Bose with effect from 13th April, 2006, due to the latter`s resignation.The board had recorded its appreciation of the invaluable contribution made by Mr. Kalyan Bose during his tenure. In accordance with the relevant provisions of the Articles of Association of the company and the Companies Act, 1956, Mr. Amal Ganguli holds office till the ensuing Annual General Meeting.The company has received a notice in respect of Mr. Amal Ganguli, from a member under Section 257 of the Companies Act, 1956, proposing his appointment as director liable to retire by rotation. Dr. Surajit Mitra ceased to be a director of the company with effect from 8th July, 2006.The board had recorded its appreciation of the invaluable contribution made by him during his tenure. At the meeting of the board of directors held on 27th July, 2006, Mr.Tsuneo Kobayashi was appointed as an additional director liable to retire by rotation in place of Dr. Surajit Mitra. In accordance with the relevant provisions of the Articles of Association of the company and the Companies Act, 1956, Mr.Tsuneo Kobayashi holds office till the ensuing Annual General Meeting. The company has received notice in respect of Mr.Tsuneo Kobayashi, from a member under Section 257 of the Companies Act, 1956, proposing his appointment as director liable to retire by rotation. Mr. Kumar Mangalam Birla ceased to be a director of the company with effect from 27th July 2006.The board had recorded its appreciation of his association during the tenure. At the meeting of the board of directors held on 27th July, 2006, Mr. D. S. Brar was appointed as a non executive independent director liable to retire by rotation in the casual vacancy caused by the resignation of Mr. Kumar Mangalam Birla. In accordance with the relevant provisions of the Articles of Association of the company and the Companies Act, 1956, Mr. D. S. Brar holds office till the ensuing Annual General Meeting.The company has received notice in respect of Mr. D. S. Brar, from a member under Section 257 of the Companies Act, 1956, proposing his appointment as director liable to retire by rotation. All the above appointments/re-appointments are subject to the approval of the members in the ensuing Annual General Meeting.The brief resume/details relating to directors who are to be appointed/re-appointed as stipulated under Clause 49(IV)(G) of the listing agreement executed with the stock exchanges are furnished in the explanatory statement of the notice of the ensuing Annual General Meeting. DIRECTORS` RESPONSIBILITY STATEMENT

As required under Section 217(2AA) of the Companies Act, 1956, your directors confirm having:

a) followed, in the preparation of the Annual Accounts, the applicable accounting standards with proper explanation relating to material departures;b) selected such accounting policies and applied them consistently and made judgement and estimates that are reasonable and prude