MUL's Jagdish Khattar: Selling more than just cars

If there ever was a bunch of sceptical investors, then Jagdish Khattar was looking at one. It was late May this year, and the 60-year-old CEO of Maruti Udyog was standing in front of a group of hard-nosed bankers and analysts, trying to sell them his company's maiden IPO. His two-hour presentation had ended, but the room-full of analysts were still not convinced. Stepping away from his laptop, Khattar tried a different tack. Being an automotive company, he told his audience, was about two things: Manufacturing and marketing. He could stand there all day long explaining marketing, but to know what really made a car-maker, the investors had to make a trip down to the company's 5-lakh-cars-a-year facility in Gurgaon near Delhi. They came and they saw-not just the factory but Khattar's point. Once he knew that the tide had turned in his favour, Khattar told the investors only one thing: Make sure you come in on the first day of the IPO. They did.

On July 9, 2003, when Khattar rang the ceremonial gong at the Bombay Stock Exchange, he raised the curtains on the most successful IPO in five years. The issue had been oversubscribed 13 times, with bids topping Rs 360 a share compared to the offer price of Rs 115.

Yet, truth be told, this is an IPO that should have been stillborn. For one, it's taken more than three years and several rounds of bitter negotiations for the two partners (Suzuki and the Government of India) to agree on the nitty-gritty of the issue. For another, the incentive for Suzuki to hard sell was minimal, given that it was the government's 27.5 per cent stake on offer and not a single rupee would come Suzuki's way. Worse, in case the issue bombed, Suzuki-as its underwriter-would have to shell out Rs 830 crore in making it good. Last but not the least, there are also reports of how a senior executive from Hyundai Motor India went around meeting institutional investors, raising concerns over Maruti's future. Caught in the middle of it all was Khattar. "The best thing I did was to keep my distance from the negotiations between the government and Suzuki leading to the sell-off. I have seen what can go wrong when management gets involved in matters it should not," says Khattar.

Staging A Coup

Khattar's biggest challenge, however, was much more fundamental. Nowhere in the world were auto stocks getting the kind of PE multiple (market price in relation to earnings per share) that the government wanted. For instance, General Motors quotes at a PE of 7.85, and back home Tata Engineering gets 16. However, in Maruti's case, even after it was decided to change the share's face value from Rs 100 to Rs 5, the floor price of Rs 115 meant that the stock would be sold at 27 times its earnings. (At the final price of Rs 125, the stock got a PE of 30.)

Stories started circulating in the media about the overpriced Maruti IPO. Screaming headlines tried to dissuade investors, questions were asked about Maruti's fiscal health and the poor performance of some of its newer launches. The most obvious question was constantly raised by the Hyundai official-the Japanese car-maker's overwhelming dependence on its bread and butter Maruti 800. The car will be 20 years old later this year, and despite a surge in sales in the recent past, the 800 was visibly showing signs of its age.

This is where Khattar came in. ''Once we knew that we were going to the public, I had a job to do. It was an issue of Maruti's credibility," says Khattar. In the space of four weeks in May and June, Khattar spent entire days in meetings, from seven in the morning to 10 at night-by his own count some 125 hours of meetings. And not just in India, but also in London, New York, Los Angeles, Singapore, and Dubai, among others.

Kotak Mahindra Capital Company (KMCC), which had been appointed as the lead book-runner in November 2002, knew it had a tough job on its hands, even though it had been involved with the IPO earlier on. For starters, it realised that with the economy slacking, it would be difficult for the markets to suddenly absorb a thousand crore rupee issue. Besides, both Suzuki and GOI were pulling in different directions.

That was not entirely surprising. Relations between Suzuki and the GOI had been strained ever since the latter appointed R.S.S.L.N. Bhaskarudu as Maruti's MD in 1997. Then, MUL was an equally-owned joint venture, and though it was the government's turn to appoint the MD, the Japanese partner felt slighted that it had not been consulted. A legal battle ensued, with SMC approaching the International Court of Arbitration in London. The stand-off ended when the government removed Bhaskarudu in 1999, and appointed Khattar in his place.

Although it had been involved with the IPO since early 2002, KMCC knew it had a tough job on its hands Uday Kotak, Chairman, Kotak Mahindra Capital Company

All the wrangling (besides a month-long suspension of sales in Delhi due to new emission norms) was beginning to take its toll on the company's finances. In 2000-01, Maruti reported its first-ever loss. Even though the loss was attributed to unusually high depreciation and the high import content of three new models (Alto, Baleno and Wagon R), the news was shocking. It galvanised the government into putting Maruti on the disinvestment list. Sure, Suzuki was keen on getting control of Maruti, but the government was equally determined to extract its pound of flesh.

While independent evaluators put a tag of Rs 2,158 crore for the government's 50 per cent stake, Suzuki was reluctant to pay top dollar. In fact, when the government wanted a "control premium" for renouncing its rights to a Rs 400-crore issue that passed GOI's 25 per cent stake in Maruti to Suzuki, the latter offered a measly Rs 170 crore. It was bumped up to Rs 286 crore when the government haggled, and finally to a staggering Rs 1,000 crore. So what did the trick? According to one insider, it was the emergence of another potential white knight that turned the tables in favour of the government. That suitor, BT learns, was General Motors, although the Detroit major vehemently denies it.

Suzuki also agreed to underwrite the sale of GOI's next lot of shares, but there was talk doing the rounds that it was trying to scuttle the issue. However, in the run up to the issue, Suzuki decided to put its weight behind the IPO. Says Sanjay Aggarwal, Head of Investment Banking, KMCC: "People started at different positions, but when it came to the crunch, everybody came around to a common stand."

While that was a welcome development, it did little to make Khattar's job-which was to sell the IPO-any easier. Khattar decided to hit the road with a vengeance. Beginning May, managers from Maruti and Suzuki criss-crossed the country and international financial centres, drumming up support for the IPO. Osamu Suzuki himself flew in from Japan to attend roadshows in Delhi and Mumbai in late May, two weeks before the IPO. KMCC's Uday Kotak, Aggarwal and their team started working closely with all three parties, and began to leverage the high-profile of the deal. The government, on its part, wanted the issue to be available to as many people as possible.

In a moment of inspiration, Maruti decided that it would also rope in its 150-plus dealers to push the IPO. Over two-and-a-half-lakh forms were sent to the dealers, who mailed these to customers (more than a third of the retail investors were from non-traditional cities). In fact, BT learns that a large number of dealers also subscribed to the IPO as a show of loyalty to Maruti. By the time it ended, the issue had covered 700 centres in 74 cities-the highest for any public issue ever.

Within hours of opening on BSE, the Maruti stock climbed 30 per cent (when BT went to press, the stock was quoting at a strong Rs 174). Khattar, on his part, followed up the IPO success by announcing a 971 per cent jump in net profits to Rs 123 crore for the first quarter of 2003-04. Sales have also rocketed 47 per cent to 1.04 lakh, raising Maruti's marketshare from 52 to 55 per cent. Needless to say, Dalal Street is upbeat about the new stock. One prominent analyst has predicted a 15-20 per cent growth in industry sales, which means the market could top the 8.5 lakh units-a-year mark. And with an installed capacity of 5 lakh cars a year, Maruti towers over its competitors.

But for Khattar, all the good work of the past few months may mean that he has a harder benchmark to beat.