By Sumana Ramanan
BOMBAY, June 24 (Reuters) - Just like many in India's burgeoning middle class, Sasikala and her husband want the relative peace, privacy and safety of their own car.
"My husband disposed of his motorcycle one-and-a-half years ago -- he found it was very stressful driving it in the city," said Sasikala, a microbiology lecturer at a college in Madras.
The couple recently bought their first car, a Maruti 800 minicar, made by India's largest automaker, Maruti Udyog Ltd, contributing to a 46 percent jump in the carmaker's sales over the year to May.
Now investors hope to take advantage of the promise of rising car sales to the 290 million-strong Indian middle class. The government, which owns Maruti along with Suzuki Motor Corp of Japan, is selling 27.5 percent of its 45.8 percent Maruti stake for $212.6 million -- the biggest initial public offering in India since 1999.
Maruti's debut in the first week of July is seen as a test of investors' appetite in a near moribund IPO market and could bode well for India's stuttering privatisation programme.
Over half the around 540,000 new cars sold in India in the past year to March were Maruti's, thanks partly to a cheap credit scheme and its dominance of a protected market.
Longer-term, though, the carmaker faces challenges to its dominance, particularly from foreign entrants as import duties come down and rich consumers upgrade to luxury cars and start putting a premium on design.
THREATS TO MARUTI
Maruti's market share has fallen from a huge 83 percent in 1998, when it was pitted against just two local firms selling cars based on 1950s designs.
Like leading Malaysian carmaker Proton , Maruti has had to fend off newer entrants such as Hyundai Motor , Fiat , Ford Motor Co and local firm Tata Engineering and Locomotive Co , after the government liberalised the sector in 1993.
But Maruti still has a virtual free-run of the entry-level segment, comprising models cheaper than 250,000 rupees ($5,365) and accounting for a quarter of new car sales.
"Our future success will, to a large extent, depend on continued demand for and market acceptance of the Maruti 800," the company said in the prospectus for its public issue.
Maruti was set up in 1982 as an equal venture between the Indian government and Suzuki, which is one-fifth owned by General Motors Corp . The government relinquished management control to the Japanese minicar specialist a year ago by diluting its stake to 45.8 percent through a rights issue.
But the key issue now for Maruti is whether it can tempt enough motorcycle owners to buy its mini-cars.
CHEAP MONEY
Luring even a small percentage of buyers in India's huge 3.7 million a year motorcycle market, the world's second largest after China's, could increase Maruti's sales substantially.
One way it hopes to do this is through the credit scheme with the State Bank of India , which can use its 9,000-plus branches to tap potential customers.
Interest rates are at a three-decade low and a consumer culture is seeping into semi-urban and even rural areas 12 years after India began liberalising its economy.
But the strategy has limitations because interest rates will not stay low forever and Indians were still too poor overall for car sales to take off, analysts said.
By one measure, a country needs a per capita income of $3,000 a year for car sales to take off, which means that Malaysia makes the cut, but India at $470 and even China at $890 have a long way to go.
So Maruti may have to wait and watch as other players come up with models in the entry-level segment ahead of the expected boom, analysts said.
Maruti also cannot lower prices much because it cannot cut production costs much in cars which are already quite basic, analysts said. The much higher fuel consumption of cars compared with two-wheelers may also deter buyers.
NECESSARY STRATEGY
Maruti's focus on entry-level cars has been driven as much by immediate necessity as long-term strategy.
It has found it tough in the largest segment of the Indian car sector, the one for small cars that cost between 250,000 and 500,000 rupees and accounts for more than half of total sales.
"Even if this segment grows, there is a lot of competition, which puts pressure on prices and market share," said Pramod Amthe, analyst at Cholamandalam Securities.
Maruti's 'Zen', 'Wagon R' and 'Alto' are pitted against the 'Santro' from South Korea's Hyundai, the highest selling model in the segment, and Indian Tata Engineering and Locomotive Company's Indica, which is picking up after a slow start.
The volumes in higher segments are very low and Maruti must jostle for space with a slew of models from the world's top carmakers such as Honda Motor Co Ltd , Ford and General Motors.
This could mean that people like Sasikala and her husband are still Maruti's best hope. (US$1 = 46.6 Indian rupees)