Maruti outperformance unlikely for few months

Tags: Companies
Maruti stock was high – literally — even before the hope rally started in September 2013, but the pace of the outperformance increased sharply during the last eight months. The scrip moved from a level of Rs 1,236 at the end of August 2013 to Rs 1,899.95 on Monday, a gain of 53.72 per cent.

This upmove came despite the company being embroiled in controversy about its proposed plant in Gujarat. Moreover, issues of corporate governance were raised by some institutional investors. It is not very often that domestic fund managers take such a proactive stand on any issue of corporate governance. In fact, domestic institutional investors (DIIs) reduced their stake in the company in the last eight months, only to see it lapped up by foreign institutional investors (FIIs).

What was going on here? Probably, for a foreign fund manager who wishes to take exposure to a pure four-wheeler player in India, Maruti’s stock is the only option. That’s because othes auto companies operate in multiple segments and hence are more risk-prone. Also, there is high probability that any India-focused ETF will have Maruti as a component.

Maruti is seen as a play on rising income of the middle class and broader macro development of rural India. But in the last two quarters, overall car industry numbers have been showing a decline. The numbers for April 2014 too were below expectation.

Despite all this, there is no doubt that this established player with a presence in every nook and corner of the country will be the first to show improvement in its bottomline as soon as the economy turns around. For buyers of its products, interest rates play an important role: lower the interest rate, lower the EMI, which translates into higher demand for cars.

If the equity market rally gets extended after May 16, the stock should do well and perform in line with sectoral indices. It will not be able to strongly outperform broader market indices for many trading sessions because the possibility of selling by DIIs is high at this juncture.

If you take the worst-case scenario of a sharp dip in equity markets on D-Day, the scrip may shed weight, a bit more than other auto stocks. That would be due to higher co-relation on lower side, better stock performance in the past eight months and large outstanding positions in derivatives segment, some of which are going to come up for unwinding if results disappoint.

(With research input by Amit Mudgill. The writer is director of independent brokerage Elan Equity Services and consulting editor of Financial Chronicle)

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