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After raising a red flag, funds stock up on Maruti Suzuki

Top fund houses may have hinted at voting with their feet in Maruti Suzuki, but that does not seem to have deterred them from buying into the stock.

, ET Bureau|
Mar 07, 2014, 09.11 AM IST
Top fund houses may have hinted at voting with their feet inMaruti Suzuki, but that does not seem to have deterred them from buying into the stock.
Top fund houses may have hinted at voting with their feet inMaruti Suzuki, but that does not seem to have deterred them from buying into the stock.
India’s top fund houses may have hinted at voting with their feet in India’s biggest car maker Maruti Suzuki and approaching the capital market regulator after flagging off corporate governance issues recently, but that does not seem to have deterred them and foreign funds from buying into the stock, looking at the company’s prospects in the near and medium term.

Foreign funds like Credit Suisse and Investec besides sovereign funds Kuwait Investment Authority and Abu Dhabi Sovereign Fund have acquired the stock when it fell after local fund houses, HDFC MF, ICICI Pru and SBI MF opposed the company’s proposal to transfer its Gujarat plant to parent Suzuki, people with knowledge of the issue said.

Foreign portfolio investors raised their stakes in Maruti between January 28 and February 28. On a consolidated basis, seven mutual funds which had objected to the transfer of the Gujarat plant had bought 21.44 lakh shares and sold 12.38 lakh shares, thus adding 9.05 lakh shares on a net basis.

The level of foreign portfolio investors interest in the stock can be gauged from the fact that after the stock fell recently, the 22% limit in the stock for foreign funds was triggered off. Foreign holding in the Maruti stock was 21.47% at the end of December, according to data from Capitaline.

Fund managers and analysts reckon that atRs1,550-1,600, the Maruti stock is quite attractive, considering the risk-reward ratio. The P/E (price to earnings) multiple is an indicator of how much an investor is willing to pay for every unit of profit. The stock has lost nearly 12% from its January high of Rs1,845 and is now trading at 12 times its one-year forward earnings compared to 16 times earlier. The decline in its PE multiple captures the uncertainty related to the proposed transfer of the Gujarat plant to Suzuki.

“The Maruti stock at Rs1,550 levels has already factored in the corporate governance overhang, as its P/E (price-earnings) multiple has been compressed to 12 times from 16 times on a one-year forward basis. With the FY16 EPS range of Rs140-150, the stock can't be ignored even at 12 times multiple, which implies a price around Rs1,800 levels,” said Basudep Banerjee, auto analysts, Quant Broking.

Maruti has been gaining market share over the last quarter. Its market share in passenger vehicles for the first nine months of FY14 was 41% compared to 38% in FY12. With volumes expected to grow at over 10% between FY14 and FY16 on the back of Celerio’s launch besides new models; earnings growth is expected to be 15%/25% in FY15/16, according to Bloomberg.

CLSA analysts Abhijeet Naik and Nitij Mangal are recommending the stock as a high-conviction buy with a one-year price target of Rs2,350 and a three-year price target of Rs3,100. A note released by them on Wednesday said that “Maruti offers multiple new product triggers over FY15-16 and will execute a new export strategy, which will boost volume strongly. Competition is high but stable in passenger vehicles and we believe the worst is over”.

What may also have prompted foreign funds to raise their holdings in the car maker is the fact that the impact of the Gujarat plant may be felt over the next four to five years, which provides them enough head room to exit if there is something negative. Fund managers concede given the growth expectations over the next couple of years, a heightened sense of investor activism should not cloud the decision to buy the stock.

“FIIs have been adding to their positions given the structural growth story of Maruti and it is very difficult to get such large quantity of the stock so easily. The current decline has given foreign funds an opportunity to accumulate with the lowest impact cost,” said a sales trader in a MNC brokerage on condition of anonymity. He said that FIIs see a lot of emotions attached to the Gujarat plant and view this more as an India centric effect.

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