Maruti: A bumpy ride

Cost pressures have hit Maruti's valuations

Car manufacturers are looking at another price increase to tackle the rise in input costs. The finance minister had increased the excise duty on steel from 12 per cent to 16 per cent in this year's Budget, and Maruti is reportedly planning a 2-3 per cent hike in car prices.

This is in addition of the price increase that would be necessary if Bharat Stage III norms start applying April 1, 2005 onwards. For smaller cars such as Maruti 800, Alto, Zen and the Wagon-R, the increase in price on account of an upgradation to the Bharat Stage III norms is likely to be upwards of 4 per cent.

In January, Maruti had introduced Bharat stage III variants of Zen, Wagon-R and Baleno. In the case of the Zen and the Wagon-R, prices were higher by 4-4.7 per cent, depending on variants.

Maruti had earlier taken a 2-3 per cent price hike towards the end of December 2004, to offset the rise in cost of inputs like steel, rubber and plastic. On a cumulative basis, the price hike could turn out to be over 10 per cent (since December) after accounting for the increase on account of the shift to Bharat Stage III norms.

The incessant cost pressures, which are now leading to price increases, have taken their toll on Maruti's valuations. In the past one year, Maruti's share price has declined by around 7 per cent compared with a 15 per cent rise in the BSE's Auto index and a 22 per cent rise in the Sensex. Coupled with investor concerns on the JV route for its new car plant, this has led to Maruti's forward valuation to drop below 12 times.

VIX""Not so reliable in a bull market

With stock indices around the world hitting new highs thanks to massive funds flows from the US, it's no wonder that market watchers are uneasily eyeing the US markets.

That's because flows to emerging markets typically rise when the US markets do well. The latest worry is that the CBOE Volatility Index (VIX) ""the underlying base for which is the Standard & Poor's stock index option "" has been at very low levels"" below 15 since November last year.

The VIX is a key measure of market expectations of near term volatility. The low levels signal a high degree of complacency among investors. The worry is that such a high level of complacency could cause a steep fall in the market. And a crash in the US markets, might trigger a fall in emerging markets.

However, the VIX apparently does not always send the right signals when it is at low levels. For instance, the VIX has been at even lower levels in 1994 ""below 10 "" and yet 1995-96 saw strong markets.

On the other hand, it may be a better indicator of market bottoms when it reaches very high levels, signalling volatility and fear. It started going up to cross the 40 level in 1997-99 when the market saw some small crashes ""an indication perhaps of the impending 2000-2002 bear market. Our very own RVIX, based on the Nifty, too appears to be more reliable while calling bottoms rather than tops.

For instance , it shot past 85 when the markets tanked on May 17 and since then the markets have not looked back. Currently, the R VIX is trading at levels of 17 or thereabouts ""it was at around 20 or so a week ago and the markets have come off slightly.

Obviously, no index can be totally reliable given the numerous other variables driving the markets. With record levels of dollar inflows, perhaps it is liquidity more than anything else that needs to be monitored.

With contributions from Mobis Philipos, Shobhana Subramanian and Amriteshwar Mathur