)
The shares of Maruti Suzuki have touched an all-time high despite weakness in the auto sector. There are two main reasons for the sharp rise in the counter.
Reports say Maruti's Japanese promoter is planning to increase its stake in the company. Suzuki Motor Corporation, which currently owns 56.2% of the Indian company is said to be contemplating various options to increase its stake. It might go in for an aggressive share buyback plan, which could trigger the takeover code and necessitate an open offer or issue preferential shares to itself or increase its holding through creeping acquisition of 5% from the open market and extinguishing these shares.
The other reason for the rise has been the fall of Japanese Yen, which is trading at a five-year low vis-à-vis dollar. A weaker Yen means lower import cost for its Indian operations.
Among the two reasons, promoters’ increasing their stake is a long-term positive for the company. A weak Yen is a temporary phenomenon. Further, with the company decreasing its dependence on imports, a weak Yen would have less impact. The company is expecting to reach a target of around 15% imports by FY15.
As far as the equity structure is concerned, a buyback or a creeping acquisition will be more favourable for the shareholders as this would mean a reduction in the equity capital. Maruti is financially strong and does not need extra equity capital from its foreign promoter.
But more than these factors, what can keep the stock up is its steady financial performance. The company has done well of late by concentrating on the rural market. Nearly one-third of the company’s sales are now from the rural segment. A modest single-digit volume growth has been enough to allow the company to keep its market share at above 40%.
Maruti’s Japanese parent’s hiking its stake comes from the confidence it has on the Indian market and a spate of new product launches. The company is planning to launch 14 new products in the next three years which is the second highest launches after Japan (16 launches). China and Europe will have seven products each. Indian operations will also play an important role in its expansion plans in West Asia and African markets.
Clearly, the increasing role of Indian operations in the overall scheme of things is prompting the promoter to increase its stake. Nothing can be more comforting for a shareholder than the promoter showing confidence in the company by buying its share.
