Car maker Maruti Suzuki India Ltd reported a drop in sales growth for September, but that hardly affected the markets’ view of the stock. Maruti’s share price continued to hover around its all-time high of Rs1,028 after the monthly sales figures were released.

Domestic sales rose 11.5% in September, compared with 19% in the five months between April and August. On a year-to-date basis, growth is still impressive at 17.5%, especially considering the rest of the sector is growing in low single digits.

Between April and August (September numbers for the rest of the industry would be released only in second or third week of this month), the rest of the industry grew volumes by 8.2%. Much of this increase came from Mahindra Renault?Pvt.?Ltd,?a new entrant that has captured a 2% share of the market.

If one were to only consider incumbents, the rest of the industry (excluding Maruti) grew volumes by just 3.2%. That Maruti increased sales by 19% during this period is commendable, especially since the growth has come despite higher interest rates.

Analysts say sales grew on the back of aggressive discounts to customers and incentives to dealers. This should typically result in lower margins. But as Maruti’s results for the quarter ended June demonstrated, margins have been maintained.

While Maruti’s cost-saving measures have helped, the firm also gained last quarter from a 14% appreciation in the rupee against the yen.

The September quarter would enjoy similar benefits because, on a year-on-year basis, the rupee has appreciated by 11% based on quarter-end rates. The firm has achieved a high level of indigenization for its auto components, but some parts continue to be imported from the parent firm in Japan. The appreciation in the rupee, therefore, leads to lower input costs. True, the appreciation in the rupee would also hit export revenues and profitability, but then as the June quarter results established, the net impact is positive.

While the going seems smooth for Maruti, both in terms of volume and profit growth, its current price of Rs990 largely captures the expectations of analysts.

Having risen sharply by about 33% in the past quarter, Maruti shares have either already met or are close to most analysts’ price targets. Bloomberg data shows that the average target price of 15 analysts tracking the stock is Rs991.

LIC’s stock market role

When foreign institutional investors (FIIs) were desperately exiting Indian stocks, the spotlight was on domestic mutual funds and life insurance firms, which were matching FII sales with huge purchases. Life insurance firms, flush with funds from sales of unit-linked insurance policies (Ulips), were touted to be the new domestic powerhouse in the Indian markets, which would soon be even capable of matching the strength of FIIs.

But before making a generic conclusion that most insurance sales are unit-linked and that much of the premium collection will end up in the equity markets, it makes sense to understand the experience at the Life Insurance Corp. of India Ltd (LIC), which, as of March, accounted for around 83% of the industry’s equity holdings worth Rs1.5 trillion.

In terms of new business premium collections, the insurance giant still accounts for about 70% of the industry’s inflows. If one were to include renewal premiums on policies sold in the past, the share would be much higher, given the firm’s much longer legacy.

LIC’s managing director D.K. Mehrotra says the insurance provider expects an investment surplus of Rs1.15 trillion this year—up from Rs0.9 trillion in financial year 2005-06. Of this, about 35% (Rs40,000 crore) would be related to funds collected from unit-linked schemes. In addition, in LIC’s case, only about 50% of Ulip funds collected are marked by investors for equity investments. (Thus, Rs20,000 crore can be expected to find its way into the markets.) This is much lower than private insurers, where equity investments account for nearly 90% of all collections from sales of Ulips. Of the balance investment surplus of Rs75,000 crore, only about 10% finds its way into equities, Mehrotra points out.

These figures are much lower than the figures that come up if one were to simply assume that most new sales are from unit-linked products, which, in turn, find their way into equities. But that’s not to say that the expected investments figures aren’t substantial. In addition to the funds collected by private insurers, investments by life insurers could easily exceed Rs30,000 crore a year. In comparison, FIIs have brought in Rs55,000 crore so far this year. But, note that, in terms of assets under management, insurance companies’ outstanding investments as of June were just one-fourth of those by their FII counterparts.

The fact that the share of inflows is higher means the share of assets, too, would increase over time. But, for this trend of high inflows to continue, equity markets would have to continue providing high returns. If trailing returns turn negative, investors would not only be less gung-ho about Ulips in general, but would also shift from equity plans to balanced/debt plans.

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