We do not track Maruti Suzuki because of our strict discipline of investing only in A1, A2 and B1 grade businesses only. Maruti Suzuki’s current grading is B2 and we do expect its grading to improve to B1 by next financial year.

Let me throw some light on how we grade these businesses. We divide these grading in two parts, first we grade business looking at its Balance sheet (A, B and C) where A is great quality Balance sheet, B is okay and C is the worse. For a ‘C’ grade business there is a good chance for them to file bankruptcy or collapse in next 2 years. Nobody would like to invest in business where there is even a good chance to file bankruptcy in the future.

The other part of grading is all about business performance (1, 2, 3 and 4), where we look at business returns on equity, cash flow, dividend policy and incremental returns on equity etc., where 1 is the excellent performance, 2 is good, 3 is okay and 4 is worse.

When we combine these both grading, looking at our funds risk profile we are only comfortable to invest within A1, A2 and B1 grade business. But this does not mean B2 grade business is not worthwhile to invest. But same time, I would not advise you to invest in poor performing business, which are A4, B4 and C4 grade.

Hope this information will help you to understand our grading.

Coming back to the Maruti Suzuki India numbers, total income from operations had jumped up by 15% to Rs 58,612 compare to its last year. EBIDTA for the year stands at Rs 9,590.30 crore or its operating margins of 16.23%. Last year operating margins were at 14.92%. The low prices of commodity had helped them to improve their margins.

We valued this business for the year end 2016 for Rs 1450 per share where dividend payout ratio stands at 22%. If they do maintain the same dividend policy, today the price is trading at premium price to our calculated intrinsic value for 2018 by almost 35%.

This is very common in the stock market for prices to move forward to its expected intrinsic value. Today, if you are a Maruti Suzuki shareholder, there is nothing wrong to ask for premium price, where overall earnings growth of many listed business is expected to be mediocre while your business is growing its earnings at far better pace. However, in the long run, prices do follow the assets underlying intrinsic value. We do expect this convergence to happen, and in this case it might in the next two years.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.