The One Thing in Common Between Maruti Suzuki and Coca Cola

Over the past few weeks, I've been working from the Equitymaster office.

In the short time I've been in office, I've had quite a few interesting conversations with Rahul Shah, co-head of research at Equitymaster.

We talked about a range of topics, from the right process to follow in building a portfolio, to the high valuations of stocks in a euphoric environment.

We agree on quite a few things but I must say that we've had plenty of disagreements too.

The idea to write this editorial dawned on me when we were talking about how the concept of 'Hold Forever' doesn't work in the stock market.

In fact, we disagree on BAAP (Buy at any price) investing and Coffee Can investing too.

In a previous editorial, I wrote about the perils of BAAP investing. Today, I want to show you why I'm against 'Buy and Hold Forever' investing.

My key argument is this...

Businesses can last 'Forever' and stock prices do not always follow businesses.

Take Coca Cola for example. Investing legend Warren Buffett became famous for his early investment in Coca Cola in 1988.

When he first purchased shares of Coca Cola for the first time, he was thinking about the longevity of the business i.e. the perpetual nature of the business.

What has changed over the past 50 years for Coca Cola?

The brand is still intact, the company generates tons of cash flows which is self-funding itself for future growth. It's also a recession proof business.

So in short, nothing had changed. In fact, things had gotten better. Especially its balance sheet size and the piles of reserves it has amassed over the years.

It was a typical 'Buy and Hold Forever' stock, wasn't it?

Well, think again.

Let us talk about the returns. Coca Cola has given a CAGR of just 8% over the past 5 years.

Now that's mediocre return by any standards. In fact, Pepsi, its biggest rival, has done better.

While Coca Cola may be a great company it's pertinent to also look at its market positioning over its stock returns.

Maybe the market does not have the same level of enthusiasm it had for Coke 20 years ago. Maybe fund managers have many tech companies to focus on. Maybe the threat of migration to a healthy life style, and a focus on natural products, is de-rating its long term valuation.

In fact, aerated water giants like Pepsi and Coca Cola both are making conscious efforts to increase the share of non-aerated beverages and snacks in their portfolio.

But the non-aerated and snacks market has a completely different playing field. These companies wanting to make a dent in the snacks and mineral water will have to redesign the wheel.

Once upon a time, distribution was considered to be a company's biggest moat. However, with giants like Amazon and other direct to consumer apps, the relevance of distribution is reducing.

Maybe the market has sensed all this and is giving it a low valuation multiple.

Whatever the reason, it's evident from the stock price return over the past 10 years that Coca Cola is out of flavour.

When I think about the Coca Cola story in the Indian stock market, one company comes to my mind.

Maruti Suzuki.

It's a well-known brand, market leader, strong balance sheet and tons of reserves. It has all the characteristics which a Coca Cola had in terms of business moat.

But in business, change is the only constant. 'Adapt or Die' is the mantra which dictates the best strategy in a disruptive environment.

So my question is: Will Maruti's stock go the Coca Cola way?

While there is no issue with the business models of both these companies, the question investors need to answer is this - 'Will the stock price stagnate'?

Just like the shift to healthy food and non-aerated drinks take centre stage for aerated drinks companies, electric vehicles are a huge challenge for traditional car makers.

Now, I'm in no way questioning the survival of these companies.

My point relates to the uncertainty in the business environment as well as their competitive positioning. These could be the reasons for mediocre stock price returns.

Take the example of General Electric or General Motors. These companies were very important stocks in the Dow Jones index many years ago.

Both these companies exist today. But they have massively underperformed the market.

General Electric has declined by 60% over the last 5 years.

General Motors gave no returns from 2010 to 2020. The stock was as like a flat tyre.

This risk of stagnation is the biggest risk in 'Buy and Hold Forever' investing. Even the bluest of blue chip companies have stagnated for years. This can lead to an underperformance of your portfolio.

Another example is one of India's pharma giants - Sun Pharma.

Over the past 5 years, Sun Pharma has returned barely 3% CAGR. Sun Pharma is considered to be a blue chip, but the stock price has gone nowhere.

So much for 'Buy and Hold Forever'.

The risk is opportunity cost. Investors should consider this to be as important as loss of capital.

We haven't heard anything concrete from Maruti Suzuki on its EV plans while Tata Motors is on a roll with a 70% market share in EVs.

Bookings for Tata Motors EVs keep piling up. The EV pipeline of Tata Motors looks promising. Private equity fund TPG group has already invested Rs 1 bn in Tata Motors. The company has a clear roadmap for launching 10 EVs over the next 4-5 years.

Maruti, on the other hand, has announced a partnership with Denso and Toshiba to build a battery plant. It plans to roll out its first electric vehicle by 2025.

However, wouldn't that be a bit late with the pace at which electrification is happening? By then Tata Motors would already have 8-10 EVs in the market.

To put it bluntly, Maruti Suzuki is late in my view.

Now to come back to my initial question of holding stocks forever...

Companies like Maruti Suzuki and Coca Cola have not only survived but thrived over decades. But these will underperform as the market positions itself based on emerging trends.

As an analyst I have no doubt Maruti Suzuki will survive.

But as an investor, with the dynamics of the auto industry getting altered, you have to ask yourself - 'Will Maruti Suzuki continue to be the market leader'?

After all, the most important thing for you, dear reader, is 'returns'.

To know more about this do watch my video on Tata Motors versus Maruti. I talked about the factors that will decide the winner.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

PS: At 5 pm today, Equitymaster's editors, Tanushree Banerjee and Richa Agarwal, will show you how to potentially accumulate Rs 7 crore in wealth over the long term. Join them LIVE here.