Pair trade: Buy Hero Motocorp; Sell Bajaj Auto

Emkay Global Financial Services has come out with its pair trade strategy. The research firm has recommended to buy Hero Motocorp around Rs 1927-1930 and sell Bajaj Auto around Rs 1607-1610.

Statistical View:

The normalized price spread between Hero Motocorp and Bajaj Auto has started converging from their lows. Currently, the spread between the securities is at less than 20 percentile level in the one-year data window. The spread lies at -11.43 levels while the mean spread is -5.19. Standard Deviation is at 6.77. The normalized price spread currently stands at -0.92 standard deviation away from the average. The current price ratio is 1.1991 and the target price ratio is 2.3367. The strategy has to be a rupee neutral strategy.

Fundamental View:

A close study of the historical P/E of both the securities suggests the spread between Hero Motocorp and Bajaj Auto has started increasing from current levels. Since the start of the current financial year, the spread has bounced back from current levels. We believe a similar kind of move might be seen in the near term," says Emkay Global Financial Services research report.

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