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Buy Maruti Udyog Ltd – Motilal Oswal

August 28, 2007

Motilal Oswal has reiterated BUY recommendation on Maruti Udyog Ltd with a price target of Rs 1,188. Passenger vehicle (PV) segment maintained its healthy growth in 1QFY08. This indicates the imperviousness of the PV industry to temporary negative factors like higher interest rates and tightness in bank financing. The structural factors sustaining the robust growth in PVs are still in place and we expect volumes to grow at 16.5% CAGR over FY07-10. As the leading player in the industry, Maruti would be a key beneficiary.

Despite a series of price cuts across its product range, competitive pressure and cost inflation, Maruti has consistently expanded its margins over the past three years (220bp over FY04-07). Estimated volume growth is at 16.4% CAGR over FY07-10; aggressive model launches could result in positive surprises. Margins would expand from 15.3% in FY07 to 15.9% in FY08, despite consolidation of the Manesar plant. EPS is estimated to be at at Rs67.7 for FY08 and Rs79.2 for FY09. The stock is attractive at 11.5x FY08E EPS and 9.8x FY09E EPS.

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