Buy Maruti Udyog; target Rs 980: CLSA

Buy Maruti Udyog; target Rs 980: CLSA

Research firm CLSA has maintained buy rating on Maruti Udyog with 12-
month target price of Rs 980. The estimates assume 10% domestic volume
growth, 100,000 units of export volumes and a 100 bps yoy margin
decline in FY2009 resulting in an EPS of Rs 74.4.

CLSA report on Maruti Udyog:

The key concerns in investor mindset regarding Maruti's stock from an
FY2009 perspective are domestic volume growth post a slew of
competitive car launches and sustainability of margins post increase
in exports as a percentage of sales. Our scenario analysis throws up a
worst-case value of Rs 750 and a best-case value of Rs 1,050 for
Maruti's stock on FY2009 basis. We maintain our BUY rating on Maruti
with a price target of Rs 980 noting favourable risk-reward.

Twin uncertainties for Maruti in FY2009

FY2009 will see a sharp increase in competition for Maruti in small
cars following competitive launches by Tata Motors, Hyundai and Fiat.
There is a possibility that Maruti will lose market share in the
domestic market in FY2009. Sharp jump in exports (108% growth) will
boost total volume growth in FY2009 but will likely put overall
margins under pressure. In our view, the incremental export volumes in
FY2009 will have lower profitability than existing export volumes.

Worst-case scenario: value of Rs 750 for Maruti

Our worst-case scenario assumes 0% domestic volume growth for Maruti
in FY2009 Vs 12.5% for industry, export volumes of 100,000 units (108%
growth) and a steep 200 bps yoy drop in EBITDA margins. This results
in an EPS of Rs 62.4 in FY2009 - a 6% decline over FY2008. If we apply
a 12X multiple (lower than 13X - the average historical 12 million
rolling multiple for Maruti), we get a fair value of Rs 750 - 5% lower
than current stock price.

Best-case scenario: value of Rs 1,050 for Maruti

Our best-case scenario for Maruti assumes 12.5% domestic volume growth
for Maruti in FY2009 - in-line with industry, 150,000 export units
(200% growth) and a more moderate 70 bps yoy EBITDA margin decline.
This results in an EPS of Rs 80.6 in FY2009 - a 21% growth over
FY2008. Applying a 13X multiple (average historical 12 million rolling
multiple), we get a fair value of Rs 1,050 - 33% higher than current
stock price.

Maintain BUY on stock noting favourable risk-reward

We maintain our BUY recommendation on Maruti with a target price of Rs
980. Our estimates assume 10% domestic volume growth, 100,000 units of
export volumes and a 100 bps yoy margin decline in FY2009 resulting in
an EPS of Rs 74.4. Maruti, in our view, is the only auto stock
offering reasonable visibility of volume growth till FY2010 on the
back of rising exports. We note that the stock has fallen to just 5%
above our worst-case scenario value, a scenario to which we would
assign less than 10% probability. We view the current market weakness
as a good opportunity to buy the stock.