Buy Maruti Udyog, target Rs 945: Citigroup

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Citigroup is bullish on Maruti Udyog and has maintained buy rating on the stock with target price of Rs 945 with 12-month perspective.

 

Citigroup Research report on Maruti Udyog 

 

Aug Sales Up +27% Y/Y 

 

Driven by strong growth in domestic sales (+25% Y/Y, 19% YTD). Exports rose 60% Y/Y, 51% YTD as company continues to increase penetration in new African and Latin American markets v Segmental Analysis 

 

A2 segment rose 29% Y/Y higher than July (+19% Y/Y). We reckon performance was boosted by discounts (ranging between Rs 7,000- 40,000, approx 4-8% on ex showroom Delhi prices) offered on models like M800, Omni, Alto, Zen Estillo, Wagonr Petrol and Esteem under the "Smile India" compaign. M800 volumes degrew 15% Y/Y due to shift to the compact segment. SX4 continued to show strong performance 

 

Market Share Trends 

 

MUL has maintained its market share at 51% in July, riding on the success of its new models, aggressive sales promotion push and innovative marketing schemes like vendor and employee referrals, "Smile India" compaign 

 

Reiterate Buy (1L) 

 

Rising interest rates remain the key short term macro risk. We believe margins will be under pressure in 2HFY08 , given a) a changing model mix, b) higher promotional spends / discounts, and c) escalating material cost pressures. Investment thesis We rate the stock as Buy/Low Risk (1L). The Indian car market is on a structural growth path (estimated CAGR of 12-15% over the medium term), driven by low penetration levels, improved demographics and infrastructure, tax cuts and availability of consumer finance at relatively low interest rates.

 

Despite the presence of most global majors, Maruti has managed to remain the dominant India player. Its competitive advantage stems from an early start, a balanced product portfolio targeted at the sweet spot of the market, its having the largest distribution and service network, and its consistently high quality ratings. While competitive pressures increase, we expect market share erosion to be gradual and growth in absolute terms to be robust for Maruti. We estimate earnings growth and cash earnings growth of 12.3% and 16.3% CAGR respectively over FY07-09, driven by unit sales CAGR of 17%. We expect margins to contract around 50bps over this period, given cost pressures, a changing product mix and increasing competition, which will keep pricing pressure subdued.

 

Valuation

 

Our 12-month target price of Rs945 is based on 11x P/CEPS FY09E. We believe the multiple compares favorably with the cash earnings CAGR of c16.3% over FY07E-09E. At our target price, the stock would trade at the mid-point of the current trading band. Maruti has a relatively short trading history. Our multiple of 11x is at a marginal discount to the 11.4x trailing 2 year average - but merited, since competitive intensity will escalate going forward, and the macro economic environment is less conducive to growth (rising interest rates impact volumes growth across the car industry, given that 80% of vehicles are bought with finance). We prefer price/cash earnings as a valuation metric for the automobile sector, given the relatively high capital intensity (both on capacity and product development) of the business.

 

Risks

 

We rate Maruti as Low Risk based on our quantitative risk-rating system, which tracks 260-day historical share price volatility. Risks that could prevent the stock from reaching our target price and rating include: (1) sales of passenger vehicles are sensitive to economic variables - an appreciable rise in interest rates could impact volumes growth across the auto sector; (2) revised emission and safety norms could bring cost pressures; and (3) competitive pressures in the Indian market continue to increase, which could impact margins over the longer term.