Buy Maruti Udyog; target Rs 980: CLSA

47259 Investors following Maruti Suzuki. Share this News with them.

0

Like this story, share it with millions of investors on M3

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.

Post your opinion here

 

0

Tweet

Share on Tumblr

RELATED NEWS Buy HCL Tech; target Rs 368: IL&FS CLSA maintains buy on United Spirits Hindalco an underperformer; targer of Rs 124: Karvy Deepak Fertilisers a market outperformer: HDFC Sec Buy KEC International; target of Rs 652: P-Sec ALSO READ News and Notices about Maruti Suzuki See interviews with Maruti Suzuki Management See what other Experts & Brokerages are saying about Maruti Suzuki See previous Results of Maruti Suzuki Maruti Suzuki BSE | NSE 25/05/12 Are Mutual Funds betting on Maruti Suzuki?

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.