DSP Merrill Lynch is bullish on Maruti Udyog and has recommended buy rating on the stock with a target of Rs 1000. DSP ML expect the company to deliver above industry growth rates, driven by slew of new launches, and a surge in exports

DSP Merrill Lynch report on Maruti Udyog:

Expect Maruti to beat industry growth

Q4 net profit at Rs 4.5bn was in line, although EBITDA margin was restricted by losses from the new car plant and higher power costs. Adjusted for this, the variance was marginal, and results were strong. We expect the company to deliver above industry growth rates, driven by slew of new launches, and a surge in exports. Reiterate Buy with PO of Rs 1,000.

Profits restricted by losses in new plant

EBITDA grew 13.3% to Rs 5.5bn, but margins declined 240bps to 12.4%. This was largely due to a loss of Rs585mn in the new car plant, adjusted for which margins at 13.8% are close to our expectations. Net profit grew 24.3% to Rs 4.5bn, in line with our estimates, though also aided by lower depreciation and higher other income, but after additional taxes related to previous years.

We are tweaking overall forecasts

We expect rising interest rates to lower sales traction, and higher costs to impact profitability in the initial half of FY08. We however, expect strong recovery from H2 as the new plant breaks even and overall volumes expand. We reflect this by lowering estimated EPS in FY08 by 3.9%, and just 1.6% in FY09E. Our forecasts factor 100bps cumulative decline in margins.

Reiterate Buy on strong growth prospects

We are bullish on passenger cars, and believe that Maruti will grow faster than the industry, given its strong competitive positioning in the domestic market, and export thrust. We reiterate our Buy rating with an unchanged PO of Rs 1,000. This does not include the potential upside from the investment in the engine joint venture.