Maruti Suzuki India (Maruti) continued to deliver robust sales with the August 2009 sales volume growing by stupendous 41.6% year-on-year (y-o-y), beating our expectations.
Thus in the year to date (YTD) period Maruti reported a strong sales growth of 25.3% y-o-y, which is much higher than the industry growth and is also above our expectations.
Further, this volume growth has come from the sale of premium end models (A2 and A3 segment that grew by 25% and 34.7% respectively), which will help the company garner higher blended realisations.
We have thereby revised our FY2010 and FY2011 estimates upwards by 2.5% and 4% respectively to factor in the higher volumes and realisations.
Taking into account the robust growth outlook we value the company at 20x FY2011E earnings and consequently upgrade our price target to Rs1,609.
However, with the sharp run-up in the stock price and the minimal upside from the current market price of Rs1,546 we believe the risk-reward ratio has turned unfavourable.
We therefore advise investors to take some profits off the table by booking partial profit in the stock and accumulate the stock at lower levels.
We maintain our HOLD recommendation on the stock. At the current market price, the stock is trading at 19.2x its FY2011E earnings and enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 11.8x.