Rising auto fuel prices and spiraling inflation have, in recent times, negatively impacted the sentiment in this counter. Our sensitivity analysis shows that a 1% increase in interest rates affects growth by 300bp.
Also, a 10% hike in petrol price would increase payouts by only 2.5% for passenger cars. However, higher reliance on alternative fuels like diesel, CNG and LPG will help the company push sales.
1) Cut in income tax rates will lead to 10% increase in disposable income of passenger car target customers. Expected playout –H2FY09.
2) Payout of three years arrear pay and 30% increase in salaries of 19 million government employees on implementation of Sixth Pay Commission recommendations. Expected playout –H2FY09.
3) Around 15-18% capacity expansion at Manesar will help monetize latent demand for Swift and Dzire and reduce current long waiting periods. Expected playout – H2FY09.
4) Launch of two news products in the compact car segment (A-Star in October 2008 and Splash in April 2009) would help stem loss of market share to Hyundai i10.
5) Commencement of exports to Europe. Expected playout – Q4FY09.
Maruti is currently trading at 8.6x our FY09 EPS estimate, significantly below the four-year (FY04-07) historical trading range of 11-17x.
We recommend BUYING the stock with a 12-month time horizon, maintaining our stance of a strong 2HFY 09. We believe Maruti is the best play in the Indian auto space, with the domestic passenger-car demand well complemented by export growth.
Our target price of Rs840 is based on 12.7x FY10 EPS of Rs66. The bear case valuation is Rs680 – based on 11x FY09 bear case EPS of Rs62 (assuming 0% domestic volume growth in July 2008-March 2009 and 100bp y-y EBITDA margin decline in FY09).