Recommendation: Buy
CMP = Rs 940
Price target: Rs 1,230
Key points:
- Maruti Suzuki Ltd (Maruti) is expected to be the biggest beneficiary of the Union Budget FY2009, which has given a fillip to the automobile sector by cutting the excise duty on small cars from 16% to 12%. The benefit of this reduction in the excise duty has already been passed on to the consumers by Maruti. The company has reduced the price of six models that qualify for the lower excise duty by 3.5% each. The positive impact of this reduction should result in a higher demand and become visible in a couple of months, i.e. from April or May onwards.
- The focus on increasing the disposable income in the hands of the consumer by rationalising the personal tax slabs and the recommendations of the Sixth Pay Commission scheduled for April 2008 are expected to spur spending on consumer goods and automobiles.
- The sedan version of Swift is slated for launch in the last week of March 2008. The "A star" compact car is planned to be launched in October 2008, simultaneously in the export and the domestic market. The success of these products could further fuel the volume growth for Maruti.
- Going forward, we believe the passenger car segment will report a better volume growth compared with commercial vehicles and two-wheelers on the back of an increase in the disposable incomes and changing demographics. Maruti would report a volume growth of 12.7% for FY2009.
- At the current market price of Rs 940, the stock trades at 12.2x its FY2009E earnings and 7.8x EV / EBITDA.
- I maintain Buy rating on the stock and retain Maruti Suzuki as my top pick in the automobile space with a price target of Rs 1,230 over next 6 months.
