BoA ML: Upgrade Maruti to Buy

Volumes drive upgrade – Raise to Buy from Underperform


Raise forecasts and PO
We upgrade our rating to Buy from Underperform, and raise PO to Rs1,720
(23% upside potential) from Rs1,369. Our estimates are 8%-18% ahead of street
over FY12-13E, and a non-consensus call driven by: (1) revision in standalone
profit forecasts by 9-19% over next 2 years, due to increased sales visibility given
recent launch successes and easing of capacity constraints, and (2) rising
contribution from subsidiaries and associates (~8%), now part of PO.
Sales outlook appears much brighter
Contrary to consensus view, we expect Maruti to maintain market share on the
back of (1) Alto K-10, Eeco success, and stronger demand for Swift, Dzire on
upgraded K-series engines, despite competition, (2) introduction of CNG vehicles
on popular models, and (3) likely entry into the premium segment next year. Mgmt
has also scaled up expansion plans by ~25% vs earlier target. We, therefore,
raise our estimate of domestic growth to 21% CAGR over FY10-13E, from 13%.
Margin concerns overdone
We believe 8.9% EBITDA margin in Q1 FY11 was near trough. Notwithstanding
currency-related impact in H2, largely maintain assumptions over FY12-13E, due
to (1) operating leverage on stronger volumes, (2) favourable sales mix (i.e.
domestic, model shift), and (3) better price realizations.
Stock is undervalued
We expect stock to revert to premium rating on (1) strong sales-led profit growth
of 24% CAGR, which we believe will lead to consensus upgrades, and (2) being a
proxy to passenger vehicles, the only listed pure-play in fastest growing segment.