Maruti

For second quarter in a row, EBITDA margins have come under pressure from raw material and manufacturing costs. We reduce our earnings forecasts and target price for Maruti, but believe the proposed A-star launch in 3QFY09 should prop up market share and profits. Buy reiterated.

EBIT for 1QFY09 disappointed by 25%
Maruti's EBIT for 1QFY09 fell 26.7% yoy due to the Rs734m impact of currency fluctuation on imports and a Rs619m additional depreciation charge. Hence, in spite of better-than-expected net sales (up 21% yoy), EBITDA margin fell 430bp yoy and 70bp qoq to 12.1%. As a result, EBITDA was nearly 11% below our expectation and EBIT 25% lower. But with higher other income and a lower tax rate, normalised PAT was better than expected at Rs4.84bn, up 6.4% yoy.

Launches should arrest market share slide, in our view
The successful launch of the Hyundai i10 in November 2007 and the sharp ramp-up since has put pressure on Maruti's domestic passenger vehicle market share, which has fallen 300bp from 1H07 to reach 43.5% by July 2008. This has also weakened Maruti's pricing power. But with the launch of the Maruti-800 Duo in June 2008 and the proposed launch of the A-star in 3QFY09, we feel market share has bottomed.

Marginally lower EBITDA forecasts
The weak operating result but better-than-expected sales realisation growth of 6.7% yoy leads us to trim FY09F EBITDA by 4% and EBIT by 7.5%. We expect the EBITDA margin to improve marginally in coming quarters, on the back of the price hikes implemented in May 2008 and cost controls. Building in higher other income from the improved yield on the company's Rs50bn cash and investments, we cut our EPS forecast by 4.1% for FY09, but maintain it for FY10-11.

Target price adjusted for a higher risk-free rate and EPS cut
We reduce our three-stage DCF-based target price from Rs985 to Rs775.40, building in marginal pressure on EPS and a higher risk-free rate (from 8% to 9%). But the steep underperformance of the stock in last one year discounts the concerns and we reiterate our Buy recommendation at the current valuation of 9.7x FY09F EPS and cash per share of Rs227, as we expect the proposed Astar and Splash launches to drive sales momentum and market share in the coming quarters.