Buy MSIL, target Rs 2,665

We maintain our buy rating on Maruti Suzuki with a target price of R2,665 a share. With an improved economic outlook and consequent improvement in discretionary income and consumer sentiments, we expect passenger vehicle (PV) industry to rebound strongly over the next 2-3 years .

Given its leadership position and three new launches (Celerio, Ciaz in Q2FY15 and compact SUV in Q4FY15), we expect MSIL to be a key beneficiary of the upturn in PV demand. We estimate robust 26% EPS CAGR on 13.7% volume CAGR (implying 3.3% CAGR over FY11-16e) and margin expansion of 150 bps over FY14-16e to 13.2%. The stock trades at 20.3x/15.9x FY15e/16e consolidated EPS of R117.2/ R149.4.

Maruti Suzuki outlined the agreement details with Suzuki Motor Corporation (SMC) for expansion of the Gujarat plant under 100% subsidiary of SMC, Suzuki Gujarat (SG), along with details of the term sheet. As indicated earlier, MSIL would voluntarily seek minority shareholders? approval for this arrangement.

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The additional clarifications by MSIL on proposed expansion of the Gujarat plant further safeguards minority shareholders? interest. MSIL could potentially save R10,500 crore, assuming post-tax return of 8.25% p.a. for the 15-year contract period. Additional funds would be used to strengthen marketing, sales infrastructure, R&D, overseas market penetration.

Motilal Oswal