HDFC Securities report on Maruti Udyog:

Maruti Udyog, MUL ended FY 2007 on a very strong note, with its domestic sales at 635,629 units, a growth of 20.6% yoy. The A2 segment, contributing around 73% of its passenger car sales, grew by a whopping 31.4% yoy, mainly driven by Alto, which grew by 41% yoy at 2,23,846 units.

MUL’s success is attributed to its 3 new launches in FY07, the Wagon R variant, new Zen Estilo and Swift Diesel, which received tremendous response from the customers.

In Q1FY08, MUL is planning to launch a new sedan, SX4, based on a new platform developed by Suzuki. This car is already sold as a hatchback in a few markets, including Japan. The success of this model will help the company arrest the decline in sales of the A3 segment, which de-grew by 7.0% yoy.

MUL is planning a capex of Rs.90 bn in the next 4 – 5 years. Around Rs. 40 bn will be invested in the Gurgaon plant and the balance Rs. 50 bn, shared between the diesel engine plant and the new assembly plant at Manesar. The Manesar plant has an installed capacity of 1,00,000 units, which will be scaled up to 3,00,000 units per year. Most of the production from this plant will be exported to Europe.

Outlook and Valuation

The stock price has corrected by ~ 25% in last two months, from Rs. 950 levels. At the current market price of Rs 756, the stock trades at 14.8x FY07E and 12.6x FY08E earnings respectively. We believe, going forward, the growth in passenger car market will slow down to 10 – 12%. However, with healthy volume growth, a strong product line-up, and an entry into the diesel car segment, we maintain a positive outlook on the stock. We strongly believe that MUL still has the potential to take on the competition through new product launches and competitive pricing. We maintain BUY.