June Sales +24% YoY:

Domestic sales rose 26% YoY, buoyed by the sharp growth in the key sub-compact segment. We reckon some of the growth was due to the deferment of demand over the previous month. Over the quarter, MUL's domestic growth is 17%, which implies 8% growth for the rest of the fiscal to meet our FY08E volumes forecast.

Segment analysis:

A2 segment growth rose sharply 38% YoY, after muted growth in May. M800 volumes continue to decline, but are offset by rising sales in the more profitable A2 segment. The A3 segment registered a strong 46% YoY growth due to the newly launched SX4. Initial response is very positive for this model, given the attractive price/value proposition.

Exports:

Growth moderated to 3.1% YoY. We maintain our export growth forecast at 15% in FY08E, on the back of better penetration in non-European markets and easing of capacity constraints.

Market share trends:

MUL's domestic market share remains steady at 51%, driven by a combination of new models and aggressive promotional schemes, which continue to drive consumer demand against the backdrop of rising
interest rates.

Reiterate Buy:

Rising interest rates remain the key short-term macro risk. We also remain cautious on the EBITDA margin outlook, given a) a changing model mix, b) higher promotional spends / discounts, and c) escalating material cost pressures.

Valuation

Our 12-month target price of Rs 945 is based on 11x P/CEPS FY09E. We believe the multiple compares favorably with the cash earnings CAGR of c16.3% over FY07E-09E. At our target price, the stock would trade at the mid-point of the current trading band. Maruti has a relatively short trading history. Our multiple of 11x is at a marginal discount to the 11.4x trailing two-year average - but merited, in our view, since competitive intensity will escalate going forward, and the macroeconomic environment is less conducive to growth (rising interest rates impact volumes growth across the car industry, given that 80% of vehicles are bought with finance). We prefer price/cash earnings as a valuation metric for the automobile sector, given the relatively high capital intensity (both on capacity and product development) of the business.