Stock correction overdone

Maruti's Yen exposure is much hue and nothing to cry about. As a policy, the company hedges against currency risk. If the average rate of JPY/USD slips 10%, we expect downside EPS risk of 2.5% this fiscal and 4.5% in FY09. We believe recent stock reaction is overdone. Reiterate Buy with PO of Rs 1,050.

No impact of borrowings in JPY

Maruti has outstanding rupee equivalent loans of Rs5.67bn from Japanese Banks. The company’s profitability should not be impacted on this account, as the loans are hedged with forward contracts. Q1 did not witness any gain on a weaker JPY.

Net importer as of now, but likely to change

Last year, Maruti imported materials worth Rs 13bn (~75% JPY), paid Rs 3bn towards royalty/technical fees (JPY), and exported vehicles of Rs5.8bn (USD). We expect imports to decline with localization and exports to rise, thereby reducing JPY exposure equivalent of Rs13bn, and net forex exposure of Rs7bn.

Marginal EPS risk from stronger Yen

From the opening average rate of JPY/USD 118, a 10% correction to 106 (present rate 113), we estimate margin impact of 70bps on an annualised basis. This implies downside EPS risk of 2.5% in FY08E, and 4.5% in FY09E. With expectations of reduced JPY exposure, this risk will likely decline.

Reiterate Buy

Stock trades at 11.9x FY08E and 10x FY09E EPS, the lowest forecast P/E multiple since listing. We believe that concerns on exchange volatility are overdone, and overlooks the strong structural growth theme of passenger cars