>MARUTI SUZUKI (MOTI;LAL OSWAL)

■ Momentum in volume to continue, with multiple drivers for medium term: Strong volume momentum to continue in November 2009 and December 2009, with volumes to remain stable on MoM basis at 83-85,000 units/ month. Volume growth in November would be driven by inventory filling in November due to plant shutdown in December. Improving availability of car finance with re-entry of ICICI Bank, recovery of demand in urban markets and continuance of strong growth in rural markets would be key drivers for growth in medium term.

■ Upgradation of engines to Euro IV would enable price hikes: Maruti normal changes prices once in a year in January. However, any changes in prices this time would be driven by a) expected roll-back in excise duty, b) increase in RM cost and c) change in emission norms. While price increase for existing Euro IV compliant model might happen as early as January 2010, other models price revision might take place along with engine up-gradation.

■ Cost inflation to restrict margin expansion: While Maruti is still negotiating RM contracts for steel and other commodities, it would be forced to give some price hikes for commodities as prices have recovered by 30-60% from the bottom levels of 4QFY09. Our interaction with Apollo Tyres indicated that it is in advanced stages of negotiating 10-12% price hike from car OEMs. With significant exposure to forex (Yen imports of 27% of sales and Euro/USD exports of 15% of sales), unhedged forex exposure poses risk to profitability, especially for FY11 where it is totally unhedged.

■ De-bottlenecking capacity by realigning product mix at both the plants: It is shifting production of Swift Petrol to Gurgaon from Manesar by Dec-09, thereby freeing up ~40,000 units/year capacity at Manesar and utilizing some idle capacity at Gurgaon. This would free-up capacity for fast selling models like Swift Diesel, DZire, A-Star and SX4. However, it is yet to decide on brownfield expansion.

■ Upgrading earnings, maintain Buy: We are upgrading our earnings estimates for FY10 and FY11, by 3.9% (to Rs76.8) and 3.5% (to Rs85.5) respectively, driven by volume upgrades and export realization upgrades in FY11. The stock is valued at 17.3x FY11E EPS and 12.6x FY11E CEPS. Adverse forex movement and pick-up in non-Euro exports are key risks to our estimates. Maintain Buy with target price of Rs1,650 (~14x FY11E Cash EPS).

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