Hold on Maruti Suzuki - TP Rs.1175 - Geojit BNP Paribas

- Maruti Suzuki is rated to 'hold' with a target price of Rs.1175 over one year.

- Company has announced merger with Powertrain India Limited (SPIL), supplier of diesel engines and transmissions, in an all stock deal and this involves the issue of 13.17 million new shares of the company.

- Based on the swap ratio of stocks, the enterprise value of SPIL works out to Rs.2500 crore and the merger terms appear reasonable.

- This merger reflects the growing importance of diesel cars and full absorption of manufacturing and technological risks associated with diesel engines. The company had earlier communicated that diesel engine capacity would be expanded by 3 lakh units and this may constrain material growth prospects of SPIL. This is yet another reason for the merger.

- The merger is expected to expand EBITDA of Maruti substantially. But, considering the fixed cost of SPIL's operations and stock dilution of 5% due to the merger, the earning impact on standalone operations would be in the range of 2-3%.

- 'Hold' rating is maintained on the stock with a target price of Rs.1175. It seems that current valuations have adequately factored in normal business operations. Considering weaker than expected demand in the car segment and sharp decline in rupee, minor downside risk cannot be ruled out in the stock.

- Tata Motors and M&M are more preferred in this segment.

Source : Equity Bulls

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