The passenger vehicle market in Asia's third-biggest economy is forecast to nearly double to 2 million units by 2010, boosted by rising incomes, affordable loans and new product launches.
A tax cut earlier this year on small cars -- which make up three-quarters of the passenger car market -- has boosted sales at Maruti and rivals Hyundai Motor Co. and Tata Motors Ltd.
But margins are under pressure as manufacturers have to pay more for inputs such as steel, aluminum and rubber, and firmer interest rates and higher fuel prices could slow demand.
"Maruti has been able to manage the cost pressures better because of a very effective cost cutting program," said Ashutosh Goel, analyst at Edelweiss Securities, who upgraded Maruti to 'accumulate'.
New Delhi-based Maruti, 54.2 percent-owned by Japan's Suzuki Motor Corp., said net profit rose to 3.7 billion rupees ($79 million) in April-June, its fiscal first quarter, from 2.23 billion rupees a year earlier.
Net sales rose 24 percent to 32.69 billion rupees from 26.27 billion rupees.
The median forecast in a Reuters poll was for net profit of 3.09 billion rupees on revenues of 30.90 billion.
Full-year net profit is forecast to rise by more than a fifth to 14.6 billion rupees, according to Reuters Estimates.
Maruti shares were up 2.7 percent at 784.90 rupees at 0944 GMT, off the day's high of 795, in a firm Mumbai market where the top-30 index was up 1.3 percent.
Maruti shares, valued at more than $4.5 billion, fell 8 percent in April-June, compared with an 11 percent drop on the auto sector sub-index and a 6 percent decline on the benchmark index.
Vehicle sales at Maruti, which controls more than half the domestic passenger vehicle market with its popular Zen and Alto models and Swift hatchback, rose 19 percent to 144,948 units in April-June from a year earlier.
Raw material costs rose 11 percent on last year, but operating margins grew nearly 2 percentage points to 14.5 percent.
Tata Motors last week posted a weaker-than-expected 40 percent rise in quarterly profit.
"There is pressure, but the higher volumes and sales of more premium models is helping Maruti contain costs," Goel said.
Maruti has said it may raise prices of vehicles for a second time since January if raw material costs continue to rise. It cut prices of five small car models after a February tax cut.
Managing Director Jagdish Khattar has said he expects double-digit sales growth this year if input costs can be offset.
Suzuki said earlier this month it would build a new compact car in India for Nissan Motor Co. to sell in Europe. Nissan is also separately planning to assign production of a car to one of Suzuki's factories in India.
Meanwhile, Maruti is building a second car plant, with a targeted capacity of 250,000 units, due to start operations by the year-end. It will also launch a diesel car this year and a new model for European markets in 2008/09.
Hyundai is also building a second Indian plant, taking its total capacity to 600,000 units by 2007, while a joint venture between Tata Motors and Italy's Fiat will build cars, engines and transmissions in India.