Rising yen may cast shadow on Maruti Suzuki’s June quarter earnings

0
104

New Delhi: Maruti Suzuki India Ltd’s June-quarter earnings may be hit by a stronger Japanese yen, at a 21-month high against the dollar, that has made royalty payments and imports of automobile parts from Japan costlier.

Concerns over the earnings impact from a stronger yen is driving the stock down, said Abhishek Jain, an analyst with Mumbai-based IndiaNivesh Securities Ltd.

Maruti’s parent Suzuki Motor Corp. is based in Japan.

On Thursday, Maruti’s shares fell 2.93% to Rs.4,084 on the BSE while the exchange’s benchmark Sensex fell 0.75% to 26,525.46 points.

The yen soared to its highest level against the dollar in nearly two years after Japan’s central bank left its policy unchanged,The Wall Street Journal reported.

The Japanese currency on Thursday jumped by as much as 1.7%, briefly touching 103.58 to a dollar, the yen’s strongest level since August 2014.

A strong yen makes life harder for Japanese exporters, a major engine for the country’s economy.

Ajay Seth, chief financial officer of Maruti Suzuki, did not respond to a phone call.

According to a Bloomberg Intelligence report, Maruti’s earnings growth will probably slow to 8% in the June quarter, despite expectations for 22% sales growth because of demand for its sports utility vehicles (SUVs).

“The stronger yen will probably raise the cost of royalty payments, weighing on earnings. Maruti is gaining market share in SUVs, with sales in the segment up 144% in May versus a countrywide 36% increase, the Bloomberg Intelligence report said,” Nikkie Lu, a Bloomberg Intelligence company analyst, wrote in a note on Thursday.

Maruti normally hedges itself against such currency fluctuations, but a surge in the Japanese yen in the past three months is bound to hit Maruti’s margins, given that about one-sixth of its cost (including royalty) is yen-denominated.

Maruti typically pays 5-6% of sales as royalty to Suzuki and it also imports materials, payment for which is made in yen.

However, from 2016-17, the car market leader will start paying royalty to its Japanese parent in rupees instead of yen on the new models, which shall reduce the impact of cross-currency volatility on its financials.

The Vitara Brezza, Maruti Suzuki’s first compact sports utility vehicle, which was launched on 9 March, is the first model for which the auto maker will pay royalty in the Indian currency, three people familiar with the matter said on condition of anonymity.

Further, the company has also started a natural hedging process by starting exports of its Baleno model to its parent Suzuki. Suzuki pays royalty to Maruti on Baleno.

According to Mahantesh Sabarad, deputy head of equity research at Mumbai-based SBI Cap Securities Ltd, Maruti’s margins have come under pressure whenever the yen has appreciated.

“Maruti’s finanacials and yen movement go hand in hand,” Sabarad said.