Maruti: Weak yen to boost margins in FY16 & FY17

Double-digit volume growth in first half of FY15 drives earnings upgrades

Maruti Suzuki India continues to extend gains in the passenger car market, both in terms of market share and profitability. The company has reported a robust volume growth of 14.7 per cent in the first half of FY15, outperforming the automobile industry, which grew 4.2 per cent. Analysts claim the company has expanded its market share by 405 basis points, thanks to such strong growth. The leadership position is expected to gain further from a healthy product pipeline and rising margins from beneficial currency movement.

Analysts say over the past three years, when the industry’s growth declined or remained flat, Maruti expanded market share along with Hyundai. All other car makers have seen their volumes shrink and profitability decline. Maruti and Hyundai are the only profitable companies. Among the unlisted multinational automakers, all companies other than Hyundai, were just about breaking even or loss-making even at the earnings before interest, taxes, depreciation and amortisation level, says Credit Suisse.

Maruti leads not only on the volumes front but also on profitability. Given the movement in the currency market since October, analysts are expecting Maruti to benefit from a weak yen. The Japanese yen depreciated sharply against the US dollar since October. The yen has depreciated by 12.5 per cent since October, which is expected to benefit Maruti Suzuki. The car maker has a significant exposure to the yen by way of imports (both direct as well as indirect) and royalty payments to its parent company Suzuki Motor, Japan. According to Sharekhan, the current trend of Japanese yen depreciation will have a favourable effect on the margins of the company, going forward. The brokerage has raised the operating margin estimates for FY16 and FY17 by 30 basis points and 100 basis points, respectively. Consequently, its earnings estimates for FY16 and FY17 are higher by three per cent and 8.8 per cent, respectively. Even though the currency movement will benefit Maruti with a lag effect, going forward, the benefit will improve Maruti’s already strong profitability.