Maruti: Currency blues

A bigger raw materials bill in yen will dent margins

India's biggest car maker, the Rs 14,654-crore Maruti Suzuki is likely to see its margins getting dented in the next couple of years.

The first blow has been dealt by the rising yen, which has appreciated by about 17 per cent versus the rupee since last December. About 12 per cent of the car maker's raw material costs are in the form of yen-denominated imports.

While Maruti, which commands a 48 per cent share of the Indian passenger car market, has been hedging its yen imports, indications are that it would not be sufficient to cover the appreciation.

In addition, the Gurgaon-based firm's raw materials bill is set to become bigger should steel prices continue to remain high. Steel prices have risen by about 20 per cent over the last three months in the wake of higher prices of iron ore and coking coal as a result of which analysts expect that Maruti's steel contracts for FY09 could be signed at a price that is about 10-15 per cent higher than current levels.

To offset the higher input costs, the company may need to take an average price increase of about 5 per cent. The recent reduction in excise duties for small cars from 16 per cent to 12 per cent was partly passed on by the company to customers "" Maruti reduced prices for some of its models by 3 per cent.

While it may be possible for the company to take a price increase in FY09, the general slowdown in the economy and the not so robust demand for cars may prevent it from doing so.

Thus, operating margins may erode by about 100 basis points in FY09 from an estimated 15.4 per cent in FY08. Analysts believe, they could fall by an additional 100 basis points in FY10 as low-margin exports to Europe account for a larger component of sales. Maruti's revenues for FY08 are estimated at Rs 21,300 crore, while it should report a net profit of Rs 1,900 crore.

The stock has corrected by about 34 per cent from its 52-week high of Rs 1,252. At the current price of Rs 822, it trades at just over 11 times the estimated FY09 earnings and notwithstanding the margin pressure, is attractively valued.