Maruti Suzuki: Strong yen spells trouble

The company sources 9-10% of its raw material from Japan; capital expenditure, royalty payouts may rise.

Ever since the earthquake hit Japan, it is widely perceived that a higher demand for yen, the Japanese currency, would result in strengthening the currency in 2011. While Japanese investment banks expect the yen to settle around 92-96 a dollar, a stronger yen over the next few months could spell trouble for Maruti Suzuki, as the company has multiple exposures to the currency. The company’s direct and indirect import content is 28 per cent of its net sales, almost 80 per cent of this import exposure is to the yen.

Also in 2011-12, Maruti Suzuki is expected to pay a royalty of Rs 15,695 for every vehicle it sells. The royalty payout would change by Rs 157 a vehicle for every one per cent appreciation in the Japanese yen. The higher royalty pay-out would affect the company’s operating profit by 0.5 per cent per vehicle.

More than the royalty payout, Maruti Suzuki will be adversely hit by a stronger yen due to its raw material imports. The company sources 9-10 per cent of its raw materials from Japan. A one per cent appreciation in the yen would affect the import of the direct components by Rs 271 a vehicle. Additionally, the company sources eight per cent components through vendors, an indirect exposure to Japan. Sharekhan anticipates a partial impact of yen’s appreciation on the company, as vendors may have to absorb part of the escalation in their cost unless they speed up localisation.

Finally, a rising yen is also expected to put pressure Maruti Suzuki’s capex plans. The company has lined up capex of Rs 10,000 crore between FY11 and FY13, to enhance its capacity and start an engine plant. Assuming 80 per cent of the capex is directed towards gross block addition, 10 per cent appreciation in the yen can inflate the capex programme by Rs 800 crore and can have a cash flow impact of Rs 560 crore (adjusted for taxes) over the next few years, adds the Sharekhan report.

Given the unfavourable macro headwinds, analysts have revised margin estimate downwards for FY12 to 9.9 per cent due to higher commodity-related cost apart from the impact of yen’s appreciation. Earnings per share (EPS) estimate for FY12 has been lowered to Rs 93.9 based on a base-case assumption.