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The fast depreciating rupee has hit hard Indian auto companies raising sharply import costs in a market which is already under pressure from a continuous slide in vehicle sales over the last seven months.
While companies across the board are tweaking their sourcing policies and working on increasing localization levels to offset the adverse impact of foreign exchange fluctuations, mid-term the focus is additionally on scaling up exports to put in place a natural hedge against the falling rupee.
Shekhar Vishwanathan, vice-chairman, Toyota Kirloskar Motor (TKM), said, “For every rupee depreciation our import costs increase by as much as Rs 90 crore per annum. While we have asked vendors to cut down on imports, it involves a lot of engineering changes. We additionally have to consider the cost aspect as well, sometimes it is cheaper to import from Indonesia or Thailand than to localize. It would take us about three years to reap the benefits of genuine localization but the process has now started. We do have a natural hedge are trying scale up exports to counter the adverse forex impact.”
Toyota Kirloskar Auto Parts (TKAP) has commenced supplies of gear-boxes largely to the market in Thailand. TKM too has plans to export around 25,000 units of the Etios series to South Africa on a dollar denominated basis, which would partially enable the company to counter the depreciating rupee.
The impact due to the depreciating rupee comes at a time, when car sales in the country on a continuous decline. In the first two months of the fiscal year itself, passenger vehicle sales have fallen by 8.56 per cent to 409,823 units.
At Maruti Suzuki too, while an immediate price hike has been ruled out due to the sluggish market conditions, the focus is on to develop non-European markets for exports. “While we are gaining on the exports front due to the depreciating rupee, we are losing out more in increased import costs. The only answer is to increase localization levels and step up exports but it takes time. We are watching the dollar closely and would be looking for covers”, said a senior executive at MSIL.The company had exported over 120,000 units in the last financial year.
Maruti Suzuki has hedged 80 per cent of its Japanese Yen/USD exposure for the rest of the financial year, the company is covered in USD/INR till the end of Q1.
The executive said, “As long as the rupee was at Rs 54-55 levels against the dollar and the yen was depreciating, we were doing good. But now with the rupee touching Rs 60 against the dollar our import costs are on a rise.”
Maruti Suzuki has both direct and indirect exposure to foreign currencies and imports automotive components worth Rs 8,000 crore annually. The company imports 19.5 per cent of automotive components largely from vendors in Japan. The company has seen pressure build up on margins over the last few days as added on to the depreciation of the Indian rupee, the Japanese Yen has appreciated against the dollar since May 22.
According to Motilal Oswal Maruti Suzuki has hedged 40 per cent JPY/USD exposure (including indirect & royalty) at 95-98 levels for FY14 (90-92 for 4QFY13), while for INR/USD leg is open. The recent pull back in USD/JPY (thereby impacting rates for further hedges) coupled with INR depreciation would impact Maruti Suzuki’s FY14E/15E EPS by 6.8 per cent - 7.7per cent (currency impact excluding the changes in our volume estimates).
The rupee has depreciated 8.3 per cent against the dollar since January this year to close at Rs 59.21 today. The Japanese Yen too has depreciated by 12.4 per cent against the dollar from the start of the year, but has pulled back from a low of Yen 102.48 (on May 22) to close at Yen 97.51 today.
The Yen is, however, expected to remain weak and depreciate by around 10 per cent in FY14 following the injection of a stimulus package by the Bank of Japan through purchase of government bonds. In the last quarter a weak Yen had helped improve margins at Maruti Suzuki by 120 basis points. The company posted record net profit for the fourth quarter ended March at Rs 1,147.5 crore compared with Rs 637.5 crore in the year-ago period.
