More mileage for auto parts firms

RUPEE SLIDE-3

The depreciation of the rupee against the US dollar by over 6 per cent in the last one month has fuelled expectations of an improvement in the operating margins of auto component manufacturers exporting to dollar-denominated economies.

Concurrently, the strengthening of the euro "" by 17 per cent since last year to 65 against the rupee "" also brings cheer for the Rs 75,000-crore Indian auto ancillary industry, which generates 20 per cent of its revenue from exports. Nearly one-third of these revenues come from the euro zone and the rest from the dollar zone, according to industry data.

"The level of margin gains of auto component manufacturers is directly proportional to the slide in the value of the rupee. Two months ago, when the rupee traded at 39 against the dollar, auto ancillaries either had thin margins or were booking losses. Now with the rupee trading at 42, the gains in margins could be in the region of 6-7 per cent," said Vishnu Mathur, executive director, ACMA (Automotive Component Manufacturers Association). "The margins also depend on the volume of specialised auto component ancillaries imported to manufacture finished goods."

"Two years ago, the component manufacturers who negotiated their contracts at the Rs 43 level are reaping the benefits now. But those who pegged at the strong level of Rs 39 have taken a hit of about 13 per cent on their margins," Mathur added.
 

TOP GEAR
Currency	% increase in op. profit margin
US dollar at Rs 42 range	6-7
Euro at  Rs 65 range	17

 
Sandhar Group, which has 20 manufacturing plants, including two in the European Union countries, sells about 24 per cent of its goods in the EU and the rest in the domestic market. The group derives about 28 per cent of its earnings in foreign exchange from goods manufactured in the EU region in the euro-dollar ratio of 83:17.

Factoring the 4 per cent raw material it imports to make finished goods, its margins fell by 2.5 per cent to 9 per cent when the rupee appreciated to the 39 level. However, its margins have increased to 12 per cent with the rupee depreciating to the 42 level.

"We are still far from the levels of Rs 46 to the dollar. Should the rupee hold at 42 or even fall further, the margins could be sustained in the face of rising commodity prices," said NK Taneja, vice-president, Minda Management, part of the Ashok Minda Group.

Auto component players are now negotiating fresh contracts, mostly of the 2-3 years' duration, pegging the rupee at the 40-41 level. There are others who are bracing for more fluctuations. "We are prepared for both 38 and 45 levels," said Jayant Davar, vice-chairman and MD, Sandhar Technologies Ltd. As of March 31, 2008, Sandhar incurred notional losses of Rs 1 crore in the derivatives market.

However, industry sources say the rupee's slide is a temporary phenomenon partly due to dollar-buying by the country's oil majors to fund imports.

The decline of the rupee over the last 30 days has been faster than the weakening of other regional currencies like the Thai baht, the Malaysian dollar, the Indonesian rupiah and the Chinese yuan. The question is if the depreciation of the rupee will make the country a cheaper destination to do business.

"The landed cost of raw materials has increased tremendously. This negates whatever respite we may have gained due to the weakening of the rupee," said Srivats Ram, joint managing director, Wheels India.

Prices of raw materials like metals and polymers have increased over the last two years. While copper prices increased by 50 per cent over the last 12 months, prices of steel shot up by 70 per cent in the last six months. Plastics became costlier by 20 per cent.