Maruti's operating margins to come under pressure as yen rises

Shares of Maruti have been hammered by investors of late. The stock has fallen 21 per cent over the last three months due to rising concerns over capacity crunch and lower margins. The delay in the Gujarat plant will impact the company's ability to meet new demand in the new fiscal. The sharp fall in operating margin in the December quarter also impacted the stock's performance. Sequentially, Maruti's operating margin fell 190 basis points to 14.4 per cent. The Street now expects margins to deteriorate further. Religare Institutional Equities has factored in lower volumes and margins for the company after its December quarter numbers.

The Street is of the view that the best may be over for Maruti as far as margin expansion is concerned. Adverse currency movement is expected to impact the company's operating margin in the coming quarters. The market had estimated the clountry's largest passenger car maker to sustain margins at 16 per cent levels. However, the view now is that Maruti will not be able to sustain its margin profile.

The start of 2016 has seen negative currency movements. Maruti continues to import from Japan and the Japanese yen's movement against the rupee impacts the company. Maruti's margins started inching up from 2013 as the Japanese yen fell 15.4 per cent between July 2013 and April 2015. However, more than half this has been undone in the last three months as the Japanese yen has appreciated against the rupee by seven per cent. While exports may offset some of this impact, analysts are toning down their margin estimates for this year and next.

IIFL Institutional Equities expects currency fluctuations to impact margins by around 50 basis points against previous assumption. Part of the impact would be negated by higher dollar realisations on Maruti's exports as well as commencement of exports of Baleno to Japan. But given the kind of demand of the Baleno in India, long waiting periods and capacity constraints, there is no clarity on the export potential either.