Yen appreciation may put pressure on Maruti Suzuki earnings, stock price

Maruti Suzuki India

  The recent appreciation in Japanese yen against major currencies is expected to put additional pressure on Maruti Suzuki earnings and its stock price. Yen is up 5.2 per cent against the dollar in the past one month, and analysts expect it to appreciate further as the Bank of Japan normalises its monetary policy, pushing up interest rates in the country. This is likely to increase capital inflows into the country, exerting upward pressure on the currency.
An expensive yen, in turn, will push up Maruti Suzuki’s import bill in Indian rupee, putting pressure on its margins. Historically, there is a close relationship between the profits margins of Maruti Suzuki and the yen to the dollar exchange rate. The company’s margins see a rise when the yen depreciates against major currencies and vice versa. The margin expansion coincided with depreciation on the value of Yen against major global currencies especially the dollar. In 2011, a dollar was worth 80 yen. The exchange ratio weakened to an average of 109.7 yen to a dollar during the first nine months of 2018.

Imports (or revenue expenses in foreign exchange) accounted for 11.7 per cent of Maruti Suzuki’s net sales during the 2017-18 financial year - unchanged from the figure a year ago. Given this, every one per cent appreciation in yen is likely to hit the company's margins by around 10 basis points, unless its finds way to pass it on to the consumers by way of price hikes.
Price hikes have been made difficult by a muted demand growth in the industry and rising competition. “It won’t be easy for the company to get price hike in the current demand scenario, and rising competition from peers, many of whom wants a pie of Maruti's small car business," says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.
Maruti Suzuki’s stock price was down 23.3 per cent in 2018 CY, the first negative returns for its shareholders in seven years. The stock has already been under pressure because of investors’ concerns over muted volume growth and the company’s below-par earnings performance during the July-September 2018 quarter.

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Maruti Suzuki net profits as a per cent of its net sales (net margins) expanded from an average of 4.4 per cent in calendar year 2011 to record high of 11.1 per cent in CY16 and 9.5 per cent during the first three quarter of 2018 calendar year.
The company's net profit was down 9.8 per cent year-on-year during the second quarter of FY19 largely led by a contraction in margins as expenses grew faster than revenues. Company's net sales during quarter was largely with 0.5 per cent yoy growth. The company's net profit margin was down to 10.4 per cent (of net sales) during Q2FY19 against 11.6 per cent a year ago.
The company has reported either a flat or negative growth in monthly vehicle dispatches including exports in the last six months compared to double-digit growth in the first six-months of the 2018. For example, company's sales volume was down 1.3 per cent yoy during December 2018.