Friday, 5 August 2011

Maruti May Cut Parts Imports on Strong Yen

Maruti Suzuki India Ltd. is looking to cut auto-parts imports from Japan by 3% a year as a strong yen is eating into its margin, said the chief financial officer of India's largest car maker by sales. Japan accounts for up to a fourth of components the Suzuki Motor Corp. unit sources from abroad. More than half of Maruti's foreign-exchange exposure is to the yen, as the company also pays royalty to its Japanese parent for using its technology.
"A 3% reduction translates to 2 billion rupees ($45 million) per annum," Ajay Seth said in a recent interview. This takes imports by Maruti's local suppliers also into account.
Maruti buys dollars and converts the U.S. currency into the yen to pay for its imports from Japan. The yen has jumped about 19% since May 2010 against the U.S. currency due to diminishing risk appetite among investors, while the Indian rupee has risen just a little over 1% against the dollar during the period. Mr. Seth said the yen is expected to trade 77-81 to the U.S. dollar, although the bias could be toward the upper end of the band. Any weakening of the yen will help Maruti's margins, he added. He didn't give any outlook on the rupee.
On Thursday, the yen fell to 79.89 as the Japanese government intervened to stem its appreciation. The rupee was last at 44.42 against the dollar.
The forex impact is worrying Maruti more because stiff competition is preventing it from raising car prices to offset cost. Growth in car sales is slowing due to higher fuel prices and rising interest rates on loans as the central bank tightens policy to control inflation.

Maruti's April-July total sales fell 7.1% to 356,826 vehicles. Its April-June net profit rose 18%, but earnings margin before interest, tax, depreciation and amortization narrowed 0.80 percentage point to 9.5% due to higher raw-material prices and foreign-exchange impact. Mr. Seth said Maruti has a direct yen exposure of 35 billion rupees on auto-parts imports from Suzuki's factories in Japan. This excludes the exposure related to parts imported by its vendors.
Maruti also has euro exposure of about 17.50 billion rupees and dollar exposure of 12 billion rupees due to car exports, Mr. Seth added.
He said the company has completely hedged its yen exposure for supplies until September and dollar exposure on exports. It has also hedged 60% of its euro exposure, he said.


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