Strong yen to hurt Japanese car manufacturers in India

Strong yen to hurt Japanese car manufacturers in India

Mumbai: Japanese car makers in India are expecting pressure on profit margins to intensify because the value of yen is rising at a time of slowing sales.

A strong Japanese currency will inflate import bills and increase production costs, said executives from car makers including Maruti Suzuki India Ltd and Toyota Kirloskar Motor Pvt. Ltd.

Despite the rise in costs, car manufacturers are not raising prices because of intense competition.

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Car sales in india fell by around 15% in July compared with a growth of 38% in the same month last year, according to a report released by Crisil Research.

The rupee has weakened to Rs57.09 per 100 yen in the first week of August from Rs55.3 in May, according to Bloomberg data. The dollar has weakened to $1.28 from $1.23 per 100 yen in the same period.

The yen has been moving northwards since 11 March when an earthquake and tsunami had hit the island nation.

Japan accounts for a major share of imports for auto parts for Japanese car and two-wheeler makers in India and the movement of Japanese currency impacts the import bills of the firms.

“It’s a matter of concern," said Shekar Viswanathan, managing director, commercial, at Toyota Kirloskar.

The value of company’s imports will increase by 10%, he said. With the exception of the Etios sedan and the Liva hatchback, which have only 10% to 15% imported parts, respectively, Toyota’s other models, Altis, Innova and Fortuner, have imported parts upwards of 50%.

The company is not considering a price hike, said Viswanathan. “No hard decisions have been taken yet," he said. “It’s not easy to pass on the increase to consumers."

For Maruti, India’s largest car maker, more than half of its foreign exchange is yen-denominated. “A 1% appreciation in yen will have an impact of 10-15 basis points on its earnings," said Surjit Arora, analyst at brokerage Prabhudas Lilladher Pvt. Ltd.

One basis point is one-hundredth of a percentage point.

The company has hedged its yen position for the second quarter and the impact will not be much, said Ajay Seth, chief financial officer at Maruti Suzuki.

“We have to watch the third and fourth quarters," he said, adding there have been some improvements in the movement of the Japanese currency after the intervention of Bank of Japan. Hedging will help Maruti only to some extent because the imports by the vendors is not hedged, said Umesh Karne, analyst at Brics Securities Ltd.

The strong yen, coupled with sluggish sales in the domestic market, will have an impact on Maruti’s earnings in the ensuing quarters, according to Karne. He has a sell rating on the stock.

“It’s a double impact, from the tsunami, and now the appreciating yen," said Roy Kurien, national business head at India Yamaha Motor Pvt. Ltd. The company’s imported models will be impacted by the yen movement, he said, but declined to elaborate.

The impact of a rising yen will be negligible for Honda Motorcycle and Scooter India Pvt. Ltd as all two-wheelers are made locally, according to Naresh Rattan, operating head, sales and marketing, at Honda Motorcycle and Scooter India Pvt. Ltd.

Officials from Nissan Motor India Pvt. Ltd were not available for comments.

Maruti expects to offset some of the pressure by gains on exports. “We have advantage on exports, where the rates on the euro are better," Seth said. Sales at the market leader dropped some 25% to 66,504 units in July as sales of Alto hatchback, its mainstay in terms of volume, contracted, and production of the Swift was stopped to make way for the new model.

“The sales of the new Swift and Dzire, its high volume models, may not be enough to make up for the entire volume growth," said Karne.

To mitigate the impact on the earnings from the currency fluctuation, Maruti plans to cut 3% imports every year, Seth told Dow Jones Newswires on 4 August.

A 3% cut will translate to 200 crore a year. This also takes into account imports by firm’s local suppliers, Seth had said.

Photo by Ramesh Pathania; graphic by Ahmed Raza Khan/Mint