Automakers Face a Rough Ride as Volatility Reins in Currency Markets
The risk of earnings growth slippage due to global currency upheavals is likely to keep stocks of Maruti Suzuki, Tata Motors and Bajaj Auto under pressure. Maruti Suzuki is affected by the appreciation of the Japanese Yen; Tata Motors is facing the challenge of the depreciation of the Chinese Yuan and Bajaj Auto is confronted with a shortage of forex availability in key export markets, including Argentina, Columbia, Egypt, and Nigeria. The currency turbulence is expected to add to woes of these automobile companies, which are also grappling with tapering demand scenario in the Indian market. The projected passenger car growth has fallen to 7-8% for the current fiscal, from 10-12% six months ago. These factors will impact the estimated operating margin and earnings growth, which would limit the upside in these stocks in the short term. The stock of Maruti and Bajaj Auto declined 18% and 2%, respectively, in the past three months compared with 2.3% increase in the BSE Auto Index. The Japanese Yen has appreciated 10% against the US dollar since the beginning of the year. Nearly 21% of Maruti’s raw material cost is denominated in the Yen.
Given the slack demand, passing on the increase in input costs to consumers would not be that easy. In such a situation, the current appreciation in the Yen may eat away nearly 200 basis points of its margins. The impact of Yen appreciation will be visible in the June 2016 quarterly results.
Tata Motors’ margins are under pressure due to a weaker Yuan. The sales volumes in China, the world’s largest automobiles market, constitutes nearly 20% of its volume for the company’s subsidiary Jaguar Land Rover (JLR). It is expected to sell units in the current fiscal, 42% more than last year. A weaker Yuan will shrink margin on sales in China as JLR costs are mainly in Pound and Euros.
Similarly, investors are reassessing the projected export growth and margin of Bajaj Auto, India’s largest two-wheeler exporter, owing to sharp currency volatility in the currencies of Nigeria, Argentina, and Egypt. Exports constitute nearly half of total sales volumes of the company and fetch more margin compared with domestic sales A depreciation of local currency hits the demand since it increases the cost of ownership of vehicles in that market.
—Ashutosh R Shyam
compiled by ETIG