Au­tomak­ers Face a Rough Ride as Volatil­ity Reins in Cur­rency Mar­kets

The Economic Times - - Markets: Beating Volatility -

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

Source: Bloomberg,

com­piled by ETIG

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