Maruti may Find it Tough to Sustain its Robust Show
Fears of global currency volatility, lower export volume growth, new steel price post MIP may put pressure on company
sation with incremental sales volumes of Baleno, SCross and Vitara Brezza, where it offers no discount. As a result, average discount per vehicle dropped ₹ 4,000 per vehicle to ₹ 17,000.
The fear of global currency volatility will continue to loom large. In the March quarter, Maruti was exposed to the direct currency exposure in terms of paying royalty to the Japanese parent. In the June quarter, it will have indirect exposure as well in the form of payments to Japanese suppliers, which occur with a quarter’s lag.
This indirect exposure is nearly 16% of the total raw material cost of the company. Export revenue acts as a natural hedge to the indirect exposure. Thus, a better export volume should help. However, Maruti has guided for a flat export volume growth for FY17 due to declining Sri Lankan volumes. This may elevate the pressure on the margins.
Also, the imposition of the minimum import prices (MIP) for steel will add to the pressure on the margins. New steel prices effective from the first half of current fiscal may trim margins as high as 100 basis points.
The company’s consensus projected earnings per share (EPS) for the current fiscal has been reduced by 12%. The stock has fallen 17% so far in FY17, making it among the worst performers in the BSE Auto index.
In the short term, the stock movement will be linked to the yen movement as it will determine the profit growth. A major trigger for the stock will be better-than-expected volume growth. Analysts expect the company’s volume to increase by 10-11% for FY17. The stock is trading at 18.9 times of FY17 projected earnings. The valuation reflects uncertainties related to margins and volumes growth.