Maruti: Currency woes to hit margins in 2H: IIFL

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Currency woes to hit margins in 2H
Maruti’s reported PAT at Rs5.98bn was inline with estimates, but this was largely due to the higherthan-
expected other income. Operationally, the results were below our expectation. Going forward, we
reckon currency movements could shave off ~200bps of margins in 2H, if exchange rates stay at
current levels. With commodity prices also expected to harden in 2H, margins could decline to ~7% in
3Q. We downgrade our FY11 earnings by 5%, but broadly maintain our FY12 and FY13 estimates. The
multiple, however, stays at 13x (lower than other auto stocks) to reflect the risk to earnings. REDUCE.




Inline 2Q when adjusted for forex gains and raw-material costs in 1Q: We were expecting adjusted

EBITDA margins to improve from 8.9% to 9.3%, but margins remained flat at 8.8%. Management, however,
clarified that there was a forex gain of Rs746m in 1QFY11 and a part of the steel cost increase for 1Q was
accounted for in 2Q. Adjusted for this, margins have grown by ~100bps QoQ, inline with our expectation.
Other income, both operational and non-operational, was higher than our expectation, as scrap sales
increased on higher volumes and there was a forex gain of Rs100m during the quarter.
Currency could shave off ~200bps of margins in 2H; During the conference call, management
mentioned that Yen/Re stood at 0.506 for 1H. With the current exchange rate at 0.55, Yen has appreciated
by 10%. Maruti’s Yen exposure (both direct and indirect) currently stands at 28% of net sales. Also, the
company has hedged 25% of direct Yen imports and since the company’s direct exposure stands at ~15%,
only ~4% of the 28% Yen exposure is hedged. So, a 10% movement in Yen could impact margins by
~240bps. With commodity prices too expected to harden in 2H, margins could be hit further.
Etios launch could be another negative trigger: Toyota will launch the Etios in January. Given the response
to the vehicle on roadshows and the Toyota brand equity in India, we reckon this will be Maruti’s stiffest test till
date. It will also impact its highest profit product, Swift and Dzire, which account for ~20% of Maruti’s volumes.