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Things seem to be falling in place for Maruti Suzuki India Ltd. The automaker is a key beneficiary of weakening of JPY/EUR against USD, which is a significant tailwind for margin.
JPY and EUR have depreciated by about 12% and 5%, respectively, against USD in the June quarter (Q1FY23) on a sequential basis, according to analysts at JM Financial Institutional Securities.
“Maruti has total 26% direct and indirect foreign currency exposure (primarily in JPY and EUR) towards sourcing of components. The USD/INR leg for both these payables is a natural hedge against the USD exports (about 15-20% of sales),” said JM Financial’s analysts in a report on July 12.
As such, the broker expects about 70 basis points (bps)/10 bps favourable impact on the June quarter (Q1FY23) margin on weakening of JPY/EUR against USD. One basis point is one hundredth of a percentage point.
However, this would provide only partial relief to the Q1 margin as commodity costs were high in the beginning of the quarter. As such, the margin is likely to be compressed sequentially. In Q4FY22, Ebitda (earnings before interest, tax, depreciation and amortization) margin stood at 9.1%.
But the costs of commodities such as steel and aluminium are softening and this would be reflected in the financials in Q2. This is in contrast to the general expectation of a rebound in margin during H2FY23.
According to SteelMint, domestic hot rolled coil price as on July 6 was ₹59,800 per tonne. This represents a 21% fall from the average seen in April.
Meanwhile, the automaker continues to see robust demand for its products. It has received good response for its new Brezza. This is likely to aid the company in regaining the lost market share in the passenger vehicle segment which stood at 43% in FY22, a fall of 5 percentage points from FY21.
In view of all the above-mentioned factors, JM Financial analysts have revised their margin estimate by about 100 bps for FY23/24E and earnings per share estimate by 21%/14% for FY23/24E.
The high competitive intensity in the sport utility vehicle (SUV) segment poses key risk to Maruti’s market share. Shares of the automaker are down by 6.6% from the 52-week high seen in early February.
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