Maruti Suzuki, like many auto makers, has been squeezed by higher input costs, rising interest rates and now, a volatile yen. While it can do little about the other factors, it is the first off the block to protect itself from currency volatility.
The company has introduced a new clause in the new contracts it will sign with its component suppliers that asks the vendors to start hedging against the yen. Explaining the rationale, Maruti Suzuki chairman RC Bhargava told FE that the company was adopting a twin strategy to de-risk its business model. ?Hedging against the yen and increase local supply to offset the volatility,? he said. He added that since the vendors have a high exposure to the yen, hedging against volatility would help Maruti budget its expenses for the year. ?Historically, we have seen that the yen has been the most volatile currency, and we must take every step to cover risks,? he said.
In the immediate aftermath of the earthquake and tsunami in Japan, the yen had surged to near-record levels, which would have made payments from India costlier. It took the intervention of the G-7 nations to bring it down again.
Maruti Suzuki?s move is prompted by the company?s fears that the yen would continue to remain unsettled, which would put immense pressure on profitability.
Currently, the company?s exposure to the yen is about 28% of its net sales, of which 8% comes indirectly through its domestic vendors. ?Vendors import a sizeable chunk of raw materials from countries such as Japan, which also puts pressure on Maruti because it directly sources components from them,? a source said. Vendors in the Delhi-National Capital Region area that supply to Maruti Suzuki said that the move would be beneficial for both sides. ?Since the recession, we have had to bear losses owing largely to the volatility in currency prices, especially the yen. But since we are hedging our risks, the costs would be controlled,? a vendor said. At present Maruti imports about 25% of its overall component requirements directly from Japan, which causes a yen outflow of around 9% of its total net sales. Apart from that, Maruti pays about 5% royalty to its parent firm Suzuki Motors, again in yen. In the October-December period last year, for instance, Maruti paid about Rs 460 crore as royalty, or 5.2% of net sales.
During the same period the company had to shell out R6,959 crore for raw materials. In the quarter, Maruti?s net profits had dipped 18% to R565 crore. Deepak Jain, auto analyst with Mumbai-based brokerage Sharekhan Securities, said that it was a prudent business move. ?Since the company?s exposure to the yen through its domestic vendors is less than 10%, it would help Maruti marginally de-risk its business. It?s a well thought out business move to include vendors as well,? he said. Currently, the yen is trading at about 80 to a dollar.
Though analysts said that at current level Maruti?s risks were covered, the problem could arise if the yen appreciated further and dipped below the 80 mark. In fact, a few months back the yen had strengthened to about 77 to dollar. ?Since Maruti has such a higher exposure to the yen, it would benefit if the yen depreciates,? Jain added.