Maruti to expand its sourcing as yen rises

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Sep 26 2011, 10:08am hrs
Indias largest carmaker Maruti Suzuki has devised a new sourcing strategy to offset the impact of the soaring yen. Since close to 80% of the companys imports are denominated in the Japanese currency, Maruti has decided to use India's free trade pacts with Thailand, Malaysia, South Korea and Asean countries to step up sourcing from these countries. With the yen rising over 10% in the last six months to 76 a dollar from 85 in the pre-tsunami period, Maruti's imports have turned expensive.

The yen is constantly appreciating. The approach is mainly aimed at de-risking the currency. It makes more sense to use free trade agreements (FTA) with Thailand and other countries to step up our imports, Maruti Suzuki chief financial officer Ajay Seth told FE. He, however, added that the full impact of FTAs would kick in gradually.

Apart from Asian countries we are also looking at parts of Europe to increase the sourcing, he said.

Since such a large chunk of its imports are yen denominated, any appreciation in the currency would force the company to pay more for the same level of purchases.

An official in Maruti's sourcing department said such a strategy would help the company reduce its dependence on yen by 3-4% every year over the next few years. Raw material prices are going through the roof. Since a large chunk of our imports are yen-denominated, we are trying to reduce its dependence in favour of the dollar, he said. In the April-June quarter, the companys raw material expenses increased 7% to Rs 6,502.3 crore from Rs 6,079.9 crore in the corresponding quarter last fiscal. This pushed up raw material costs to net sales by three percentage points to 78% during the quarter.

Over the last six months, the company has adopted several innovative means to curb the impact of a volatile currency. FE had reported in March this year that the company had asked its vendors to start hedging against the yen since the companys indirect exposure to the currency through its component suppliers are as high as 15%. Maruti is also looking at some European countries which offer tax and VAT reduction which can add up to 5% of the cost of a vehicle if up to 40% parts are sourced from Europe.

Deepak Jain, auto analyst with Sharekhan Securities said Maruti had to de-risk its business. The FTAs will help increase imports and reduce dependence on Japan. What has complicated the matter is that even the rupee has started appreciating tremendously. Hence, it is becoming a double whammy for the company, he said. According to Jain, the companys payments for its imports are first converted to dollars from rupees and then from dollars to yen.