Maruti Suzuki, Honda, Toyota Kirloskar, Nissan expect to ride weaker yen to better profitability

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Despite sluggish sales, Japanese auto companies operating in India — Maruti Suzuki, Honda, Toyota Kirloskar and Nissan — expect a significant boost in profitability and possibly lower royalty payouts this fiscal on the back of stimulus package announced by the Japan's central bank earlier this month. The Bank of Japan (BoJ) package aims to further weaken yen and make Japanese exports cheaper, thus spurring economic growth.

A weak yen has already helped market leader Maruti post record R1,147-crore profit on Friday in the fourth quarter ended March 31, a growth of 80% over the same period last fiscal. After the announcement, Maruti's CFO Ajay Seth indicated that margins may improve further because of a weaker yen in the first quarter of FY14 as around a quarter of its net sales is spent on yen-denominated imports and royalties to Suzuki.

In fact, Maruti's shares on BSE had jumped 7.23% to R1,405.95 on April 5 after BoJ announcement. Maruti is the only publicly listed company among the many Japanese auto companies in India. In Q3 FY13, Maruti's profits had risen almost two and a half times to R501.29 crore, though Q2 profits had dipped 5.4% to R227.45 crore.

RC Bhargava, chairman of Maruti Suzuki, in which Japanese parent Suzuki Motor Corporation has around 56% stake, welcomed the BoJ move, adding that the impact of a depreciating yen will take a quarter to take full effect. "This is a result of the new government in Japan and their agenda is very clear — to pick up growth. For us, Japanese exports will become cheaper, but we still have to see to what extent the yen will weaken," he said.

Other Japanese players such as Honda, Toyota Kirloskar and Nissan may have more reason to cheer. Unlike Maruti which has a high level of local sourcing, these firms rely heavily on imported components and raw materials such as high-grade steel. Yen appreciation and weakening of the rupee versus the dollar has had a severe impact on their profitability in the last few years.

"It is definitely positive for us, but to really get the benefit the rupee must be stable or strengthen versus the dollar. Also, the Thai baht is appreciating versus the rupee, which makes imports expensive from there," said Jnaneswar Sen, senior VP for sales & marketing at Honda Cars India.

According to data posted in the registrar of companies, Honda Cars posted a R604-crore loss in FY12, adding to a R213-crore loss in FY11. Toyota Kirloskar, which had recorded a R222-crore profit in FY11, posted a loss of R27 crore in FY12.

"The big benefit will be when the actual royalty payout reduces on a weak yen, leaving more money to build a cash reserve and invest in local expansion. Honda, for one, is investing a lot of money in India in both cars and two-wheelers," an industry analyst said.

Shekar Viswanathan, vice-chairman, external affairs, Toyota Kirloskar Motors, said, "If the rupee starts appreciating against the yen, we will see some impact, but if it appreciates against the dollar, the gains will be far more."

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