Maruti's operating margins to come under pressure

Also, the delay in the Gujarat plant will impact the company's ability to meet new demand in the new fiscal

Shares of Maruti Suzuki have been hammered by investors of late. The stock has fallen 21 per cent over the past three months due to rising concerns over capacity crunch and lower margins. The delay in the Gujarat plant will impact the company’s ability to meet new demand in the new financial year (FY17). The sharp fall in operating margin in the December 2015 quarter also impacted the stock’s performance. Sequentially, Maruti’s operating margin fell 190 basis points (bps) to 14.4 per cent. The Street now expects margins to deteriorate further.

Religare Institutional Equities has factored in lower volumes and margins for the company after its December 2015 quarter numbers.

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The Street is of the view that the best might be over for Maruti as far as margin expansion is concerned. Adverse currency movement is expected to impact the company’s operating margin in the coming quarters. The market had estimated the country’s largest passenger car maker to sustain margins at 16 per cent levels. However, the view now is that Maruti will not be able to sustain its margin profile.

The start of 2016 has seen negative currency movements. Maruti continues to import from Japan and the Japanese yen’s movement against the rupee impacts the company. Maruti’s margins started inching up from 2013 as the Japanese yen fell 15.4 per cent between July 2013 and April 2015. However, more than half of this has been undone in the past three months as the Japanese yen has appreciated against the rupee by seven per cent. While exports might offset some of this impact, analysts are toning down their margin estimates for this year as well as the next. IIFL Institutional Equities expects currency fluctuations to impact margins by around 50 bps.

Part of the impact would be negated by higher dollar realisations on Maruti’s exports as well as commencement of Baleno exports to Japan. But, given the kind of demand for Baleno in India, long waiting periods and capacity constraints, there is no clarity on its export potential either.