Maruti's yen windfall to further lift margins after Q4 surprise

By Henry Foy and Krishna N Das

MUMBAI/NEW DELHI (Reuters) - Maruti Suzuki's profit margins are set to show even stronger gains in the current quarter as India's biggest car maker reaps an even greater windfall from cheaper yen-denominated imports of components.

The yen's dramatic decline since Japan's Prime Minister Shinzo Abe embarked on his campaign for bold monetary easing has proven to be a huge filip for Japanese and Japan-related firms, and could give Maruti a further leg up over rivals like Tata Motors Ltd.

Cheaper imports of parts and a smaller royalty payment to its parent Suzuki Motor Corp contributed to an 80 percent rise in January-March net profit, smashing analysts' forecasts. Maruti's shares shot up 5 percent after the results.

"Indirect costs are on a quarter lag, so you have not seen the full impact of the indirect import benefit," Chief Financial Officer Ajay Seth told an analysts conference call.

Also benefiting from robust sales of its Ertiga multi-purpose vehicle, net profit for the quarter was 11.5 billion rupees excluding the impact of its recent merger with its engine production unit Suzuki Powertrain India Ltd.

That was far higher than the 7.2 billion rupees expected by analysts polled by Thomson Reuters I/B/E/S.

"The numbers were superb, really extraordinary," said Ashish Nigam, an auto analyst at Antique Stock Broking in Mumbai. "The yen impact could be much more in the coming quarters, so margins can only improve."

The yen has also weakened further since the end of the quarter and many expect additional softening in the months ahead if Japanese investors shift funds abroad in search of higher returns.

Maruti's results assumed a value of 94 yen to the dollar, while the yen is currently trading at around 98. The automaker spends the equivalent of around a quarter of its net sales on yen-denominated imports and royalties to Suzuki.

IMPRESSIVE MARGINS

The carmaker's EBITDA (earnings before interest, tax, depreciation and amortisation) margin for the fourth quarter, excluding the powertrain unit, was 10.6 percent, compared with 7.5 percent in the same quarter last year, said Seth.

The yen impact accounted for 1.3 percentage points. He declined to comment on margin expectations going forward.

Maruti, which accounts for 40 percent of all of India's passenger vehicle sales, has also struck gold as its Ertiga, a family sized multi-purpose vehicle (MPV), hit a sweet spot with consumers, helping it weather the first fall in India's annual industry-wide car sales in a decade.

MPVs and sports-utility vehicles were the only segments to see sales soar last year, on a trend towards more bulky cars for India's often poorly maintained and traffic-clogged roads, and generous government subsidies on diesel, the segments' primary fuel.

Although its overall sales of vehicles declined by 4 percent during the quarter, the better product mix lifted Maruti's net sales 9.4 percent to 125.7 billion rupees, excluding the powertrain unit.

Helped by expectations of yen weakness, Maruti has been the only automaker in India to see its share price climb for the year through to Thursday's close, gaining 6.8 percent compared to an average 9.2 percent drop for its local peers.

After the results on Friday, its shares rose to end up 5.2 percent higher at their highest level since October 2009, compared with a 0.6 percent decline in the broader market.

Maruti currently hedges 30 percent of its yen exposure, Seth said, adding that it would soon increase that to 60 percent as the currency remained volatile.

It also said that despite the lower costs due to the yen, it would continue a drive to reduce its reliance on components imported from Japan by boosting its local sourcing. (Additional reporting by Reshma Apte in BANGALORE; Editing by Edwina Gibbs)