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Rising yen to hurt margins of Maruti Suzuki

Updated : August 14, 2019 12:43 PM IST

The currency impact is in the form of higher cost of raw material sourced from the parent company

Maruti aims to bring down its yen exposure to zero in the next couple of years

India’s top carmaker Maruti Suzuki, which is already buffeted by plunging sales, faces fresh trouble due to high foreign exchange rates, particularly with the yen.

The depreciation of the rupee against the Japanese yen may further erode the margins of the company, a unit of Japanese automaker Suzuki Motor Corp. Yen-denominated costs account for roughly 10 percent of Maruti’s revenue.

Appreciation in the yen typically impacts subsidiaries of Japanese companies across the globe. In Maruti’s case, the currency impact is in the form of higher cost of raw material sourced from the parent company as well as increased royalty outgo.

In the past 10 days, the rupee has weakened by 8 percent against the yen. The rupee is now quoting at 0.68 against an average of 0.63 in the first quarter of FY20.

Shares of Maruti Suzuki have slumped more than 20 percent since the beginning of 2019 as Indian automakers grapple with rising commodity prices and foreign exchange rates, amid weak monthly sales and declining demand.

Maruti, on its part, has been lowering its yen exposure. It aims to bring down the exposure to the Japanese currency to zero in the next couple of years. The company has also been paying the royalty to its Japanese parent in rupees to mitigate the impact of the yen’s volatility.

The company's exposure to yen-denominated costs was roughly 18 percent a few years ago. If the yen holds at current levels, it will ultimately hurt Maruti’s margins and profitability going ahead.