Domestic auto sector could face Japan heat

Sneha Padiyath Mumbai | Updated on March 18, 2011

In the wake of the massive earthquake in Japan followed by a tsunami and now a possible nuclear meltdown, the auto sector may be the only casualty on the Indian shore.

The Indian markets continue to be volatile; however, they have been largely immune to the events in Japan.

According to a report by Emkay Global Financial Services, the impact on the Indian auto sector will be two-fold — supply side issues and currency risk.

From the supply perspective, world over the auto sectors will be impacted as many key components for the production comes from Japan, but India may not be severely affected, say analysts. The three Japanese auto companies which have presence in India are Toyota, Honda and Suzuki. Of these, Toyota and Honda contribute to less than 15 per cent of the Indian market as they represent luxury car segment.

“As of now there is no immediate impact; the issue is more of supply chain management. Products are not sourced from Japan, but key components required in production and manufacturing are. So, on that front, there could be a problem in the future,” said Mr Abhinav Angirish, Managing Director, Abchlor Investment Advisors.

According to the report, the company which would be most affected is Maruti Suzuki India Ltd (MSIL). The report says, for MSIL, the biggest risk is on the currency side. A change of one per cent in the Japanese yen (JPY), impacts MSIL's EBITDA by 2.7 per cent and its earnings per share by 2.6 per cent. “As MSIL has not hedged its JPY currency risk, in the near term there could be pressure on margins,” stated the report.

However, the report termed it as a temporary event.

The auto index on the BSE in the last one week has lost about 2.15 per cent and in the last six months, the index has fallen by about 12 per cent.

Maruti Suzuki has around 11 per cent weightage in the BSE Auto index. The auto index on Thursday closed at 8,659.47 down by 1.27 per cent, on a day when the benchmark Sensex fell by 1.14 per cent.

The biggest fall in the index was seen in case of MSIL which fell by 4.44 per cent, followed by Apollo Tyres and Tata Motors at 1.76 per cent and 1.72 per cent, respectively.

The auto sector, in India, has been underperforming for the last six months. “The auto industry had a significant run-up till about two years ago; so what we are seeing now is profit-booking.

“Also, the rising interest rates have impacted the sales of commercial vehicles. There has also been a cost push as well which has been squeezing margins,” said Mr Avinash Gupta, Assistant Vice-President Research Equity, Bonanza Portfolio.

Published on March 17, 2011

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