Maruti Suzuki: Yen for success in a volatile foreign exchange market

The company is a subsidiary of Suzuki Motor Corporation of Japan. MSIL manufactures a wide range of vehicles, including hatchbacks, sedans, SUVs, and vans.

Foreign Currency Exposure

Foreign currency exposure is the risk of loss that arises from changes in the value of foreign currencies. Maruti Suzuki India Limited (MSIL) pays a royalty to its parent company, Suzuki Motor Corporation (SMC), for the use of its intellectual property, including technology, trademarks, and designs. The royalty rate is a percentage of MSIL’s net sales. In 2023, MSIL paid a royalty of Rs 4,500 crore to SMC. This represents a 40% increase from the royalty payment of Rs 3,200 crore in 2022. Maruti Suzuki has shifted to rupee payments from yen payments and the process partially began in 2019 and completed fully in 2023. The shift to rupee payments was made to reduce Maruti Suzuki’s exposure to foreign currency risk. By paying royalties in rupees, Maruti Suzuki is no longer exposed to the fluctuations in the yen-rupee exchange rate.

Effect of Foreign Currency Exposure on Financials

A weakening yen can have a positive impact on Maruti’s EBITDA in the form of Decreased costs of imported goods and services. If a company imports goods and services, then a weakening yen will decrease its costs. This is because the company will have to pay fewer yen for the same amount of goods and services. However, these reduced costs benefit the company they are unlikely to be passed to the consumers.

The following table shows how much the company’s profit and equity would change if the Indian rupee (INR) became stronger or weaker by 10% against the currencies that the company has debts and receivables.

Source – Maruti Suzuki Annual Report 2022-2023

Maruti Suzuki, for the year ended 31st March 2023, had Net liability exposure. following are the scenarios a company can come across if having net liability exposure.

1. Liability exposure (trade payables) and foreign currency appreciates
   When a company has trade payables in a foreign currency, an appreciation of that currency will result in a loss for the company because the company will pay more in domestic currency.

Suppose, Maruti Suzuki had trade payables of 200,000 JPY (Rs 112,636) on October 1, 2022, at the exchange rate of 0.56318 JPY/INR. On February 2, 2023, the JPY/INR exchange rate increased to 0.63526, which means that the trade payables increased to Rs 127,052. This appreciation of the Japanese yen has resulted in a loss of Rs 14,416 for Maruti Suzuki with Yen exposure being the same.

2. Liability exposure (trade payables) and foreign currency depreciates –
Maruti Suzuki had trade liabilities of 200,000 Japanese yen (JPY) on March 19th, 2023, which were worth Rs 125,210 at the exchange rate of 0.626049 JPY/INR. On July 7, 2023, the JPY/INR exchange rate decreased to 0.574976, which means that the trade liabilities are now worth Rs 114,995. This depreciation of the Japanese yen has resulted in a gain of Rs 10,215 for Maruti Suzuki.

In other words, the decline in the value of the Japanese yen relative to the Indian rupee has made Maruti Suzuki’s trade liabilities less expensive to settle. This has resulted in a financial gain for the company.

The following table can help understand the impact of Foreign Currency Fluctuations on Asset and Liability Exposures

Further JPY/INR and Maruti Suzuki’s stock price correlation can be clearly established as shown in the following image –

In conclusion, MSIL has taken steps to reduce its exposure to foreign currency risk by shifting to rupee payments for royalties. However, the company is still exposed to foreign currency risk due to its trade payables and receivables. MSIL can use various hedging strategies to manage its foreign currency risk exposure and reduce its impact on its financials. Given the scenario of depreciating yen, reducing raw material prices and easing of semiconductor situation Maruti Suzuki is in a better position for upcoming quarters

Disclaimer: Above article is for educational purposes only. Investments in the securities market are subject to market risk. Please seek an advice from a professional before investing.