Bloomberg News

Bleak Future for Carmakers as Rupee Plummets: Corporate India

August 28, 2013

Maruti Suzuki India Ltd. (MSIL) and Hyundai Motor Co. (005380), the nation’s biggest carmakers, will have to raise prices of vehicles sold overseas to maintain profitability as a plunging rupee raises costs amid stagnating demand at home.

India’s currency plummeted the most in two decades to a record yesterday. A further depreciation will increase imported component costs and worsen a sales slump in India, R. Sethuraman, Hyundai Motor India Ltd.’s director for finance, said in an e-mail. The unit of South Korea’s largest automaker purchases as much as 40 percent of its raw materials from overseas depending on the car model, according to Sethuraman.

Automobile companies are rushing to increase use of local parts as the rupee’s drop raises costs and deliveries decline in Asia’s third-largest car market. Higher export prices may stymie sales overseas, while a cash squeeze engineered by the Indian central bank to stem the rupee’s decline prompts banks to raise interest rates, deterring buyers at home.

“Overall the picture looks bleak in the Indian car market as there are no pull factors for buyers,” Maruti Chief Financial Officer Ajay Seth said in an interview. “Nobody expected the sudden rupee depreciation, so there’s no short term measures that we can take to avoid the pain.”

Maruti is delaying a plan to build a new plant in Gujarat, said Chairman R.C. Bhargava, after deliveries in India declined for nine straight months through July. Hyundai, which exports 40 percent of its production, is seeking newer markets in Latin America and Africa, Sethuraman said.

‘Limited Advantage’

“While the rupee depreciation has a limited advantage in the short term, continuous depreciation will have a reverse impact on pricing in the export market,” said Sethuraman. Rising raw material costs “may lead to a further drop in already stagnating demand in the domestic market.”

Maruti’s profit growth may slow to 13 percent in the year ending March 31, according to a median estimate of eight analysts compiled by Bloomberg. Net income rose 47 percent in the same period a year earlier. Overseas sales accounted for about 10 percent of the company’s revenue last fiscal year.

Shares of the Indian unit of Suzuki Motor Corp. have dropped 17 percent this year. They fell 1.9 percent to 1,236.35 rupees in Mumbai yesterday as the benchmark S&P BSE Index rose 0.2 percent.

Payments Crisis

The rupee has dropped more than 20 percent this year, the biggest loss since a balance of payments crisis in 1991 forced authorities to pledge the nation’s gold reserves for loans from the International Monetary Fund. The advances prompted India to open the economy to foreign investment.

The rupee slumped 3.9 percent to an unprecedented 68.8450 per dollar yesterday in Mumbai, the biggest drop since 1993, according to prices from local banks compiled by Bloomberg.

“As far as domestic car demand is concerned, I’d be negative on that for sometime at least,” said Shaukat Ali, a New Delhi-based analyst at Quantum Securities Pvt. The falling rupee will boost oil import costs, which will “lead to rise in fuel prices. That way it’s going to impact very badly,” he said.

To lure customers, carmakers from Maruti and General Motors Co. (GM:US) to Volkswagen AG (VOW) and Ford Motor Co. are introducing new models and offering discounts. Maruti introduced a new version of its Wagon R model called the Stingray while Ford has started selling the Ecosport, a compact SUV.

Growth Estimate

Maruti also plans to cut use of imported parts by 3 percentage points this year, CFO Seth said on a July 25 conference call with analysts. The company imported 19.5 percent of its raw material as of March 31, he said.

India’s gross domestic product probably rose 4.6 percent in the three months ended June 30, the least since the first quarter of 2009, according to the median of 41 estimates in a Bloomberg survey before official data due tomorrow.

Slowing growth and rising borrowing costs may keep buyers away from showrooms this year as well, said Quantum’s Ali. Annual sales in the year through March 31 fell 6.7 percent to 1.89 million units, the biggest decline since 2001, according to the Society of Indian Automobile Manufacturers.

“The whole economy will suffer dramatically” due to the rupee’s drop, said Adi Godrej, chairman of Godrej Consumer Products Ltd. “There will be huge inflation, which will lead to high interest costs and a whole vicious cycle will be created.”

Auto Loans

HDFC Bank Ltd. (HDFCB), India’s biggest lender by market value, raised the base rate by 20 basis points to 9.8 percent this month after the central bank increased two interest rates. Banks are not allowed to lend at rates below the base rate. Kotak Mahindra Prime Ltd., the auto finance unit of billionaire Uday Kotak, forecasts no growth in loans this year.

“The sentiment is so poor that no one wants to buy a large ticket discretionary like a car,” said Sumit Bali, director at Kotak Mahindra Prime. “One can’t rule out another rate hike.”

Vehicle loans grew 24.2 percent in twelve months to June 28, data compiled by central bank show. That’s unchanged from the same period a year earlier, data show.

Lack of demand prompted Maruti to delay the Gujarat plant that was scheduled to begin production in the 12 months starting April 1, 2015 and was expected to boost the company’s capacity to 2 million cars by that fiscal year, Maruti said last year.

“If anyone can tell me when the car industry will turn around or even show signs of turning around, I will tell you when we will begin building the Gujarat Plant,” said Maruti’s Bhargava said.

To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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