Maruti and Hero MotoCorp in OEMs and Apollo Tyres in ancillaries to benefit the most from rupee's appreciation
The rupee has appreciated by 4.4% to 53.25 against the dollar and by 3.3% to 0.685 against the yen in the last one month. We evaluated our automobile (auto) tracking universe to ascertain the impact of the strengthening rupee on their earnings in FY2013. The rupee's appreciation benefits Hero MotoCorp and Maruti Suzuki (Maruti) the most amongst the original equipment manufacturers (OEMs) as their royalty bill will reduce and the import of components from Japan will get cheaper. Among the ancillaries, Apollo Tyres stands to gain the most.
Exporters such as Bharat Forge and Bajaj Auto appear to be affected as their export realisations will be lower but there may not be any impact on their earnings in FY2013 as they have hedged their inflows for the rest of the year. Mahindra and Mahindra (M&M) remains the most insulated from the volatility in the currency market.
At a macro level, the rupee's appreciation, the lower international crude prices and the moderation in the auto loan financing rates are expected to revive sentiments during the forthcoming festive season. Our preferred picks in the auto sector are M&M and Maruti.
Royalty-paying companies benefit: Hero MotoCorp and Maruti
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Maruti: Royalty forms 5.5% of the company's sales. The company pays royalty bi-annually and generally hedges its rupee-yen exposure for the following quarter. The benefit of the rupee's recent appreciation would accrue in Q4FY2013. We estimate an impact of 0.9% on the company's EPS purely on account of the royalty if the rupee sustains at the current levels.
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Hero MotoCorp: After splitting from Honda Motor Company (Honda) the company originally agreed to pay Rs180 crore as a fixed royalty to Honda and charges the same under "Depreciation" every quarter. However, the company faces the risk of the rupee's depreciation. Due to a sharp depreciation in the rupee, the royalty payable every quarter had swelled to Rs228 crore in Q1FY2013. On new models, such as Ignitor, Impulse and Maestro, the incremental royalty is guided at around 1% of the total sales. We estimate an EPS benefit of 1.4% in FY2013 assuming the rupee-yen rate sustains at the current levels.
Outlook
Directionally, the study above indicates Maruti, Hero MotoCorp and Apollo Tyres will be the primary beneficiaries of the rupee's appreciation with the assumption that the rupee shall sustain at the current levels for the rest of the year. However, we are not changing our Hold recommendation on the stocks on which we have a rating (Maruti and Apollo Tyres) because of specific issues related to each company. Maruti would announce extremely weak Q2FY2013 numbers while Apollo Tyres would face the Competition Commission of India's penalty in the near term.
Also, in view of the fact that the rupee has limited visibility in the medium term, we continue to prefer the stock that is insulated from the fluctuations in the currency market, ie M&M. Our price target of Rs849 for M&M was achieved today. We will review our call on M&M after the announcement of its September 2012 volume numbers for a possible upgradation.
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