Japanese companies like Ricoh, Hitachi heading towards challenging times on D-Street

Japanese companies listed on Indian exchanges such as Maruti Suzuki, Ricoh, Honda Siel Power, Hitachi Home Appliances, Sharp India and Lumax Industries are seen heading for challenging times on D-Street, after the Japanese Yen rose to an 18-month high against the US Dollar on Tuesday, which is counted as major headwind for earnings growth.

Analysts reckoned that some of these companies’ profitability may come under pressure due to higher cost of raw materials that is sourced from the parent company, as well as higher royalty outgo. The operating margin for companies such as Maruti Suzuki gets impacted by 15-20 basis points with every 1% rise in Yen value.

"The margins may get adversely impacted due to sharp appreciation of Yen against the US dollar, which is seen as negative," said Harendra Kumar, MD-Institutional Equities, Elara Capital. "The smaller companies are more vulnerable as they don't have treasury department to deal with complexities of currency fluctuation, while prior-agreements with vendors regarding payments make things more difficult."

Maruti Suzuki stock has gained 3.13% this year so far, against Sensex decline of 2.51%. However, smaller companies such as Ricoh India has dropped 61.81% year to date, Sharp India -12.64%, Honda Siel Power -9.92%, Lumax Industries -4.20% and Hitachi Home Appliances -0.44%, all these stocks have underperformed the BSE 500 Index that has declined 2.94% over the same period.

Maruti Suzuki management in the recently held analysts meet said that the rise in commodity prices and unfavorable forex (Yen) movements are the key challenges this fiscal year's earnings. The management also acknowledged that they are witnessing an uptick in input costs, Maruti’s exposure to the Yen is through royalty payments (6% of sales) it makes to the parent Suzuki Motor Co, and the import of raw materials, which forms 17% of revenues.

"The street currently have negative outlook about the companies, but there could be a reversal in fortunes, as the value of Japanese Yen is expected to drop against the US dollar over next 2-3 months,” said Tirthankar Patnaik, chief strategist and head of research-India at Mizuho Bank. "There is possibility that the Bank of Japan may announce stimulus measures around mid-summer post the US Federal Reserve meeting, and Brexit referendum, which may ease pressure on the Yen."

The Bank of Japan (BoJ) move not to consider stimulus package in the recent meeting and the depreciation of US dollar on expectations that the US Federal Reserve may delay interest rate to next year has hurt the Japanese Yen, which has appreciated nearly 14% against the US dollar from the lows in made in January of 123 a US dollar, to currently 106. Analysts said an emergency of BoJ meeting cannot be ruled out if Yen appreciation gets out of control.