Bajaj Auto: Export worries may worsen

The Bajaj Auto stock was down over three per cent on worries that further adverse currency movement in its key markets like Nigeria could hurt the company's revenues and margins. Nigeria, which accounts for over two-thirds of its Africa exports, is the single largest export market for Bajaj Auto with more than than a third of its export volumes going into that country. Why Nigeria and other key export markets such as Egypt are important is because exports constitute a major portion of the company's revenues at about 45 per cent and an even higher portion of operating profit given these markets fetch better margins. In December, the company's exports fell 12.4 per cent year-on-year which the management attributed to low dollar availability in key export markets such as Nigeria and Egypt. The situation, according to analysts, is expected to continue for some more time impacting the company's export volumes.

While in the past the company has taken price hikes or split the realisations with the distributor to offset the impact of the adverse currency movement, analysts at Axis Capital argue given macro demand issues in these markets especially the crude oil exporting countries, it would be difficult to protect its margins.

While rupee has depreciated against the dollar and is a positive, the currency fall of some of Bajaj's export markets versus the dollar has been higher making imports from India costlier. Moreover, given Chinese players are the biggest competitors, the weakening of the Chinese currency is also a worrying factor for Indian two wheeler makers such as Bajaj Auto.

Given the flattish volume performance in the December quarter, price cuts in export markets and falling share of three wheelers in product mix, the company's top line growth in the December quarter is expected to see a fall, believe analysts at HDFC Securities.

What has helped the company offset some of the export weakness has been the improvement in domestic volumes which were up nearly 17 per cent year-on-year in December. While the newly launched Avenger which is grossing volumes of 20,000 units a month (last year 3,000 units) has helped, the company is banking on a mid-February launch of a bike in the executive (commuter) segment to boost volumes. The management expects domestic volumes to move up from the current 143,000 units a month to about 180,000 units a month going ahead. Analysts, however, say it is a tall order to expect volumes to jump to that level and expect a more realistic incremental volumes of 15,000-16,000 units.