Airtel, Bajaj, Hero may be hit hard by dollar supply slump in Africa

Scarcity of US dollars in a majority of the African nations is likely to have an impact on some of the top Indian companies who have a significant business presence in the continent.

The list of affected firms include Bharti Airtel Ltd, Bajaj Auto Ltd, Hero MotoCorp Ltd, Godrej Consumer Products Ltd and Dabur India Ltd.

The global slowdown in prices of commodities such as oil and metals has hit mineral-dependent economies in Africa and across the globe, while importing countries such as India have benefited. This has led to a slump in dollar inflows, putting pressure on the balance of payments position of these countries.

This is likely to impact Bharti Airtel due to its exposure to the local currency and India’s automobile companies the most, a majority of who rely on African markets for their shipments.

The main impact will come from Nigeria, where the local currency, Naira, is expected to depreciate 50% after the Nigerian central bank fixed the exchange rate at 197 to the dollar in 2015; but from 20 June, it was allowed to float freely which is expected to result in sharp depreciation versus the dollar. On 28 June, Naira was trading at 280 to a dollar.

New Delhi-based Bharti Airtel derives 7% of its consolidated earning before interest, taxes, depreciation and amortization (Ebitda) from Nigeria, and after taking into account the 50% currency fall, it results in a 2.3% reduction in consolidated Ebitda estimates for 2016-17 and 2017-18, according to G.V. Giri and Balaji Subramanian, telecom sector analysts at India Infoline Ltd.

Further, Airtel’s Nigerian operation company has dollar denominated finance lease obligations of $500 million.

“On depreciation of Naira, assets and liabilities of the Nigeria opco other than dollar denominated debt, which is $500 million, would be restated in dollar terms. Based on this, we calculate the balance sheet impact at US$167 million (around Rs.1,100 crore),” Giri and Subramanian said, adding Naira depreciation versus the dollar would affect three quarters in 2016-17, while 2017-18 will be the first full year of impact.

The tower sale process Airtel initiated in Africa has resulted in dollar denominated finance lease obligations, which reduced finance costs in Africa.

“But with Naira depreciation impacting profitability in the near term, the time frame for PAT (profit after tax) break even in Africa has been stretched out further,” Giri and Subramanian said.

Currency fluctuation in Nigeria will also impact Bajaj Auto Ltd, which exports about half a million two-wheelers to Nigeria alone.

In response to a detailed questionnaire, Bajaj said most markets are recovering since April. “This is evident in the increase in our exports since May. For instance, Nigeria has recovered from an average of 11,000 in January, February and March to 26,000 now and (it) is inching closer to our best average of 37,000,” the company said.

The company does not see a long-term impact of the currency devaluation.

However, in a 27 May note, Gaurant Dadwal and Vivek Sarin of Nirmal Bang Equities Pvt. Ltd, said Bajaj is looking at a volume of 4.6 million units in 2016-17, whereby it expects export sales at 1.6 million units, which is around a 9% decline over the year ended 31 March.

“Nigeria used to contribute 40,000-45,000 units on a monthly basis, which has come down to 15,000-20,000 units now due to currency unavailability in Nigeria,” Dadwal and Sharma said.

It isn’t just in Nigeria, Africa’s largest market, that these companies are seeing a hit, said a top executive at a leading automobile company who has business interest in the continent.

“Currency devaluation is a constant across nations in Africa,” said this person, requesting anonymity.

Giving a two-year comparison, the person said the South African rand has depreciated from 10.5 to a dollar in June 2014 to 15.2. The Egyptian pound is down from 7.1 to a dollar to 8.8. Among Latin American countries, the Chilean peso has depreciated from 550 a dollar to 680 in the last two years; the Mexican peso devalued from 12.9 to a dollar to 18.98, while the Columbian peso stood at 5,000 to a dollar against 2,000 to a dollar two years ago.

“Behaviour of different countries is very different due to political and economic reasons,” this person said. “But they all affect business. Demand in African auto market has nearly halved. Those who export to Columbia and other Latin American countries will also be impacted.”

The other problem, this person said, is that some of the countries have stopped remittances in dollars, which has impacted trade even when there is demand for automobiles.

“For example, Egypt and Angola. They are not allowing imports apart from food and other such items,” this person said, adding that some of the automobile models in Egypt continue to have a waiting period of seven-to-eight months.

At Hero MotoCorp Ltd, the firm may adopt a “go-slow policy” in expanding footprint in Africa and Latin American markets. As a result, India’s largest two-wheeler maker may cut its projections for exports, Mint reported on 5 February. A questionnaire sent to a Hero MotoCorp spokesperson remained unanswered.

Consumer products firms are also expected to be impacted.

About 15% of Godrej Consumer Products’ revenue comes from the African region, though for Dabur it is around 7%, while for Marico, it is just about 1.3%, and for Emami, Africa sales are negligible.

“For the quarter ended 30 June 2016, the impact would be very negligible. For July-September quarter, Godrej’s Ebitda may be impacted by around 5% and it would be less than 3% for Dabur if the currency value stays at the current level or erodes further. Other firms such as Marico and Emami would not suffer much,” said Sachin Bobade, an analyst at brokerage firm HDFC Securities Ltd.

Dabur India Ltd chief financial officer Lalit Malik said, “There’s no major impact on the consolidated business from the currency devaluation in Nigeria as the contribution from Nigeria is negligible in the overall scheme of things.”

Godrej Consumer Products, Marico and Emami declined comments for the story.

Harjeet Kohli, group treasurer of Bharti Airtel, said, “While currency devaluation does have an impact on the respective countries’ financials, we manage the same by prudent hedging policies to hedge foreign currency exposure. Also, we have our portfolio of operations in African continents where there is intrinsic mitigation due to different currencies appreciating or depreciating.”