Nigeria currency volatility may hit Bajaj Auto's exports

ET Intelligence Group: Investors are reassessing the projected export growth and margins of Bajaj Auto due to sharp volatility in the currency of Nigeria, the largest export market for the company.
What turns investors more cautious is the yawning difference between the prevailing rate of the naira, the currency of Nigeria, and its six-month forward rate, which suggests the possibility of another 25 percent devaluation.
Africa's largest economy, Nigeria, depends on crude oil for more than 90 percent of its foreign exchange and nearly 75 percent of employment.
The steep fall in crude oil prices has rattled government finances and its central bank does not have enough reserves to pay for its dollar liabilities.
With crude prices at a 12-year low, an unprecedented spending and black market rates close to a record have been heaping pressure on authorities to scrap the country's trading limit on the naira and allow the currency to depreciate further. However, some respite to the naira came after its central bank did not change the trading band last Tuesday. But, fears of a devaluation seem to have been deferred, not evaporated.
According to Bloomberg, three-month and six-month forwards indicate devaluation of 17 percent and 28 percent. The government plans to raise $1 billion of Eurobonds to help plug its budget deficit and it may be hindered if the country puts limits on the currency's trading band.
Here are a few reasons why Bajaj Auto investors are keenly looking at Nigeria's currency: Bajaj Auto bills its dealer in Nigeria in dollar terms. So, if Nigeria is facing lack of forex availability, it affects the incremental volumes of the company. Vehicles sold in Nigeria are not on credit, which is a comforting factor.
Devaluation affects the pricing power of the local currency, thus in order to sustain volumes, the company has to cut prices. Last month, it reduced prices by $10-20 per bike. It impacts average realisation for the firm as Nigeria accounts for nearly 30 percent of its total two-wheeler export.
If the company continues to bite the bullet, it will be margin dilutive. Exports account for nearly 46 percent of total volumes and, according to analyst estimate, 55 percent of operating profit. The market is pricing in an operating profit margin of 21 percent in FY16 and FY17, compared with 19 percent FY15.
*First published by BENNETT,COLEMAN & CO.LTD.