Export demand bigger worry for Bajaj Auto

Stimulating demand in key export markets holds key

With the depreciation of the yuan and cheaper Chinese exports, one segment that could face Chinese competition is motorcycles. The largest exporters of motorcycles from India are Bajaj Auto (48 per cent of volumes) and TVS Motor (20 per cent). Credit Suisse analyst Deepali Bhargava says bike makers are more vulnerable to relative price changes as India and China have similar levels of comparative advantage. The Bajaj Auto stock has been the biggest loser among Indian two-wheeler makers, losing 14 per cent over the past week, while TVS is down 2.4 per cent.

Given the cross-currency changes, higher competition and weak demand in key export markets, the earlier perception that companies such as Bajaj Auto will benefit from the depreciation of the rupee against the dollar is not playing out, says an analyst. This is because while a weaker yuan is a worry, demand in key export markets such as Nigeria is a bigger headache. The steep fall in commodity prices has hurt oil exporters leading to a sharp fall in local currencies against the dollar such as that of Nigeria’s naira. Bajaj Auto has been passing on the benefits of rupee depreciation to spur demand in key markets. Africa accounts for 45 per cent of overall export volumes for the company. What is in favour of the firm is the quality perception and the fact that the price segments Chinese players occupy is lower than that of Bajaj.

Since mid-June, when Chinese markets saw major selling, the yuan has depreciated 3.3 per cent versus the greenback, whereas Indian currency has fallen 3.18 per cent. While the depreciation of the yuan will have an impact, the intensity will depend on the spread (rupee and yuan depreciation against the dollar). According to analysts, only if the spread widens further will the companies have to resort to price cuts to sweeten the deal for importers. If the yuan depreciates further, Bajaj Auto could suffer as two-thirds of its earnings come from exports, which enjoy higher estimated margins of 30 per cent compared with overall margins of 19 per cent. TVS, too, should feel the heat given that it gets 20 per cent of volumes from exports.

Key areas Bajaj will have to improve include its sluggish domestic volumes and boosting exports while maintaining margins. Analysts believe the firm will stick to 19-20 per cent margins, but achieving the two-million export target for FY16 might be touch.