Should investors sell Bajaj Auto as Nigeria devalues currency?

MUMBAI: Two-wheeler major Bajaj Auto is witnessing some selling pressure on concerns that exports to Nigeria will be hit following devaluation of Nigerian currency.

The Nigeria Central Bank has devalued its currency Naira to the US Dollar by over 8 per cent to about 168 per dollar. At the same time, it has raised key interest rate to a record high.

The Nigerian government intends to combat speculation against currency.

There are concerns that Bajaj Auto’s topline will be impacted if it doesn’t hike prices after the currency devaluation. The country contributes to around 12 percent of revenues for the company.

UBS has downgraded the stock to ‘Sell’ as it sees downside risk to export margins. The brokerage sees downside risk to Bajaj Auto’s export margins as the currencies of its key importing countries, Nigeria and Columbia, have depreciated sharply against the US dollar in the past three months.

While Bajaj receives export payments from its distributors in US dollars, the products are eventually sold to customers in their respective local currencies.

"In the past three months the rupee has been largely stable while currencies in key markets Nigeria and Columbia have depreciated 7.5 per cent and 12.5 per cent, respectively, against the US dollar. As a result, we believe the risk to export margins in now on the downside," the report said.

"We see modest earnings growth for the company over the medium term, driven primarily by growing export volumes. However, Bajaj's export margins are extremely high and may be impacted by increased competitive intensity in export markets as well as depreciation of importing currencies versus the US dollar over the medium term," the report added.

It has downgraded the stock to Sell from Neutral earlier with a price target of Rs 2,300.

Meanwhile, analysts at Emkay Global the development in Nigeria is likely to be incrementally negative for the company but they don’t see any immediate risk to company’s earnings.

According to the brokerage nearly about 12 per cent/14 per cent of the company’s revenue/Ebitda is contributed by Nigeria and hence the development is an incremental negative. It expects higher vehicle prices and interest rate to somewhat impact demand.

The devaluation is likely to impact the competition as well and thus won’t lead to market share loss for Bajaj Auto in Nigeria. The brokerage is building in 15 per cent export volume growth in FY16 (vs 24 per cent YTD in FY15).

At 10:45 a.m.; the stock was at Rs 2,598, down 1.74 per cent, on the NSE. It fell 2.79 per cent to touch intraday low of 2570.15 in trade today.