Geopolitics may hurt Bajaj in SL

DNA: Bajaj Auto, India’s biggest two-wheeler exporter, risks a decline in exports to Sri Lanka if the island nation hikes import duties yet again.

Sri Lanka faces a vote at the United Nations Human Rights Council on 21 March over alleged violation of human rights of its ethnic Tamil population and there is a huge political pressure on India to vote against it.

“Last year, when India voted against Sri Lanka, we saw import duties going up and exports to Sri Lanka dropping from 20,000 to 22,000 units per month in the fourth quarter of fiscal 2012 to around 8,000 to 10,000 by the end of the first quarter of this fiscal,” a Morgan Stanley report said.

Sales have recovered from the April 2012 low and now they are at 15,000 units a month. About a third of Bajaj Auto’s turnover comes from exports and Sri Lanka is one of its biggest markets.

At its peak, the company used to sell around 10,000 three-wheelers and 10,000 two-wheelers every month in that country. However, a duty hike last year led to significant demand contraction there. Indian automakers account for 90% of Sri Lanka’s motorcycle and three-wheeler imports and 30% of car imports.

Sri Lanka exports formed an estimated 7% of Bajaj’s fiscal 2012 revenue and 10% of operating profit. In fact, the company was also considering to launch its four-wheeler RE60, in Sri Lanka before its India debut.

“If the duties are further hiked, then the company might delay the launch of the vehicle. Even if they launch it, volumes may get affected,” analyst with Prabhudas Lilladher Surjit Singh Arora said. This could be a double-whammy for Bajaj Auto.

In order to be sure, domestic motorcycle sales have been flat this fiscal and are not expected to recover soon. “We are expecting the overall two-wheeler market to grow 7% to 8% in fiscal 2014 on the higher side,” Arora said. Motorcycles grew just 0.90% during April-February over the year-ago period.

“Sri Lanka is about 3% of sales and 5% of Ebitda this fiscal and we expect recovery in fiscal 2014 (plus RE60 launch) and Sri Lanka to form 7% of sales and 8% to 9% of Ebitda,” the Morgan Stanley report said. “If there is any import duty hike then our earnings could be at risk,” the report cautioned.

“There was an impact last year on our sales when the Sri Lankan Government increased duties. We will have to wait and see the situation this time,” Bajaj Auto executive said, who requested to be left unnamed.