Bajaj Auto Ltd. Earnings Call Nuggets: Export Hedges and African Market

Bajaj Auto Ltd. (532977) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Export Hedges

Binay Singh – Morgan Stanley: Binay Singh, calling from Morgan Stanley. My question is firstly could you update us bit on the export hedges? Secondly, could you talk a little about demand and pricing environment in your key export markets like if rupee continues to remain weak or weakens further, what kind of pricing power or retention power do we have in these markets?

Kevin P D’sa – President, Finance: Sure. As far as export hedges are concerned, we have taken up for the balance nine months; approximately $740 million open hedges are there. This represents approximately about 70% of the export for the balance nine months. Most of these exports going forward will be at a lower band of about INR55, INR56 with a higher band of – at about INR64 to INR66. This is for a year ended March 14. What we see is if I see the rate that I’ve realized in the first quarter, it is in April, because the rupee being where it was. It was an average (duration) for the month of April, a little over INR53. May was INR55 and June was INR57. As a result for the quarter, we got at INR55.56. As we go into the second half — the second quarter 30% of our exports are hedged at a upper band of INR59 and the balance 70% are hedged at a upper band of about INR67, INR68, so going forward into Q2 and H2. I would see that if the rupee is somewhere in the INR59 band, which is it’s currently today, as against INR55.56, I would see our realization of INR58.5 in quarter two and little over INR59 in quarter three. Coming to the export market is concerned, there is no pressure at all in the Company to pass on the benefits, the sales that are taking place, a lot of good field work has been done, so there is no pricing pressure on us per say to reduce the prices, but having said that we may decide to take one or two markets, where we will decided on sort of expanding the market rather than just trying to passing the benefits so wherever we feel that there is a greater potential of expanding the market by making our vehicle more affordable, we will do this.

Binay Singh – Morgan Stanley: So as of now like in the first quarter, did you lower prices or did you pass the benefit in any of the markets?

Kevin P D’sa – President, Finance: Definitely. So for example, if you remember my conversation that was there after the conference call of the annual results, I did say that we have passed on the benefits et cetera to Africa. We have passed on the benefits to Sri Lanka to Egypt and to major markets, but the price benefits that we passed on was like as I mentioned is between INR53 and INR49.5. Everything that is over the INR53 mark has been retained. So when I did the pricing in the current year for the export market, it was on the benchmark rate of INR53 to the $1 as against INR49.5 that we realized last year. That is what I said 50% of the benefit has been passed on, but if the rupee going to INR55 in the current year and going forward to INR59, there is absolutely no pressure on the Company to pass on further benefits…

Binay Singh – Morgan Stanley: Kevin, if you could also comment about demand in these markets in your key…

Kevin P D’sa – President, Finance: In these markets I would say that the demand is okay. The issue basically is most of markets where we are currently exporting, which are the consumer for motorcycles comes from the developing countries and all the developing countries have their share of problem of inflation, of foreign currency, et cetera. So you are seeing many of these countries putting restrictions on consumption or by interest rates hike, et cetera. The main concern and problem that we are facing right now is Egypt, which is a relatively a large market for us. We sell approximately about 7,000 three-wheelers and about 6,000 motorcycles every month. The demand is huge. The dealer over there that is willing to open any amount of (LCs) for the full quantity of about 12,000 to 13,000 three-wheelers. But since the (LC) has not been confirmed by a bank of stature in India, I am not accepting those (LCs). But the demand is very much there. As far as Nigeria goes, one is seeing a little bit of tapering off of demand, again because of the ban of using these vehicles as taxis in certain provinces. But those sales that have come up in a little bit of Nigeria has been more than made up by a growth in Lagos, by growth in Kenya and other markets. So net-net, Africa is flat at this point of time.

Binay Singh – Morgan Stanley: On the outlook, overall, in FY’14 for exports?

Kevin P D’sa – President, Finance: See the way I look at it, I’ll give you our outlook story for my side of view, is very clearly I’m extremely bullish on the Company for the outlook for FY’14 and the reason why I’m saying it is like this. If I take the individuals business verticals of the Company, we start with exports, number terms we may grow by about 5%. I correct my earlier stand of 10%, which I was talking about to – since four months are already over, I would say somewhere near the 5% mark. But on account that the export realization is taking place, my profitability and my top line is very, very, very positive and encouraging as what you have seen in the first quarter. In the first quarter we’d have realized somewhere near about close to INR200 crores coming purely from the exchange difference and I would say a further INR100 crores are expected in quarter two and given where the rupees and the situation where we see in the country, I don’t see the rupee appreciating below INR58. So for me, rupee depreciation, good export story, that continue and that (forms) today 35% of my business. Coming to the three wheelers, again new permits coming up, upgrades coming into place, pricing power over there, I see this part of the business also growing well. Third is the spares business, which is going as per plan, so 52% of my business is absolutely on a solid (wicket), growing at the desired profit level. So for me, the 48% of the market which is the motorcycle market, which today, we have seen the overall market itself being sluggish, but I look at it in a positive mind and sense that my market share today in the motorcycle domestic business is 24%. I see six more products being launched in the Discover family. I’m hoping H2 becomes better given the monsoon, so one, I expect in the second half, the market will expand and hopefully my market share to expand, so then the balance 48% of my business which is trailing will also do very well, so net-net I see FY ’13, ’14 being a very good year for us.

African Market

Hitesh Goel – Kotak Institutional Equities: Sir, I just missed your outlook on the African market, because you had said in the last quarter that you were gaining market share in Nigeria, now if I look at the first quarter, there is a decline of 20% in the motor cycle sales.

Kevin P D’sa – President, Finance: And the industry had declined by 22%.

Hitesh Goel – Kotak Institutional Equities: Yeah, so I mean, do you see further market share gains in which markets in Africa you are targeting, even you had said, you are targeting assembly plants in different African countries. So, can you clarify that?

Kevin P D’sa – President, Finance: We are getting into Kenya, we are getting Ivory Coast, we are getting into Uganda, we’re getting into Tanzania, in all these markets we are (ceding) these markets et cetera. So currently we may be doing about 150 to 200 per month in each of these markets. But as we go forward, I think this is going to be the growth area. So net-net, if I look at Africa, my market share, let’s say, in Nigeria, where the industry declined by 22%, I declined by 12% hence growing the market. This market decline that took place was primarily because of the ban of two stroke vehicles and which the Chinese were the biggest sufferers. Now with the ban of the Chinese and two stroke vehicles, which were selling at about 65,000 Naira, 70,000 Naira, there is a price point that is available where people cannot go all the way up to 115,000 Naira, because of the four stroke vehicles. So therefore there is a business opportunity over there to expand the market by doing a little bit of price making the vehicle little more affordable. That’s why in my opening remarks I said that some part of the benefit that we see in the foreign currency, we may pass on not because the market is requiring it or the pressure from the distributor, but we believe internally that it is a nice way of expanding the market to make the market – product much more affordable. Those people who are in the 70,000, 80,000 price point, who can go up to 100, 110, are making our vehicle (indiscernible)…

Hitesh Goel – Kotak Institutional Equities: Can you talk about three wheelers in Africa as well, what is the growth there, what is happening? Finally, you’ve reported INR57 to $1 rate, foreign exports in this quarter. Does it include – no, no, in the number in the press release that you’ve given, that includes exports incentive as well?

Kevin P D’sa – President, Finance: No, which press release are you talking about?

Hitesh Goel – Kotak Institutional Equities: The press release that you’ve given, you’ve given dollar number and you’ve given the rupee number. So that comes out 57.3?

Kevin P D’sa – President, Finance: No., no, please don’t do that. The rupee number that you are talking about was about, I think, INR1,870 crores odd, and the export was about $327 million.

Hitesh Goel – Kotak Institutional Equities: First quarter I have INR1,876 crores and $327 million.

Kevin P D’sa – President, Finance: Correct. Now, now INR1,876 crores includes exports to Iran, which is in rupee payments, includes the exports to Nepal, which is rupee payment. So you cannot divide INR1,876 crores by $327 million, you will come to a wrong figure. You multiply $327 million into (INR55.56) and that’s what the export realization is in to these countries. The balance amount that you’ll get is purely on account of rupee trade with Iran and Nepal.

Hitesh Goel – Kotak Institutional Equities: Can you just finally give outlook on three-wheelers, what is happening in Africa right now?

Kevin P D’sa – President, Finance: As far as our three-wheelers is concerned, a lot depends on Egypt, which is about 8,000 number. The dealerships are dry. The demand is huge, and therefore, I would say that between domestic and exports, I am quite confident to quote a run rate of about the 45,000 numbers of three-wheelers going forward from August onwards.