Bajaj Auto Ltd, India’s largest exporter of motorcycles and three-wheelers, has cut prices by 10-15% in Sri Lanka to compensate for a recent import duty hike in that country and revive demand.
Bajaj had increased prices of motorcycles and three-wheelers by 29% and 32%, respectively, in Sri Lanka after the local government in April increased import duty to contain its rising fiscal deficit. Duties on cars were raised from 120-291% to 200-350%, on three-wheelers from 51-61% to 100%, and on two-wheelers from 61% to 100%. Buyers in Sri Lanka shunned Bajaj models after the price hike and as a result the Pune-based firm halted exports to the island country in May and June, dragging down its overall exports.
“The buyers were stunned by the price hike announcement,” said Rakesh Sharma, president, international business, at Bajaj Auto. “There are anyways lot of uncertainties in the environment and they (buyers) have been paying a higher price for consumer durables and automobiles.”
The burden of the price cut will be shared by Bajaj and its dealers, but the ratio is not known, said analysts.
Sharma said the pared prices are for a limited period.
Analysts said the impact of the price reduction will play out only after two-three months. “We don’t see an immediate impact of the reduction in price,” said Ronak Sarda, analyst at domestic brokerage, institutional business group, MSFL Institutional Research. Assuming that Bajaj bears the burden of the entire price reduction, the average drop in its Ebitda (earnings before interest, tax, depreciation and amortization) margin will be 80 basis points (or 0.8 percentage points), Sarda said. On a full-year basis, its revenue from exports will contract by almost 200 basis points, partly offset by the depreciation of the Indian rupee against the US dollar, he added.
This, however, will be a temporary setback for the stock and will improve once volumes to Sri Lanka increase, he said. Sarda has a “buy” rating on Bajaj and a Rs.1,846 target price.
Bajaj’s average realization per unit in Sri Lanka last year was Rs.41,000, he said.
Another analyst with a domestic brokerage, who declined to be identified, said Bajaj’s prices in Sri Lanka are high even after the reductions.
“We don’t see despatches to Sri Lanka go beyond 5,000-10,000 units, which is half of what it used to export” to the country, he said, adding that Bajaj’s margins will get eroded by 100 basis points if the reduced prices prolong.
Prior to the price hike, Bajaj exported 10,000 motorcycles and 12,000 three-wheelers a month on an average to Sri Lanka. The country accounted for 17-18% of its total exports.
Overall, exports accounted for 36% of Bajaj’s production in fiscal 2012. It shipped more than 1.5 million two-wheelers and commercial vehicles overseas. Bajaj’s other key export markets are Africa, the Philippines and Latin America.
Bajaj Auto’s shares closed at Rs.1,555.30 apiece, down 1.78%, on BSE on Thursday. The benchmark Sensex gained 0.43%.
