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Nigeria's devaluation to hit some Indian companies

 

A 50 Naira note. Photo: Flickr

A 50 Naira note. Photo: Flickr

 

  The Naira’s devaluation this week in one of Africa’s largest markets, Nigeria, spells trouble for some big Indian companies operating there.

This is the third devaluation in 18 months and will see the Naira’s value to the dollar fall nearly 30 per cent, after similar reductions of 20 per cent and eight per cent, respectively, in the earlier ones.

IMPACT IN INDIA Bajaj Auto, Bharti Airtel and Godrej Consumer Products (GCPL) to be impacted the most by Naira’s devaluation Nigeria is Bajaj Auto’s single largest export market Africa is 26 per cent of Bharti’s consolidated revenue, with Nigeria being the single biggest market GCPL gets around a third of its revenue from Africa
Bajaj Auto, Bharti Airtel and Godrej Consumer Products (GCPL) are among the biggest hit. Nigeria is a key export market for Bajaj Auto; the other two have local operations. Both get hit by a devaluation, as imports into the market get more expensive and operating expenditure rises for companies with a local manufacturing base.

“This puts pressure on margins,” says G Chokkalingam, founder, Equinomics Research & Advisory.

For Bajaj Auto, exports are 42 per cent of its revenue. Nigeria is its single largest export market, a third of its export volume. Given the foreign exchange issues, export volumes to Nigeria have already halved to 20,000 units a year, from 40,000 earlier, analysts say. An added worry since these exports fetch higher margins than domestic operations.

Analysts at UBS expect export volumes for Bajaj Auto to decline five per cent in 2016-17 with the Nigeria problem. Africa is 26 per cent of Bharti’s consolidated revenue, with Nigeria being the single biggest, a third of its top line.

GCPL derives around seven per cent of its consolidated revenue from Nigeria, a market that is key for the firm within the larger African continent. GCPL gets around a third (33 per cent) of its revenue from Africa, a bit lower than Indonesia, its largest international market.

Omar Momin, head of mergers & acquisitions, business development and Africa, GCPL, says the firm sees currency devaluation as an integral part of its business planning. “We’ve built capabilities to deal with emerging market (EM) currencies. As in other countries, the economy and business will soon adapt to the new level of the Naira, since it will be market-driven,” he says. Sunil Duggal, chief executive officer, Dabur, strikes a note of caution. He says frequent currency devaluation increases business risk for companies which set foot in EMs for growth. “There is a translation impact when the top line of an EM is converted into rupees. At a consolidated level, revenue from that geography is lower. No company would want that,” he explains. Dabur, for the record, has a manufacturing base in Nigeria.

Duggal notes currency risks in EMs in regions such as Africa, Latin America and West Asia have grown in recent years, a challenge for Indian entities that have expanded there in the past decade.

The African business of Bharti, for instance, has been hit by a weak Tanzanian (shilling) and Zambian (kwacha) currency in the past few quarters. Dabur had to deal with currency fluctuations in key international markets such as Turkey and Egypt last year. Fitch Ratings expects the FY17 operating margins of Bharti’s Africa operations to decline by 100-200 basis points, on the back of depreciating currencies, higher competition and divestment of profitable operations. Bharti’s Africa margins had hit its lowest at 21 per cent in 2015-16 since acquisition of Zain Telecom’s Africa assets in 2009-10.