Auto sector caught in the trap of an appreciating rupee

Auto sector caught in the trap of an appreciating rupee
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First Published: Thu, May 10 2007. 08 11 AM IST
Updated: Thu, May 10 2007. 08 11 AM IST
Mumbai: The rising rupee could put paid to the plans of some Indian automotive companies to offset slowing domestic demand—a result of an increase in interest rates—by exporting more.
A few auto firms that expanded capacities over the past two years to cater to growing domestic demand are looking at overseas markets to de-risk their business. This won’t be easy, said experts, because the rise of the rupee against the dollar has already started eroding export profitability.
Tata Motors Ltd, India’s largest truck manufacturer; Ashok Leyland Ltd, the second-largest truck maker in the country; and India’s second-largest bike maker Bajaj Auto Ltd are all eyeing a bigger exportmarket, but they are also aware of the downside of the rising rupee.
Tata Motors plans to raise the contribution of its international business revenue from 16% to 25% in the next three-four years. “The company’s focus is on South Africa, Spain, Italy and Turkey, besides countries in South Asia. In the coming years, the number of focus countries will expand even as we consolidate on the existing markets,” said a Tata Motors spokesperson.
Ashok Leyland Ltd plans to increase exports from 8% of total revenue to 15-20% in the five years, said company vice-chairman Dheeraj Hinduja. Bajaj Auto wants to double exports by crossing the one-million-units mark in three years. “Efforts to increase focus on international markets are part of the de-risking strategy that the companies are getting into to overcome any slowdown in the domestic market,” said Umesh Karne, a senior analyst at Mumbai’s Emkay Share and Stock Brokers Ltd.
However, the rising rupee is the biggest challenge for firms looking to increase exports. The rupee has appreciated by 8.4% against the dollar since the first week of March. “Around 40% of our exports is in dollars, which is being affected by the rupee appreciation. As we continue to cut the import of auto components, it does not offset the erosion in export earnings. Besides, all imports are in euros, a relatively stable currency,” said Arvind Saxena, vice-president sales and marketing, Hyundai Motors India Ltd. The firm exported 1,15,526 passenger cars out of the 3,14,604 it made in India last year.
“Bajaj Auto is a net foreign exchange earner and all our exports are in dollars. The recent appreciation in rupee does hurt our margins,” said Bajaj Auto executive director Sanjiv Bajaj. “We have already undertaken some export price corrections in our products effective 1 May. Besides, we follow a policy to hedge our exports using different instruments available in the market. Currently, we have hedged between 30% and 50% of the year’s planned exports,” he added. Bajaj Auto’s exports of two- and three-wheeler have risen from less then 40,000 in 2002 to 4.4 lakh in 2007, or Rs1,700 crore in value terms.
Last year (2006-07) saw a 13.5% rise in the production of passenger vehicles, commercial vehicles, and two- and three-wheelers, from 97,43,053 to 1,10,65,142. Domestic sales grew at an identical pace, while exports grew by 25% and crossed the one-million-unit mark for the first time.
Analysts predict slower domestic sales growth for vehicles in 2008. The growth in the passenger car segment is expected to come down to around 12% in 2008, against 22% last year. Similarly, the demand for medium and heavy goods carriers may come down to 10-12%, against 37.37% growth achieved in 2007. The demand for motor cycles is also expected to come down to 10% from 12.79%.
“In the 18 months or so, the installed capacity for passenger cars in India will cross two million from the current 1.5 million. As the domestic demand slows down with the rise in interest rates, auto firms will have to focus on exports to avoid idle capacity,” said an analyst with a foreign brokerage who asked not to be named, citing company policy.
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First Published: Thu, May 10 2007. 08 11 AM IST
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