Bajaj Auto: Out-of-the-money - Views on News from Equitymaster

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Bajaj Auto: Out-of-the-money

Jul 5, 2002

While Bajaj Auto has perfected the art of making motorcycles in recent years, it is not the case when it comes to investing in stock markets. Or so it seems. Despite the uncertain sentiment in the stock markets, the two-wheeler major has increased its exposure in equity shares during FY02. For a change, we review Bajaj Auto's performance in FY02, this time in the stock markets. Bajaj Auto's (BJAT) total investment of surplus funds in FY02 was Rs 22 bn, a rise of 37.9% compared to previous year. The quantum of invested funds would definitely make many a Asset Management Company (AMC) pale in comparision. Just to put things in perspective, Zurich Mutual Fund's asset under management stood at Rs 26 bn as of May 2002. While there has been a sharp spurt in investment in government securities and bank deposits, mutual funds seem to be out of favour. Instead, it is relying more on its own investment skills, which is apparant from the rise in equity share investment and equity based mutual funds. Though as a percentage of total invested surplus funds this has come down, the quantum has increased by 18.5% to Rs 8.5 bn in FY02.

The surplus fund investment mix…
(Rs m) FY01 % of total FY02 % of total % rise**
Govt. securities & bank deposits 4 0.0% 5,797 25.7% 144825.0%
Mutual Funds 696 4.3% 510 2.3% -26.7%
Debentures and bonds 2,860 17.5% 4,040 17.9% 41.3%
Loan to Bajaj Auto Holdings 53 0.3% 184 0.8% 247.2%
Equity shares* 7,174 43.8% 8,499 37.7% 18.5%
Total of the above 10,787 65.9% 19,030 84.4% 76.4%
Total surplus funds 16,361 100.0% 22,556 100.0% 37.9%
*includes equity share based mutual funds
**change in FY02 over FY01

Not only has the company invested on its own, it has lent close to Rs 131 m in FY02 to Bajaj Auto Holding Company as loans and advances. The subsidiary company has inturn increased its exposure to equity markets by Rs 31 m in the same period with additional investments in Global Tele-systems, Ranbaxy and Tata Chemicals. Consequently, the subsidiary's average price of Global Tele has come down from Rs 1,563 per share in FY01 to Rs 835 per share in FY02. Remember the stock currently trades at Rs 112, which implies a loss of 86.5%.

If this is not a cause of concern, Bajaj Auto itself has huge investments in speculative stocks like Global Tele (Rs 168 m or 1% of total investment). The average holding price in FY02 was Rs 737 per share. Besides, the auto major itself has made losses in a number of 'investment' decisions in FY02. The table below lists the purchases and sales made by the company in the same period. It has made hefty losses in stocks like BF Utilities, Zuari Industries and German Remedies. This is in contrast to FY01 where it managed to book profits in stocks like HFCL, Shyam Telecom and Vikas WSP. For more on this, read    An AMC in the making?

Purchases and sales in FY02…
(Rs m) Purchase cost Sale proceeds Gain/Loss Gain/Loss (%)
BF Utilities 2.51 0.10 (2.41) -95.9%
Zuari Ind 0.44 0.16 (0.29) -64.8%
German Remedies 7.01 4.64 (2.37) -33.8%
Godrej Consumers 1.50 1.04 (0.46) -30.7%
TamilNadu Newsprint 0.92 0.77 (0.15) -16.4%
Aftek Infosys 4.78 4.77 (0.01) -0.2%
Uniflex Cables 0.00 0.00 0.00 12.3%
Total of the above 17.16 11.48 (5.69) -33.1%

Another key thing that comes to notice is that Bajaj Auto has made a number of equity share investments in FY02 for which delivery is yet to received. The quantum of such investments is Rs 134 m.

Shares purchased to be delivered…
Company No. of shares (m) Price (Rs)* (Rs m)
ACC 25,000 162 4
Digital 40,000 662 26
BSES 88,161 221 19
Global Tele 20,000 110 2
HPCL 20,000 274 5
L&T 125,000 183 23
Telco 150,000 161 24
Wipro 20,000 1,475 30
Total     134

Given this backdrop, one is not sure as to whether such huge exposures to capital markets is indeed required. The cause of concern is that the company's exposure has been on the rise despite the volatility exhibited by the markets in the past. Why not distribute surplus funds to the shareholders? Bajaj declared a dividend of Rs 14 per share in FY02, a dividend payout of just 27%. In fact, the payout has actually declined in FY02. It has to be mentioned that it requires some investments to enhance its motorcycle manufacturing capacity in the future. But one hopes that the company exercises caution on its investment decision's for the welfare of the shareholders. After all, Bajaj Auto's core competence is making two-wheelers and not asset management.


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