Jul 18, 2000|
Bajaj Auto - Stockmarkets is the new focus area!
Bajaj Auto (BAL), India's largest two wheeler manufacturer is also a keen speculator on the bourses. During FY2000, BAL 'traded' in 50 stocks. The purchase price of these 50 stocks was Rs 887 m and they were sold at a profit of Rs 640 m, earning BAL a return of 72%.
What is a manufacturer of scooters and motorcycles doing in the stock markets? Speculating. Atleast that's what its balance sheet seems to suggest. And we agree.
This profit on sale of shares accounts for 13% of BAL's other income for FY2000. In terms of profits it accounts for 10.4% of the company's bottomline for the year, not a small amount. This is clear speculation and raises doubts on the company's future performance, credibility and management strategy.
As per the FY2000 balance sheet of BAL, the total of investments, cash and loans and advances is Rs 38 bn and this is 70% of its total balance sheet size. Though the company has decided to use a portion of this to finance the buyback of shares, it is still sitting on a huge surplus of funds.
The issue here is that why should a scooter company use shareholder's funds for such speculative activities. Shareholders will obviously not be comfortable investing in a company which uses its funds in risk taking businesses and not for its mainline business activities. In this case though the company has made a profit in trading on shares, it is very likely that at times the losses could exceed the profits resulting in a sheer waste of the surplus funds on hand.
From a shareholders point of view the surplus funds of the company should be used in research and development activities and higher dividend payouts rather than on speculative activities. BAL has been lacking on its focus in research & development. The company does not seem keen on increasing its investment in R&D. R & D accounted for only 1.1% of net sales as of March'2000.
This new focus area for the company is a key concern for investors, as it indirectly exposes them to the vagaries of stock markets. Investors must take note of this development before making their investment decisions.
On the current price of Rs 361, BAL is trading at 7.0 x on its FY2000 EPS of Rs 51.4.
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