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An AMC in the making?

Aug 3, 2001

Most fund managers have been badly bruised. Retail investors have taken a severe beating. The tech meltdown, which unfolded between April 2000 and March 2001 inflicted large losses. However, there is one very unlikely winner (if one may say so). Unlikely because its core competency lies in two wheelers. You may have guessed it right, the company in question is Bajaj Auto. Take a look at the chart below. Bajaj Auto invested in five stocks, which were among the front runners in the new economy euphoria. These stocks, as mentioned, took a severe beating during financial year ended March 2001. Nevertheless, the compay's fund managers seem to have done a good job for their employer. A two wheeler company probably beat most fund managers on these calls.

Name Quantity Purchase
Cost Rs m
Sale Proceeds
Rs m
Profit
Rs m
Share price
* Change
HFCL 31,100 29.8 43.2 13.4 -89.8%
Infosys Tech. 7,000 56.3 57.5 1.2 -50.1%
Satyam Computers 10,000 31.3 31.1 (0.3) -71.3%
Shyam Telecom 20,000 6.1 6.3 0.3 -85.7%
Vikas WSP 3,000 1.5 1.8 0.3 -69.0%
    125.0 139.9 14.9  
* Decline in share price between 1st April 2000 and 31st March 2001.

Not that there are no lemons in its portfolio.The company is very bullish on Global Tele. It increased its investments in the company by 85% during the year. The average cost of its holdings works out to Rs 817, as against the market price of Rs 111, a notional loss of Rs 215 m (86% of cost). Also, the company seems to be unusually bullish on ICICI and IDBI, both of which are grappling with large NPAs and potential losses (for example loans to Enron).

The broader issue is whether the company should be actively pursuing its stock market interests. Indeed, their exposure to stock markets (in 'other quoted' companies, excluding listed trade related companies) is marginally over Rs 6 bn, which is 54% of their total investment portfolio. Of this Rs 6 bn, Rs 2.7 bn (23% of total investments) is in 'other' shares as per the balance sheet. Surprisingly, the company has not disclosed what companies form a part of this investment (new economy lemons?).

Sadly, the company's core business is not doing well. The opertaing margins fell from 18.2% in FY00 to 9.8% in FY01. Probably the company needs to refocus its efforts. The Chairman, in his letter to the shareholders, fails to even make a mention of this disproportionate exposure to the stock markets, and whether he plans to do something about it.

  • This is what we had to say about the company's stock market exposure in July 2000: Bajaj Auto - Stockmarkets is the new focus area

    This is probably a key reason why investors and analysts are probably staying away from the counter. The valuations too make this apparent. Bajaj Auto trades at a price to earnings ratio of 9.7x on FY01 earnings as compared to Hero Honda, which trades at 13.3x.


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