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Bajaj Auto: 'Unlocking' value?

Sep 4, 2003

If media reports are to be believed, Mr. Rahul Bajaj, Chairman of Bajaj Auto, has expressed his intention of spinning off a part of its investment surplus into a seperate arm with an identical shareholding pattern. Though it is only a proposal at the current juncture, the objective seem to be 'unlocking' value to shareholders.Before going any further, consider the investment mix of Bajaj Auto as of March 31st, 2003 in brief. If one were to rank the mutual funds in India on the basis of corpus under management, Bajaj Auto will surely find itself in the top six or seven for sure. 'Assets under management' has increased by 29% to Rs 29 bn in FY03. However, for the first time in the last three fiscal years, investment in equities have come down in absolute terms. Slowly, the company seem to be realising the fact safety of capital is more important than high returns, which is indicated by the sharp rise in government security holdings.

The surplus fund investment mix...
(Rs m)FY01% of totalFY02% of totalFY03% of total
Govt. sec & bank deposits40.0%5,79725.7%8,65329.7%
Mutual Funds6964.3%5102.3%1,7396.0%
Debentures and bonds2,86017.5%4,04017.9%8,69829.9%
Intercorporate dep/Pref shares4,72828.9%3,52615.6%2,5058.6%
Loan to Bajaj Auto Holdings530.3%1840.8%1400.5%
Equity shares7,17443.8%8,49937.7%7,35525.3%
Total cost16,361100.0%22,556100.0%29,090100.0%
Market value (Rs m)21,235100.0%29,433138.6%
Gain/Loss (%)  -5.9% 1.2% 
Per share value (Rs)  210 291 
% of current mkt price (%)     39.9% 

How have these investments performed in the last two years? As against the book value of investment of Rs 29 bn in FY03, the market value is marginally higher by 1%. This compares favorably with the previous year performance when the company actually lost money. Though equity shares and shares based mutual funds form about 25% of the total portfolio, the company has not disclosed equity holdings in 2003. This is in contrary to the previous practices of disclosing a part of holdings in annual reports.

Bought and sold - Still in the red...
(Rs m)Purchase costSale proceedsGain/Loss (%)
Chennai Petro0.20.2-22.2%
Total of the above0.80.4-47.6%
Mutual funds (Rs m)3,5103,5180.2%
Combined gain/loss (Rs m)3,5113,5180.2%

Given this backdrop, the first question that comes to a retail investor's mind is the objective behind such huge exposure to stock markets? If the company is profitable and generated Rs 5.7 bn as net cash from operating activities, why not return surplus cash to shareholders? Dividend payout actually declined in FY03 to 26% from 27% last year. Agreed that the two-wheeler market is increasingly becoming competitive and product cycles are shortening. If so, why not increase the quantum of investment in research and development? Bajaj has plans to spend Rs 378 m in R&D in FY04, which is not even 1% of projected sales.

The stock currently trades at Rs 728 implying a P/E multiple of 12.5x FY04E earnings. Valuations seem to be on the higher side when compared with its peers like Hero Honda and TVS. Though Bajaj Auto may outpace both its peers in FY04 in terms of revenue growth, return ratios continue to remain poor (Return on net worth at 16% compared to 68% for Hero Honda).

The moot point is whether demerging a part of the surplus cash into a separate investment firm with a corpus of Rs 1 bn will improve the 'price to earning ratio' of the company. More importantly, why should the management think about stock price and not focus on running the business profitably and in the process, rewarding shareholders?

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