Bajaj Auto: Enhancing shareholder value ? - Views on News from Equitymaster

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Bajaj Auto: Enhancing shareholder value ?

Sep 25, 2000

Bajaj Auto Ltd (BAL) is currently offering a buy back of shares to its shareholders. It proposes to buy back upto 18m shares, representing 15.08% of the company’s total paid up equity capital at a price of Rs 400 per share. This will definitely enhance shareholder value, however its important to see that in other areas how serious is the company towards its shareholders. The buy back of shares will increase the company’s earnings per share by reducing the share capital as well as use the company’s surplus funds for the sake of the common shareholder. 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 Rs 7.2 bn to finance the buy back of shares, it is still sitting on a huge surplus.

Even in its mainline business of two wheelers the company has become aggressive. Its continuously launching new products in motorcycles, mopeds and scooters so as to increase its market share. Especially in the Japanese motorcycle front the company has fared very well in the current year. The company is in the process of expanding its motorcycle capacity and is currently the number two player in this segment with a 25% market share. Its overtaken TVS Suzuki which was the number two player in motorcycles in FY2000.

BAL: robust motorcycle sales
Sales: April-Aug 00 April-Aug 99 % change
Scooters 215,499 284,558 -24.3%
Sunny/Spirit 33,724 24,080 40.0%
Step thrus 57,146 59,702 -4.3%
Japanese Motorcycles 158,095 78,272 102.0%
Three-Wheelers 73,005 68,266 6.9%
Total 537,469 514,878 4.4%

Though margins are lower in the motorcycles and moped segment as compared to the company’s traditional scooters, atleast the company is making efforts to increase its volumes.

On the other hand a natural question that comes to the mind of investors is that as BAL is a cash rich company what will it be doing with its remaining surplus funds. The company continues to be very active in the stock market, this obviously does not provide a high comfort level to its shareholders.

Also the company’s recent decision to enter the non-life insurance sector through an initial investment of Rs 1.1 bn. This could be a source of worry for shareholders as motor insurance has been a loss making business for the entire general insurance industry for a long time.

Hence on one hand the company is making amendments to enhance shareholder value on the other hand it is not. This would tilt shareholders towards the buy back option. BAL should put to use its surplus funds for increasing dividend payouts, and invest in businesses where it earns a return higher than its cost of capital.

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