Bajaj Auto's may transfer investments to AMC - Views on News from Equitymaster

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Bajaj Auto's may transfer investments to AMC

Nov 27, 1999

Bajaj Auto plans to hive off its investment portfolio to a wholly-owned subsidiary in a bid to improve valuations. This was revealed by a leading financial daily. Bajaj Auto is India's largest manufacturer of two/three-wheelers with a presence in all three segments of the two-wheeler market - scooters (64% market share in September 1999), motorcycles (26% market share) and mopeds (6% market share).

Bajaj Auto's is mulling a transfer of investments (Rs 15 bn book value) to an wholly-owned subsidiary in an attempt to improve its return on capital employed (ROCE). As close to 50% of the company's balance sheet size is locked up in investments, it pulls down the composite ROCE of the company. At current level of operations, the company's ROCE stands at 20%. However, ROCE of its manufacturing operations hovers at close to 28%, while the ROCE from investments is close to 14%.

Hiving off its investments will the unlock value of its manufacturing operations, which have been pulled down by lower returns from investments. Analysts are of the opinion that such a move will reflect in a 50% appreciation of the company's stock price

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