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Bajaj Finserv: Huge control over subsidiaries - Outside View by Luke Verghese

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Bajaj Finserv: Huge control over subsidiaries
Apr 16, 2013

A financial giant in the NBFC space but it is not clear what exactly the game plan here is

Not so young in the world of NBFCs

Bajaj Finserv in its present avatar is still a toddler at 5 years young, and it is the holding company of the group. In a sense this group of NBFCs' commenced its innings in public life in 1987, as Bajaj Auto Finance Ltd, and it has grown quite some since then. It is today designated as the pocket borough of Sanjiv Bajaj, the younger scion of the ebullient and affable pater familias Rahul Bajaj. The latter not wanting to relive the epoch making chaos that followed his return from Harvard Business School way back in the 1960s’, and the much later fratricidal dispute with younger brother Shishir pushed the pedal while he still held the reins. He very sensibly decided to split the spoils that befell his lap among his own two male siblings before it got a little too hot under the collar.

Today, the promoters including --- Bajaj Holdings & Investment, and Jamnalal Sons --- together control 58.87% of the outstanding voting capital of Rs 723 m (face value Rs 5) while friends and associates of the promoters control another 10.6% making in all a voting strength of 69.5%. (Rahul Bajaj in his individual capacity holds 1.7 m shares). Interestingly, the Foreign Institutional Investors (FIIs) hold another 9.89% of the capital stock. One may add here that given the level of the promoter holding, the floating stock for trading purposes in the secondary market is limited. But the share price oscillated from a low of Rs 391 in Dec 2011 to a high of Rs 690 in Feb 2012. That is a dramatic movement in price range over the space of just 2 months.

A large operation

Like Bajaj Auto this company too is big, quite big if one takes into account the many parts that go to make up the whole. Besides its own operations it boasts of four siblings and one joint venture. The largest underling by far in terms of capital investment is its 60.98% owned sibling Bajaj Finance Ltd-which commenced corporate life initially as Bajaj Auto Finance Ltd. (The share is listed for trading in the bourses, and it became a sibling of the parent in July 2010).The siblings also include two undertakings----Bajaj Allianz Life Insurance Company and Bajaj Allianz General Insurance Company-in which the parent has a 74% stake each, and two 100% percent held undertakings -Bajaj Financial Solutions and a step down sibling sporting the name Bajaj Financial Securities Ltd. There is also a joint venture going by the name Bajaj Allianz Financial Distributors Ltd in which it has a 50% stake. (Who owns the balance 50% please?) Collectively the group recorded revenues of Rs 39.05 bn during the financial year against Rs 24.44 bn previously. On a standalone basis the parent recorded revenues of Rs 1.35 bn against Rs 1.198 bn previously.

Big ticket holdings

The capital investment in Bajaj Finance has increased during the year to Rs 9.39 bn from Rs 6.33 bn previously. The additional shares were acquired at a per share cost of Rs 651 during the year. The total purchase cost per share presently averages Rs 373 against Rs 309 in the preceding year end. Since Bajaj Finserv holds only 60.98% of the outstanding equity of Bajaj Finance, presumably the balance is held in the public space? The capital investment in Bajaj Allianz Life amounts to Rs 1.11 bn while the investment in Bajaj Allianz General Investment amounts to Rs 816 m. These shares were acquired at par value. Of the total investment portfolio of Rs 13.49 bn at year end the book value of its investment in its siblings and joint ventures amount to Rs 11.93 bn. The balance is accounted for by investments in debt securities.

The word Finserv is probably an acronym for financial services. But take a look at the revenue side of the P&L account of the company. Of the total revenues of Rs 1.35 bn, over 62% emanated from grossly non financial activities. It earned a gross of Rs 843 m from wind farm activity, and is inclusive of renewable energy certificates. To be more precise sales of power generated brought in Rs 546 m, and the latter chipped in with Rs 289 m. The latter receipt did not figure in the preceding year. So it is not known how it will play out in the current year, and whether there is a particular ratio in this earnings stream if any, and how it all fits in. The balance 38% odd is the return from investment activity-receipts on capital and revenue account which are very subjective. It includes interest income on fixed income securities, dividend income from its siblings and profit on sale of investments. There is for example a wide variance in the income receipts under the respective heads in the two years.

(It may interest readers to know that selling the power that it generates is a piece of cake. In 2010-11 slightly over 50% of all power sales was to two group companies-Bajaj Auto and Mukand Ltd (formerly Mukand Steel). In 2011-12 such sales to the two companies accounted for a little over 66% of all sales).

The income and expenditure account

The receipt side of the income and expenditure accounts also has an expense item -- the amortisation (write down) of fixed income securities to tally with the market value of these instruments as per the law. (But the profit on loss on these instruments is booked in the revenue accounts only on sale). Then there is a separate ‘other income’ schedule which accounts for such niceties as rent, miscellaneous receipts, and provisions no longer required amounting to Rs 84 m against Rs 63 m previously. Here too there does not appear to any fixed pattern at all. But I guess the parent has the power to ‘manage’ the receipts if nothing else and that is the essential thing. From the manner in which it accounts for its receipts- the parent is nothing short of a mother hen brooding over the affairs of the group companies.

Wind power to the fore

There is a lot more to this company. Going by its financials, generating wind power appears to be a gold mine or something. Income under this head as stated earlier is Rs 843 m. The direct expense incurred to generate this income is only Rs 121 m. Then there is the marginal depreciation on the fixed assets. The company is also debt free so there is no interest to be accounted for. This begets the question on why the company does not generate more wind power. Where the shoe pinches in a manner of speaking is in the ‘pagaar’ department. The total payout on this account is Rs 108 m. Of this, the CEO Sanjiv’s take-home is Rs 30 m. That is to say he alone accounted for 28% of all pagaar paid out to employees. It must definitely be a nice feeling sitting in the corner room office.

Anyways the company makes a nice profit on the revenues that it generates simply because a part of the receipts have no expenses to bear due to the very nature of such receipts. On gross revenues of Rs 1.44 bn it earned a pre-tax of Rs 1.07 bn. In the preceding year there was also a write back of Rs 1.39 bn in respect of some sales tax deferral scheme etc - which had the effect of boosting the pre-tax to Rs 2.23 bn. That pre-tax makes for a healthy return on a share capital base of Rs 723 m. No debt, no trade receivables, humungous reserves of Rs 13.72 bn, miniscule working capital outlays, negligible cash balances, and an excess of current and non-current investments make up the financials of this company. The investments by and large belong to the ‘tied’ variety-investments which will never be sold.

Cash flow on the ball

The cash flow is about as good as it gets. Though it generated negative cash of Rs 35 m from operating activities, it was only due to the extra outflow of cash on the investment of Rs 730 m in group company shares. But for this demand on funds, the cash flow exercise is a piece of cake for its accountants.

Contrasting siblings

The two insurance companies are a study in contrast. The life insurance company towers over that of the general insurance company, and by a mile at that, in terms of total assets. Take a look at some of the stats. The general insurance venture had total assets of Rs 9.58 bn while the life insurance venture has total assets of Rs 394 bn. There is humungous mismatch here. The paid up capital of the two is less dilatory. The respective capitals are Rs 1.10 bn against Rs 1.50 bn. But the reserves and surplus are rather dilatory at Rs 8.49 bn and Rs 34.1 bn, while the investment portfolio stands even at Rs 38.65 bn and Rs 36 bn respectively. Ditto with the turnover/ operating result is Rs 1.95 bn and Rs 2.90 bn respectively -- again only a marginal difference. This again is a gross ‘mismatch’ given the drastically different asset sizes. The question that also arises is how the ‘turnover’ and ‘operating result’ can be one and the same. The two mean two different things altogether or have I got it all wrong? Besides, how can there be so many divergent figures when the paid up capital of the two companies is only marginally off-track? At first sight some of the financial figures appear nonsensical to the uninitiated. The chairman, Rahulbabu, in his letter to the shareholders states that the life insurance company is the second largest in the private sector in terms of policies issued in the latest financial year. There is no mention of where the general insurance company stands in the pecking order. The life insurance company however get s a massive leg up in the bottom-line department with a transfer of Rs 10.7 bn to the credit of P&L account.

The case of Bajaj Finance which lends across the board is just as curious. The parent has acquired shares in this sibling at fab premiums to the face value. No sweat here. The company boasts of mighty reserves and surplus of Rs 20.28 bn on a paid up capital of Rs 413 m. Note that more than half the reserves emanate from the share premium route. This is money for jam from the company’s operations point of view. It has total assets of Rs 129.2 bn at year end which generated revenues of Rs 21.7 bn during the year. Is that the very best in terms of its ability to get its assets to sweat? It generated a pre-tax profit of Rs 6 bn, and after taxes it could reveal a post tax of Rs 4 bn. For whatever reason the directors’ decided not to enrich the coffers of the parent in any direct way. The point is that the catch lies precisely here. The parent is in a position to manipulate the cash flow of its siblings to meet its own exigencies and when the need arises. And this is not a happy augury. But then the axiom is that the ends justify the means.

The last of the siblings is the pidgin Bajaj Financial Solutions Ltd which has yet to find a solution on how to turn a profit on its operations.

It is very difficult to take a call on companies such as this which appear to operate more on the whims and fancies of the management.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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