The Hindu Business Line : Bajaj Auto to consider demerger on May 17

This is the first formal reference to the demerger issue by the company and comes four years after Mr Rahul Bajaj, Chairman of the company, first talked about the possibility of a demerger, in 2003.

The Bajaj family members refused to elaborate on the demerger. But going by Mr Bajaj's own earlier public statements, the proposal is to split Bajaj Auto into a manufacturing company and a finance entity that would include the financial investments and the insurance businesses of the company.

A part of the large cash reserves of Bajaj Auto is expected to be transferred to the new company, for investment in the finance and insurance businesses.

Mr Bajaj has maintained that the split is intended to enhance shareholder value, and has indicated that the extra funds of the company could be put to more productive use to fetch better returns than from earnings on equity and investments.

It is not intended primarily to fit the separate aspirations of his two sons, Mr Rajiv and Mr Sanjiv Bajaj, he has claimed. However, there have been reports that Mr Bajaj is seeking to resolve the differences between his sons by splitting the company.

Investment folio

As on March 31, 2006, Bajaj Auto had investments of Rs 5,856 crore (by market value); this would be substantially higher now, a year later, said analysts. The company's surplus funds would be in the range of Rs 8,000 crore currently. How much of the company's cash surplus would be transferred to the new entity would be a key matter that the demerger proposal will have to address.

"Insurance is capital-intensive and perhaps the extra finances could be deployed there, while the auto business is already in a strong position to generate finances for itself," said an analyst.

Bajaj Auto owns 74 per cent stake each in unlisted Bajaj Allianz Life Insurance Company and Bajaj Allianz General Insurance Company. Bajaj Auto Holdings is wholly owned by it.

Bajaj Auto also holds 49-50 per cent stake in Bajaj Auto Finance; analysts said one possibility is that it could be moved into the finance entity, perhaps to become a Non-Banking Financial Company.

Control issues

There are ownership and control issues within the larger Bajaj family business network as well. A faction headed by Mr Rahul Bajaj's brother, Mr Shishir Bajaj, and the latter's son, Mr Kushagra Bajaj, had recently accused the other faction of trying to wrest control in Bajaj Hindustan Ltd by increasing their hold over the family-holding companies Bajaj Sevashram, Jamnalal Bajaj and Bachchraj & Co.

Shares of Bajaj Auto gained 1.7 per cent on the BSE, closing at Rs 2,609 on Thursday.

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