The Hindu Business Line : Some relief for investors from two wheeler woes

The stock markets have usually tended to greet de-merger proposals, especially complicated ones, with initial suspicion (Reliance Industries is a leading example) and Bajaj Auto's announcement was no exception.

That it was also accompanied by a profit decline for the quarter, also contributed to an adverse stock market reaction.

However, de-mergers which separate unrelated businesses have in general, proved lucrative returns for the investors who held on to receive shares in the de-merged entities.

The split-up of Reliance Industries' telecom, finance, energy and communication businesses into four separate entities or Zee Telefilms' more recent move to separate its broadcasting and distribution businesses have each delivered healthy returns to original investors.

Unlocking benefits

In Bajaj Auto's case, the de-merger proposal gives investors in the stock an opportunity to unlock benefits from the high potential financial services business (Bajaj Allianz is the second largest player in domestic insurance), at a time when the core vehicles business is under pressure.

Increasing pricing pressure and slowing sales of two wheelers have already contributed to a shrinkage in the valuations for two-wheeler stocks in recent months.

Price-earnings multiples for vehicle makers have declined from over 20 times latest earnings to the low teens in recent months.

With Bajaj Auto investors set to receive one share each in Bajaj Finserv (the financial services business), they could benefit from higher valuations for this arm going forward.

The vehicles business to be housed with the new Bajaj Auto could in contrast, command a price-earnings multiple that hovers in the low teens. In terms of financials, based on the FY07 results, post-tax profit for the vehicles business is at about Rs 800-825 crore (assuming a tax incidence of 33 per cent), while that for the financial services businesses is at about Rs 50 crore (including life, general and retail finance businesses).

Cash distribution

The distribution of Bajaj's cash coffers between the new entities and the deployment of the substantial investment book, now to be vested with Bajaj Holdings, is likely to be the key bone of contention for investors, as both the vehicles and financial services businesses may require an ongoing infusion of cash to fund research/marketing outlays and future growth respectively.

More Stories on : Two/Three Wheelers | Restructuring | Bajaj Auto Ltd | Microscope

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