The Hindu Business Line : Cash must ride the pillion son Bajaj Auto

This idea, though, is at a nascent stage, if one were to take the company's Chairman, Mr Rahul Bajaj, at his word. But this is best nipped in the bud, so that Bajaj Auto can battle intensifying competition from a position of strength.

Cash is strength: Bajaj Auto has been sitting on a cash pile for over five years now. Over the next couple of years, competition in the two-wheeler market is set to intensify.

Come 2004, Honda is likely to ramp up its Indian operations. Suzuki is also set to make a pitch, and it also has an alliance with Kawasaki in Japan.

TVS Motors and Hero Honda are also on a product expansion binge. To fight this battle and retain its hard-earned market share in the motorcycle segment, Bajaj Auto will need its cash muscle. A look at its own story over the past five years provides valuable insight.

Back from the brink: About five years ago, Bajaj Auto was a fringe player in the motorcycle business, unable to match the scorching pace of Hero Honda and to a lesser extent, TVS Motors.

It was the low-priced Boxer, with discounts thrown in, that helped it to ramp up volumes for Bajaj.

Subsequently, models such as Pulsar have strengthened their position. Without its strong cash position, Bajaj Auto would have been hard-pressed to adopt the high-volume and low-margin strategy.

Fine on paper: The initial indications are that the equity structure of the new company in which the investments would be vested would mirror that of Bajaj Auto.

This may appear equitable. But much would depend on the value assigned to the automobile business.

It may be on the high side, due to the lower earnings capacity of cash pile. The valuation that would be assigned to such an investment outfit may be substantially on the low side.

No drag on PEM: The price-earnings multiple accorded to Bajaj Auto's automobile business may not jump sharply to provide adequate compensation.

Bajaj Auto now trades at a PEM of 15 times its earnings — higher than the PEMs of 10 times and 14 times that pure two-wheeler players such as Hero Honda and TVS Motors respectively command.

Bajaj Auto's stock price has revved up on the back of successful product launches (an indicator that the valuation is driven by the auto business), without the cash pile acting as a drag.

Delisting worry: What is worrying is that there is an idea to delist the investment company (also an indirect indication that it would be listed initially). This would be closing the valve of equitable ownership distribution.

There is a hint of a buyback of shares of the investment company as this is the only way it can be delisted. The company would not be short of cash to put through such a buyback.

Factors such as low valuation, low trading interest and the need to provide shareholders may be cited as plausible reasons for the buyback.

The Piramal way: Effectively, it would turn out to be an exercise in taking private, assets created through public funds.

Such a development would be similar to the manner in which the Piramal group took Piramal Holdings private about five years ago.

The latter was rich with well-located real estate and upmarket developed property in places such as Mumbai and Pune.

The exit price for shareholders was far less than what the company was worth in terms of market value of its assets.

Stake for Kawasaki: Bajaj Auto's attempt to vest the surplus cash in a separate company may be a prelude to offering a stake to Kawasaki of Japan in the equity of the automobile company.

The latter has been playing an increasingly active role in Bajaj's recent models, and its brand name is also more visible in Bajaj bikes than in the past.