The Hindu Business Line : Bajaj Auto kickstarts demerger

An unexpected structure for the de-merger, uncertainties about the valuation of the insurance business and a sedate outlook for the two-wheeler business have combined to put severe pressure on the Bajaj Auto stock price after it unveiled its de-merger proposal this week. The proposal basically tries to split Bajaj Auto's vehicles business and its insurance, retail finance/wind farm businesses into two separate (newly formed) subsidiaries, while retaining the substantial cash coffers with the holding company. The key facets of the de-merger that have triggered the de-rating in stock price are:

Though shareholders are being given one share each in Bajaj Auto, Bajaj Finserv and the holding company, Bajaj Holdings, issue of additional shares in the new subsidiaries is resulting in an expansion in equity base for the new entities. The new Bajaj Auto, which will house the vehicles business after the de-merger, will be left with an equity base of Rs 144.6 crore — higher than the current equity base of Rs 101.1 crore. This means the net profits of roughly Rs 800-850 crore will now have to service a higher equity base.

Disclosures made now reveal that the Allianz group, Bajaj's partner in its two insurance ventures, has an option (running until 2016) to hike its stake in its insurance joint ventures with the Bajaj group, to 50 per cent in the general insurance segment and 74 per cent in life insurance, at a nominal, pre-determined price. The stock market fears this could cap the valuations of the insurance business and reduce profits available to shareholders in Bajaj Finserv — the new finance company. Though the options given to Allianz do have the potential to trim the valuation of the insurance business, the exercise of this option is subject to policy changes allowing higher FDI limits in insurance (now 26 per cent) and the actual timing of the decision.

Despite the above misgivings, the demerger is likely to lead to a much sharper business focus. With the demerger, the group's patriarch, Mr Rahul Bajaj, would have also pre-empted the possibility of a family rivalry bristling over and affecting management. The Rs 1,500 crore of cash and cash equivalents allocated to the new Bajaj Auto will give this entity financial independence that could enable the management to speed up decision-making on critical issues such as new investments in R&D, new products, exports and overseas manufacturing.

Bajaj Auto's two-wheeler business, the group's real cash-cow, is poised at a critical juncture and its strategy will depend on shortening the time to market for its new products. The de-merger will be a positive on this front. Unlike its key competitor and two-wheeler market leader Hero Honda, which continues to flog one product that finds consumer acceptance, Bajaj Auto has demonstrated that two-wheeler buyers are willing to buy a bike in spite of the looming risk of withdrawal in the next few years. But to announce a complete exit from the 100cc segment even before showcasing the replacement product seems to have spooked buyers and shareholders.

In this context, with the expected rollout of Bajaj's new bike platform next month, expected to showcase a range of new bikes incorporating innovative, new, in-house R&D features in the 100cc+ plus segment, the market may finally be able to appreciate the rationale for the company's announced exit from the entry-level bike category.

The above factors suggest that, after the 15 per cent decline in stock price since the announcement, the key concerns triggered by the de-merger may already be reflected in the current stock valuations.

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

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