Bajaj Auto Ltd (BAL) on Thursday announced its break-up into three companies: one for its auto operations, another for its finance operations and a third that will be a holding and investment firm. While Rahul Bajaj, chairman of BAL, will head the holding and investment firm, his elder son Rajiv Bajaj will head the auto business and younger son Sanjiv, the finance one.
Meanwhile, BAL shares fell sharply on concerns over call options it has issued to Germany’s Allianz SE to lift its stake in two insurance joint ventures with the company.
Rahul Bajaj said the move was prompted by a desire to unlock shareholder value and not divide the group between his sons. The company also disclosed that Allianz has the option of increasing its stake from 26% now to 50% in the general insurance venture and 74% in the life insurance venture when the government increases the limit on foreign direct investment in insurance, currently capped at 26%.
BAL shares fell 12.7% soon after the announcement, to Rs2,398, but recovered to close at Rs2,500.30, still down 6.7% from Wednesday’s closing price. “The shares fell because of the Allianz call option,” said Vaishali Jajoo, automobile analyst at Angel Broking Ltd.
According to the terms of a 2001 agreement between BAL and Allianz, the latter can increase its stake in the general insurance venture by paying Rs10 a share and interest compounded annually at 16%; the agreed price for the life insurance business is Rs5.42 a share and the same quantum of interest. On the basis of these numbers, analysts calculate the value of Bajaj Allianz’s insurance businesses at Rs5,400 crore, 23% lower than the Rs7,000 crore valuation, based on projections of earnings of the two businesses for 2007-08.
After the break-up, BAL will have two subsidiaries, Bajaj Holdings and Investment Ltd (BHIL) and Bajaj Finserv Ltd (BFL). BAL will first transfer the auto business, with all its assets and liabilities, and Rs1,500 crore from its investment portfolio, to BHIL. BAL has a Rs6,000 crore investment portfolio with a market value of Rs8,500 crore. BAL will transfer its wind power project and investments in Bajaj Allianz General Insurance Co. Ltd and Bajaj Allianz Life Insurance Co. Ltd and non-banking finance company Bajaj Auto Finance Ltd to BFL. BFL will receive Rs800 crore from BAL’s investment portfolio.
Later, according to the plan presented by Rahul Bajaj on Thursday, BHIL will be renamed BAL and BAL will be renamed BHIL.
“Rajiv Bajaj will continue to be the managing director and chief executive officer of the new auto company while Sanjiv will remain the executive director, finance, and continue to report to Rajiv. However, he will hand over his responsibility for the international market function to Rajiv in the next 12 months to be in a better position to oversee the finance business,” said Rahul Bajaj.
As chairman of BHIL, Rahul Bajaj will continue to wield the baton of authority and power.
Analysts said Rajiv will have a limited source of funds to plan a major expansion. And the finance arm of the group that will compete with companies such as GE Money and Citi Financial in the consumer finance business, will not have as strong a balance sheet as the current Bajaj Auto does.
“The two new companies will be able to tap, on an arm’s length basis, into the cash pool of the investment company to support future growth initiatives, if required,” a Bajaj Auto statement said.
The company expects the break-up to be complete by the end of 2007. All shareholders of the existing Bajaj Auto will be issued shares of the two new companies in the ratio of 1:1. This means for every Bajaj Auto share (face value of Rs10), shareholders will get one share each of Bajaj Holdings (face value Rs10) and Bajaj Finserv (face value Rs5).
After the issue of new shares, the existing shareholders of Bajaj Auto will hold around 70% stake in the new companies. The remaining stake will be held by the new holding company.
Analysts said the demerger would help improve returns on both the auto and the finance businesses.
“These investments, now at 85% of the capital employed, and 115% of net worth and earning approximately 9-10% returns pull down the return ratios of the company as a whole. For instance, the overall return on equity and the return on capital employed for Bajaj Auto is at 23-24% compared with 36% and 48%, respectively, for Hero Honda,” Ashutosh Goel, analyst at Edelweiss Securities, had said in a recent report.
Riding high on the profit from the insurance business and return from the investments, the company reported a Rs401.15 crore net profit for the quarter ended 31 March 2007, up 20% from a year ago. For the full year, the company posted a net profit of Rs1,248.28 crore compared with Rs1,104.60 crore in 2005-06. Its net sales increased from Rs8,103.74 crore for the year ended 31 March 2006 to Rs1,0118.67 crore for the year ended 31 March 2007, a growth of 24%.
(Ravi Krishnan of Mint and M.C. Govardhana Rangan of Reuters also contributed to this story.)