Bajaj Auto: Split theory

Pune-based motorcycle maker Bajaj Auto is likely to get a re-rating by investors after the hive-off

For the last seven to eight years, investors have demanded that the cash on the balance sheet of Pune-based motorcycle maker Bajaj Auto be spun off into a separate company.

Or better still, returned to shareholders. After all, there's not too much money needed to run a two-wheeler business. And the Rs 7,629 crore (FY06 stand-alone revenues) company had around Rs 7,500 crore worth of investments as on March 2006. Moreover, ever since it has started gaining market share in the motorcycle segment, cash flows have been strong.

In FY06, Bajaj Auto turned in an operating profit of Rs 1317 crore, which is expected to go up to Rs 1,530 crore in the current year. The market has been valuing the stock on a sum-of-parts basis for some time now especially after the insurance businesses, life and general, have started doing so well.

Today, the Bajaj insurance subsidiaries, both of which have Allianz as their foreign partner, occupy the number-two spot in their respective spaces, among private sector players.

Currently, analysts attribute Rs 750 per share for cash, around Rs 650 a share for the insurance business and around Rs 1700 for the motorcycle business. That gives a target price of Rs 3,100. The stock closed one per cent higher in Friday's trading at Rs 3047.

There is unlikely to be any re-rating of either of the businesses, unlike in the case of Reliance Industries since the Bajaj Auto stock is in any case being valued on a sum-of-parts basis.

But, after the financial businesses are spun off, which chairman Rahul Bajaj has said should happen by the 2007-end, investors will have a choice as to whether they at all want to be shareholders in the new entity.

Also, since the financial services business will have a different management, it might put the cash to better use.