Bajaj Auto: Running on excess fuel?

Raghuvir Srinivasan

AN ADVERTISEMENT from Bajaj Auto asking for an equity research analyst?

The Rs. 4,000-crore two-wheeler manufacturer advertised last week in a financial daily for an equity research analyst with experience of managing a ``large fund''. Given the well-endowed investment portfolio of the company, the advertisement is not surprising at all.

Earlier last month, Bajaj Auto had said that it was considering a foray into the just-opening-up insurance sector and was looking for a foreign partner to enter the non-life segment. There were also reports that the company was considering amending its objects clause to include the power business. Besides all this, there has been a rumour, ever since the Government began talking of divesting its stake in Maruti Udyog, that Bajaj may be an interested party. What is Bajaj Auto up to? What is the signal it is sending out?

It is very evident that the company is flush with funds and for want of better deployment avenues, has invested in securities, listed and unlisted, government and private. As per its latest annual report for the year ended March 31, 2000, Bajaj Auto's total investments were Rs. 1,952.36 crores, up 34 per cent from Rs. 1,459.06 crores in 1998-99. Of this, Rs. 607.31 crores has been invested in listed equities consisting of ICICI (Rs. 271 crores), Global Telesystems (Rs. 13.5 crores) and DSQ Biotech (Rs. 24.6 crores) among others. Of the above, DSQ Biotech is an acquisition made in 1999-2000 and similarly -- but for a small part worth Rs. 0.53 crores -- the rest of the investment in Global Telesystems has also been made in 1999-2000 only.

The soundness of the company's investment strategy may be questioned, as it has locked up huge funds in some doubtful stocks, excluding ICICI. There are surely better choices available in the market. Besides this, there is also a Rs. 150.83-crore investment in mutual fund units and the rest of the portfolio is made up of government securities and corporate bonds. In contrast to Bajaj's total investment portfolio of Rs. 1,952 crores, the corpus size of the largest private sector mutual fund in India is around Rs. 1,600 crores, while the smallest is about Rs. 6 crores. In short, outside of US-64 and ULIP of Unit Trust of India, Bajaj Auto's investments would rank as the largest fund operation in the country! This should give an indication of how financially sound Bajaj Auto is.

It was probably to put such surplus funds to good use that Bajaj Auto opted to buy-back a portion of its shares. Its buy-back offer at Rs. 400 per share is expected to take up about Rs. 720 crores of its free cash, apart from sending a strong signal to the market on the company's view of its stock's valuation. But, unfortunately for Bajaj, the buy-back price has been perceived as being on the lower side by the market, and the money being spent may not really achieve the purpose of securing a re-rating in the stock.

If Bajaj Auto's current moves give the impression that the company is sitting pretty on its two-wheelers business and has really no use for the surplus cash, it may not be right. It is an accepted fact that the scooters segment is fast losing out to motorcycles. Being the largest scooter manufacturer in the country, Bajaj Auto will take the greatest hit from this fundamental shift in the market.

Though it was late in accepting this reality, the company quickly turned its focus on to motorcycles. Its large volume ramp-up in the last few months probably signifies the success of this strategy but it must be pointed out that these volumes have been attracted by some low-interest-low-instalment schemes for buyers. The company has been able to manage this because of its sound liquidity position. In the short term, this strategy may work to its benefit.

The long term could be a different story. The two-wheeler industry, especially motorcycles, is undergoing a rapid transformation, in terms of model upgradation. The success of the Hero Honda CBZ shows that there is a market for high-power city bikes, though its price may resemble more that of a second-hand car than a motorcycle. Of course, Bajaj Auto is set to shortly launch its own versions in this segment through the Pulsar and the Eliminator. But, by its own admission, these vehicles are being produced in a division where Kawasaki has complete control over all functions. Bajaj Auto likes to call this a ``company within a company''. In short, Bajaj Auto has no long-term claim to either the brand or the technology.

It is in this backdrop that one has to view the company's plans of entering insurance, power and passenger car manufacture (via Maruti), all at the same time. To be sure, each of these businesses has its own share of risks and even given all of Bajaj Auto's experience in Indian industry, it can certainly claim no expertise in any of the above areas.

Of course, not all of the new entrants into the insurance sector today can claim prior expertise. But they have all tied-up with major foreign insurance companies (Dabur with All State Insurance, and HDFC with Standard Life, to name just two) which will ensure flow of insurance product knowhow. Bajaj Auto may still find a partner and the insurance regulations are also on its side, as the foreign company cannot ask for majority control.

But the signals sent by the company in the last few months point to a confusion on what to do with its surplus funds. The only clear thing now is that it appears to be weighing a number of alternatives to put its cash to work, none of which appear encouraging at this point in time.