Bajaj Auto demerges into three entities

Bajaj Auto (BAL) announced its much-anticipated demerger on May 17. What has emerged is three separate entities, whereby the automotive and financial businesses will be separated as distinct entities along with a holding and investment company.

Rahul Bajaj, chairman, BAL will head the holding company, while elder son Rajiv Bajaj will remain as managing director of the automotive operations, and younger son Sanjiv will handle the financial services operations.

After the demerger, BAL will have two subsidiaries: Bajaj Holdings and Investment (BHIL) and Bajaj Finserv (BFL). The company’s auto business with all its assets and liabilities as well as investments in Indonesia and few vendor companies will be transferred to BHIL. It will also hold Rs 1,500 cash and cash equivalents, out of BAL’s Rs 6,000 crore investment portfolio with a market value of Rs 8,500 crore.

Similarly, the wind power project, investments in Bajaj Allianz General Insurance Co and Bajaj Allianz Life Insurance Co as well as Bajaj Auto Finance BFL. It will hold a cash and cash equivalents of Rs 800 crore.

Once this is completed, what is now BAL will be renamed BHIL, and the new auto business company (BHIL) will be renamed BAL. BHIL would act as the primary investment company and focus on new business opportunities.

Bajaj expects the breakup to be completed by the end of 2007. Bajaj shareholders will be issued shares of the two companies on a 1:1 ratio. This means they will continue to hold a share of BHIL (existing BAL) of Rs 10 each fully paid. For every share they hold, they will be allotted one share each of the new BAL (existing BHIL) with a face value of Rs 10 each, as well as a share of BFL at a face value of Rs 5 each.

After the new shares are issued, the existing shareholders of Bajaj Auto will hold 70 percent in the new entities. The remaining stake will be held by the holding company, that is new BHIL. The immediate reaction to the demerger was a thumbs down as the scrip fell 6.7 percent to close at Rs 2,500.30 on May 17.

Moving on to the company’s fourth quarter results, Bajaj Auto’s net profit for the quarter ending March 31, 2007 was down 11 percent to Rs 308.21 crore thanks to rising input costs and higher interest rates. It operating income rose nearly 9 percent to Rs 2,471.25 crore from Rs 2,268.95 from the same quarter a year ago.

The company’s net profit for the full year ended March 31, 2007, rose 10.13 percent to Rs 1,237.10 crore, compared to Rs 1,123.27 crore posted during the same period last year. Operating income was up 24.29 percent to Rs 10,076.05 crore from Rs 8,106.35 crore posted last year.