New Delhi: Auto giant Bajaj Auto Board on Thursday approved a demerger scheme, splitting the group into three separate entities with the creation of two new companies. As per the scheme, Bajaj Auto's various businesses would be demerged into two newly incorporated subsidiaries - Bajaj Holdings and Investment (BHIL) and Bajaj Finserv (BFL).
Post the demerger announcement, Bajaj Auto shares ended Thursday at 2,419 down 261.05 points, or 9.74 per cent. Since the announcement of the demerger, people are holding back on two counts. One is the cash component in the holding auto company and the other is the fact that Allianz does not have the option of hiking to 50 per cent and later to 70 per cent.
Jigar Shah of KR Choksey Securities thinks the biggest disappointment in terms of the demerger was more of the Allianz isue. “Whenever these kinds of demergers happen, the Indian markets are not experienced and price discovery only happens as we move forward. There is still a good amount of time and ultimately the market forces would give us a better idea of the whole picture,” Choksey told moneycontrol.com.
Though, it’s possible that the call option exercised was the only negative surprise.
To this, Deepak Jain of Anand Rathi Securities says, “The call price option was already there in the fine print. The knee-jerk reaction in Bajaj Auto suggests that maybe the market has not factored in the price”.
According to Jain, if the general insurance business is valued at a price of Rs 5.87 and compounded at 16 per cent annually, Allianz would be able to exercise a call option at Rs 60/share.
There's another factor that shows Bajaj Allianz’s equity plus reserves amount to Rs 1,100 crore and Bajaj has contributed less than Rs 80 crore there, which would mean that the entire contribution is coming from Allianz. That makes its contribution around Rs 1,000 crore and stake only 24 per cent as per regulations. Hence, the uncertainty regarding Allianz exercising the option has now increased.
Whether Rs 1,500 crore is enough for Bajaj Auto, Jain says, “Bajaj Auto, the vehicle manufacturing company is generating a huge amount of cash. And this Rs 1,500 crore is given, if they venture into some big projects”.
But Ashutosh Goel of Edelweiss Capital seems to be disappointed on both counts. He says, “Just the structure of the demerger is a minor disappointment, compared to the price at which the call option works for Allianz, which is much lower than what everybody had been assuming, as a value of the business”.
He sees the demerger as a reason to believe that in the near term, Bajaj Auto will be an underperformer. But the core business continues to be robust and believes that over 9-12 months, the company should recover some of the losses in recent times.
Though, going forward, he continues to be positive on the core two-wheeler business.
“I think their guidance of 10 per cent is a bit conservative. From Q2 onwards, once their new model platform is launched, the volume numbers should start looking up. Margins should improve as more and more of Platina production shifts to their new Uttaranchal plant, given that fiscal benefits are available to that site. On the whole, the core business continues to look healthy,” he says.
With inputs from moneycontrol.com
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