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Bajaj Auto on carve-up course

New Delhi, Sept. 3: Bajaj Auto, the country's second-biggest motorcycle maker, is to be split into two — a production company and an investment entity.

“The plan is to take out nearly a third of the Rs 3000-crore cash surplus with Bajaj Auto,” Rahul Bajaj, managing director of the two wheeler maker told reporters here today. “While Bajaj Auto will remain the manufacturing company, the investment company to be formed would be the holding company.” The Bajaj family-controlled Bajaj group holds a 51 per cent stake in Bajaj Auto.

Asked to explain the rationale behind the demerger plan, which is yet to be approved by the board, Bajaj said: “We are planning to do it to improve the price-earnings ratio of Bajaj Auto.”

Bajaj refused to set a time-frame for the move. “It might take four months to two years and will be subject to corporate governance regulations,” he said. “Both companies will have an identical shareholding pattern and will be able to buy each other’s shares,” he added.

Analysts gave the plan a thumbs-up, saying it is just the change a company with a cash surplus of Rs 3000 crore needs to generate the highest return on capital.

The company has had to live an interest rate of 6-8 per cent as interest even as its manufacturing business was giving back returns of 16 per cent or more. This has led to a significant decline in its other income.

It is a logical and positive move that will help the market take a fresh look at the manufacturing company and its investment firm,” says Avinash Gorakhshakar, an auto analyst at Emkay Share and Stock Brokers. Sumeet Pillai of Karvy Stock Broking says the planned investment company will act as a ‘mutual fund’.

Last month, Bajaj Auto acquired 17.7 per cent in subsidiary Bajaj Auto Finance as part of a restructuring exercise.

Bajaj, which is the industry leader in scooters, reported a higher-than-expected net profit in the first quarter (April-June). It has also divested equity investments worth Rs 78 crore that it held in a variety of firms.

The financial restructuring, coupled with higher dividend and income from mutual fund units, has helped the firm treble its non-operating income. The shares have reflected the performance, rising 12.5 per cent in 2003, outpacing a 10.3 per cent increase in the Bombay Stock Exchange sensex in the period.

Analysts have forecast a “higher future growth” as the company has the highest operating profit margin of 18.6 per cent. Industry leader Hero Honda Motors and TVS Motor Company, the number three two-wheeler maker, have margins of 16.1 per cent and 9 per cent respectively.

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