VALUATION OF BAJAJ AUTO LTD.

AN MBF LEVEL 3 PROJECT PRESENTED BY NILESH KEDIA

MEM. NO. 069959 REG. NO. MBF/12KL/031

About Bajaj Auto Ltd.

2

Introduction
The Bajaj Group is amongst the top 10 business houses in India. Its

footprint stretches over a wide range of industries, spanning automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer and the Bajaj brand is wellknown across several countries in Latin America, Africa, Middle East, South and South East Asia.

About Bajaj Auto Ltd. (continued.)

3

Plant
Bajaj Auto's has in all three plants, two at Waluj and Chakan in
Waluj Chakan Pant Nagar Bajaj range of motorcycles and three-wheelers Bajaj range of motorcycles Bajaj range of motorcycles

Maharashtra and one plant at Pant Nagar in Uttranchal, western India.

Plant Locations
Bajaj Auto plants are located at:

1. Bajaj Nagar, Waluj, Aurangabad 431 136 2. MIDC, Plot No A1, Mahalunge Village, Chakan 410 501 Dist. Pune 3. Plot No. 2, Sector 10 Phase -II - E, Pant Nagar, Sidcul, Rudrapur Dist. Udhamsingh Nagar Uttranchal

Top Brands
Bikes
Avenger
4

Discover

Pulsar

Platina

Top Brands (continued..)

5

Three Wheeleres

Commercial Vehicle

Passenger Vehicle

Two Wheelers Market in India

6

As per the Report of CARE Research on Indian Two

Wheeler Industry dated March 2013, two wheeler growth will continue due to Growing young population coupled with improving income levels in both urban and rural areas. However, Two-wheelers sales witness moderate growth in FY13, hit by economic uncertainties but Motorcycles continue to remain on a strong foothold. Exports observe a decline in FY13 on account of hike in import duty and uncertainties in global environment. Top Two Wheelers companies in India are :

Hero MotoCorp Limited Bajaj Auto Limited TVS Motor Limited

Two Wheelers Market in India (continued.)

7

Indian two wheeler industry saw a slight growth of 1.04% during the April-May period of 2013 compared against the same period of 2012. A total of 2,374,253 units were sold during the period as 2,349,814 units were sold in April-May 2012. The period April-May of 2013 saw the share of Hero came down to 43.63%. Honda gain some shares and put themselves at second place replacing Bajaj. Honda holds 19.79% share as per April-May 2013 while Bajaj has now 17.35% share. An analysis of sales volume of different Two wheelers companies is depicted below:-

General Purpose of Valuation

Purpose of valuation

Examples

Valuation for transactions

Business purchase , Business sale, M&A (Mergers & Acquisition), Reverse merger, Recapitalization, Restructuring, LBO (Leverage Buy Out), MBO

(Management Buy Out), MBI (Management Buy In),

BSA (Buy Sell Agreement), IPO, ESOPs, Buy back of shares, Project financing and others
Valuation for court cases

Bankruptcy,

Contractual

disputes,

Ownership

disputes, Dissenting and Oppressive shareholder cases, Divorces cases, Intellectual property

disputes and other

Valuation for compliances Valuation for planning

Fair value accounting, Tax Issues Estate planning, Personal financial planning, M&A planning, strategic planning

Objective/ Purpose of valuation

9

In order to study the efficiency of Indian capital

market, a sample company has been chosen from Auto Industry, the valuation of which will be conducted and then compared with its market capitalization.

Valuation Methodologies
10

Market Approach
Guideline Publicly Traded Company Method Guideline Merged and Acquired Company Method

Income Approach
Capitalization of Earnings/Cash Flow Analysis (Gordon Growth Model)

Discounted Cash Flow Analysis (DCF)

Dividend Discount Model (DDM)

Asset-Based Approach

Method of Valuation Adopted

11

We are using here Capitalization of Earnings/Cash Flow

Analysis (Gordon Growth Model) method under Income Approach to value the business of Bajaj Auto Ltd. Income Approach

Reason for using Gordon Growth Model under

Bajaj Auto Ltd. being a publicly traded company and assuming to be perpetual in nature, capitalization on Income based on a particular discount rate and growth rate is best suited for the company. Asset Based Approach is typically not a suitable method for valuing going concern operating companies as this method does not provide values for goodwill and other intangible assets. Further Market value of Assets is not easily available. Although Market approach is a good method to value a company but considering its complexity, Income approach has been selected to value Bajaj Auto Ltd.

Capitalization of Earnings Approach

12

Single Period Discounted Cash Flow Analysis Simplest for Companies with Stable Growth Next Year Free Cash Flow to Firm (FCFF) Next Year Free Cash Flow to Equity (FCFE) Apply Appropriate Discount Rate
CF1 Value = (r-g) CF = Free Cash Flow (FCFF or FCFE) r = Discount Rate Cost of Capital or Cost of Equity g = Expected Growth Rate

Estimating Growth Rate

13

Growth rate has been estimated based on the past

trends of Bajaj Auto Ltd, the calculation of which is shown below:-

March10 being an odd year, has not been considered in estimating growth rate. Further, growth rate being negative sometimes, hence geometric mean cannot be used, hence arithmetic mean has been adopted.

Estimating Cost of Equity

14

CAPM method has been followed to cost of Equity

which is as follows: Re= Rf + (Rm-Rf)*Be Where Rf=Risk Free rate= 7.5% Rm=Market Return= 13% Be= Beta of Bajaj Auto= 1.1

Therefore,
Re= 7.5 + (13.-7.5)*1.1= 13.55%
Source: internet

Estimating Free Cash Flow For Equity (FCFE)

15

Relevant Extracts from Balance Sheet and P/L Statement of Bajaj

Auto.

FCFE Calculation

Note : Bajaj Auto is almost an zero leverage firm with no secured loans and unsecured loans amounts to 1 % of the shareholders fund. Hence debt value has been ignored.

Value of Firm based on FCFE Approach

16

Value = FCFE (1+g)

Re-g = 2898(1+0.06) 0.1355-0.06 =Rs. 40687.15 Crores

Market capitalization V/s Firm Value

17

No. of outstanding shares of Bajaj Auto= 28.93 crore

Average Market price : 1900

Market Capitalization : 1900*28.93= Rs. 54967 crore

Value as per our calculation : 40687.15 crore

Its seem that Bajaj Auto shares are overpriced.

Hence going short on Bajaj Auto will be beneficial.

Limitation to valuation
18

Valuation is not a one day job. A correct valuation can only be

done after through analysis of the operations of the firm. Merely relying on the public available data may give biased results. Traditional methods of valuation may not work in all types of firms. It depends upon the industry the firm is in. Projections are not guarantees; unforeseen future events can cause income or earnings projections to be completely invalid. Reliance on past earnings may ignore potential future growth. May understate value for firms using aggressive strategies to reduce taxable income.

Conclusion
19

Valuation plays a key role in many areas of finance --

in corporate finance, in mergers and acquisitions and in portfolio management. Valuation is not an objective exercise, and any preconceptions and biases that an analyst brings to the process will find their way into the value.