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AN MBF LEVEL 3 PROJECT

PRESENTED BY NILESH KEDIA MEM. NO. 069959

REG. NO. MBF/12KL/031

VALUATION OF BAJAJ AUTO LTD.

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About Bajaj Auto Ltd.

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 well-known across several countries in Latin America, Africa, Middle East, South and South East Asia.

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About Bajaj Auto Ltd. (continued….)

Plant Bajaj Auto's has in all three plants, two at Waluj and Chakan in

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 1362. MIDC, Plot No A1, Mahalunge Village, Chakan 410 501 Dist. Pune3. Plot No. 2, Sector 10 Phase -II - E, Pant Nagar, Sidcul, Rudrapur Dist. Udhamsingh Nagar Uttranchal

WalujChakanPant Nagar

Bajaj range of motorcycles and three-wheelers Bajaj range of motorcyclesBajaj range of motorcycles

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Top BrandsBikes

Avenger

Pulsar

Discover

Platina

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Top Brands (continued…..)

Three Wheeleres

Passenger Vehicle

Commercial Vehicle

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Two Wheelers Market in India

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

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Two Wheelers Market in India (continued….)

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 casesBankruptcy, Contractual disputes, Ownership

disputes, Dissenting and Oppressive shareholder

cases, Divorces cases, Intellectual property

disputes and other

Valuation for compliances Fair value accounting, Tax Issues

Valuation for planningEstate planning, Personal financial planning, M&A

planning, strategic planning

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Objective/ Purpose of valuation

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.

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Valuation Methodologies

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

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Method of Valuation Adopted

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.

Reason for using Gordon Growth Model under Income Approach

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.

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Capitalization of Earnings Approach

– 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

Value =

CF = Free Cash Flow(FCFF or FCFE)

r = Discount RateCost of Capital orCost of Equity

g = Expected Growth Rate

CF1

(r-g)

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Estimating Growth Rate

Growth rate has been estimated based on the past trends of Bajaj Auto Ltd, the calculation of which is shown below:-

March’10 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.

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Estimating Cost of Equity

CAPM method has been followed to cost of Equity which is as follows:

Re= Rf + (Rm-Rf)*BeWhereRf=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

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Estimating Free Cash Flow For Equity (FCFE)

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 shareholder’s fund. Hence debt value has been ignored.

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Value of Firm based on FCFE Approach

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

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Market capitalization V/s Firm Value

No. of outstanding shares of Bajaj Auto= 28.93 crore

Average Market price : 1900Market 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.

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Limitation to valuation

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.

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Conclusion

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.