Finance project(final)

FINANCIAL
MANAGEMANT
REPORT ON BAJAJ AUTO LTD

SUBMITTED TO -: SUBMITTED BY-:

Prof. D. Satish Section A, Group 3

Ankit Singhal 10BSPHH010105)

Anish Pawar (10BSPHH010093)

Dhruv Chawla(10BSPHH010226)

Gunjan Mundhra(10BSPHH010257)

Karan Jain (10BSPHH010319)

Shikha Mohanty (10BSPHH010768)

Tanvi Bisht(10BSPHH010830)

1|Page

TABLE OF CONTENTS

Acknowledgement………………………………..…………………………….2

Introduction & History....................................................................................... 3
Bajaj Auto Equity Profile ................................................................................... 7
Acquisitions and Mergers................................................................................... 8
Financial Function ............................................................................................ 10
Working Capital ................................................................................................ 12
Long Term Capital............................................................................................ 14
Relative valuation of the market price (per share) ....................................... 16
CAPM ................................................................................................................. 17
Significance of Beta ........................................................................................ 18
WACC……...………………………………………………………………….19
DDM ................................................................................................................... 21
Conclusion…………………………………………………………………….23
Exhibits…………………………………………………..................................24

Appendix……………………………………………………………………....33

Bibliography ...................................................................................................... 36

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Acknowledgement

Every project requires a great deal of creativity and co-operation on the part of the group
members in order to achieve the desired objectives. This Financial Management project gave
us an opportunity to work as a team and also helped us to gain insights into various financial
tools and techniques that are used by managers which help them to make effective and
efficient decisions. It also helped us to put into practice the concept learnt in class and in
learning their applicability.

We would like to take this opportunity to thank Prof. D Satish, for providing us with his
valuable advice and guidance at every step of this project.

We would also like to thank our classmates and seniors for their co-operation and support.

4

Introduction & History

Company History

Bajaj Auto Limited is India's largest manufacturer of scooters and motorcycles. The company
generally has lagged behind its Japanese rivals in technology, but has invested heavily to
catch up. Its strong suit is high-volume production; it is the lowest-cost scooter maker in the
world. Although publicly owned, the company has been controlled by the Bajaj family since
its founding.

Origins

The Bajaj Group was formed in the first days of India's independence from Britain. Its
founder, Jamnalal Bajaj, had been a follower of Mahatma Gandhi, who reportedly referred to
him as a fifth son. 'Whenever I spoke of wealthy men becoming the trustees of their wealth
for the common good I always had this merchant prince principally in mind,' said the
Mahatma after Jamnalal's death.

Jamnalal Bajaj was succeeded by his eldest son, 27-year-old Kamalnayan, in 1942.
Kamalnayan, however, was preoccupied with India's struggle for independence. After this
was achieved, in 1947, Kamalnayan consolidated and diversified the group, branching into
cement, ayurvedic medicines, electrical equipment, and appliances, as well as scooters.

The precursor to Bajaj Auto had been formed on November 29, 1945 as M/s Bachraj Trading
Ltd. It began selling imported two- and three-wheeled vehicles in 1948 and obtained a
manufacturing license from the government 11 years later. The next year, 1960, Bajaj Auto
became a public limited company.

Rahul Bajaj reportedly adored the famous Vespa scooters made by Piaggio of Italy. In 1960,
at the age of 22, he became the Indian licensee for the make; Bajaj Auto began producing its
first two-wheelers the next year.

Rahul Bajaj became the group's chief executive officer in 1968 after first picking up an MBA
at Harvard. He lived next to the factory in Pune, an industrial city three hours' drive from
Bombay. The company had an annual turnover of Rs 72 million at the time. By 1970, the
company had produced 100,000 vehicles. The oil crisis soon drove cars off the roads in favor
of two-wheelers, much cheaper to buy and many times more fuel-efficient.

A number of new models were introduced in the 1970s, including the three-wheeler goods
carrier and Bajaj Chetak early in the decade and the Bajaj Super and three-wheeled, rear
engine Autorickshaw in 1976 and 1977. Bajaj Auto produced 100,000 vehicles in the 1976-
77 fiscal year alone.

The technical collaboration agreement with Piaggio of Italy expired in 1977. Afterward,
Piaggio, maker of the Vespa brand of scooters, filed patent infringement suits to block Bajaj
scooter sales in the United States, United Kingdom, West Germany, and Hong Kong. Bajaj's
scooter exports plummeted from Rs 133.2 million in 1980-81 to Rs 52 million ($5.4 million)
in 1981-82, although total revenues rose five percent to Rs 1.16 billion. Pretax profits were
cut in half, to Rs 63 million.
5

New Competition in the 1980s

Japanese and Italian scooter companies began entering the Indian market in the early 1980s.
Although some boasted superior technology and flashier brands, Bajaj Auto had built up
several advantages in the previous decades. Its customers liked the durability of the product
and the ready availability of maintenance; the company's distributors permeated the country.

The Bajaj M-50 debuted in 1981. The new fuel-efficient, 50cc motorcycle was immediately
successful, and the company aimed to be able to make 60,000 of them a year by 1985.
Capacity was the most important constraint for the Indian motorcycle industry. Although the
country's total production rose from 262,000 vehicles in 1976 to 600,000 in 1982, companies
like rival Lohia Machines had difficulty meeting demand. Bajaj Auto's advance orders for
one of its new mini-motorcycles amounted to $57 million. Work on a new plant at Waluj,
Aurangabad commenced in January 1984.

The 1986-87 fiscal year saw the introduction of the Bajaj M-80 and the Kawasaki Bajaj
KB100 motorcycles. The company was making 500,000 vehicles a year at this point.

Although Rahul Bajaj credited much of his company's success with its focus on one type of
product, he did attempt to diversify into tractor-trailers. In 1987 his attempt to buy control of
Ahsok Leyland failed.

The Bajaj Sunny was launched in 1990; the Kawasaki Bajaj 4S Champion followed a year
later. About this time, the Indian government was initiating a program of market
liberalization, doing away with the old 'license raj' system, which limited the amount of
investment any one company could make in a particular industry.

A possible joint venture with Piaggio was discussed in 1993 but aborted. Rahul Bajaj told the
Financial Times that his company was too large to be considered a potential collaborator by
Japanese firms. It was hoping to increase its exports, which then amounted to just five
percent of sales. The company began by shipping a few thousand vehicles a year to
neighboring Sri Lanka and Bangladesh, but soon was reaching markets in Europe, Latin
America, Africa, and West Asia. Its domestic market share, barely less than 50 percent, was
slowly slipping.

By 1994, Bajaj also was contemplating high-volume, low-cost car manufacture. Several of
Bajaj's rivals were looking at this market as well, which was being rapidly liberalized by the
Indian government.

Bajaj Auto produced one million vehicles in the 1994-95 fiscal year. The company was the
world's fourth largest manufacturer of two-wheelers, behind Japan's Honda, Suzuki, and
Kawasaki. New models included the Bajaj Classic and the Bajaj Super Excel. Bajaj also
signed development agreements with two Japanese engineering firms, Kubota and Tokyo R
& D. Bajaj's most popular models cost about Rs 20,000. 'You just can't beat a Bajaj,' stated
the company's marketing slogan.

The Kawasaki Bajaj Boxer and the RE diesel Autorickshaw were introduced in 1997. The
next year saw the debut of the Kawasaki Bajaj Caliber, the Spirit, and the Legend, India's first
four-stroke scooter. The Caliber sold 100,000 units in its first 12 months. Bajaj was planning

6

to build its third plant at a cost of Rs 4 billion ($111.6 million) to produce two new models,
one to be developed in collaboration with Cagiva of Italy.

New Tools in the 1990s

Still, intense competition was beginning to hurt sales at home and abroad during the calendar
year 1997. Bajaj's low-tech, low-cost cycles were not faring as well as its rivals' higher-end
offerings, particularly in high-powered motorcycles, since poorer consumers were
withstanding the worst of the recession. The company invested in its new Pune plant in order
to introduce new models more quickly. The company spent Rs 7.5 billion ($185 million) on
advanced, computer-controlled machine tools. It would need new models to comply with the
more stringent emissions standards slated for 2000. Bajaj began installing Rs 800 catalytic
converters to its two-stroke scooter models beginning in 1999.

Although its domestic market share continued to slip, falling to 40.5 percent, Bajaj Auto's
profits increased slightly at the end of the 1997-98 fiscal year. In fact, Rahul Bajaj was able
to boast, 'My competitors are doing well, but my net profit is still more than the next four
biggest companies combined.' Hero Honda was perhaps Bajaj's most serious local threat; in
fact, in the fall of 1998, Honda Motor of Japan announced that it was withdrawing from this
joint venture.

Bajaj Auto had quadrupled its product design staff to 500. It also acquired technology from
its foreign partners, such as Kawasaki (motorcycles), Kubota (diesel engines), and Cagiva
(scooters). 'Honda's annual spend on R & D is more than my turnover,' noted Ruhal Bajaj.
His son, Sangiv Bajaj, was working to improve the company's supply chain management. A
marketing executive was lured from TVS Suzuki to help push the new cycles.

Several new designs and a dozen upgrades of existing scooters came out in 1998 and 1999.
These, and a surge in consumer confidence, propelled Bajaj to sales records, and it began to
regain market share in the fast-growing motorcycle segment. Sales of three-wheelers fell as
some states, citing traffic and pollution concerns, limited the number of permits issued for
them.

In late 1999, Rahul Bajaj made a bid to acquire ten percent of Piaggio for $65 million. The
Italian firm had exited a relationship with entrepreneur Deepak Singhania and was looking to
reenter the Indian market, possibly through acquisition. Piaggio itself had been mostly bought
out by a German investment bank, Deutsche Morgan Grenfell (DMG), which was looking to
sell some shares after turning the company around. Bajaj attached several conditions to his
purchase of a minority share, including a seat on the board and an exclusive Piaggio
distributorship in India.

In late 2000, Maruti Udyog emerged as another possible acquisition target. The Indian
government was planning to sell its 50 percent stake in the automaker, a joint venture with
Suzuki of Japan. Bajaj had been approached by several foreign car manufacturers in the past,
including Chrysler (subsequently DaimlerChrysler) in the mid-1990s.

Employment fell from about 23,000 in 1995-96 (the year Bajaj suffered a two-month strike at
its Waluj factory) to 17,000 in 1999-2000. The company planned to lay off another 2,000
workers in the short term and another 3,000 in the following three to four years.

7

Principal Subsidiaries: Bajaj Auto Finance Ltd.; Bajaj Auto Holdings Ltd.; Bajaj Electricals
Ltd.; Bajaj Hindustan Ltd.; Maharashtra Scooters Ltd.; Mukand Ltd.

Principal Competitors: Honda Motor Co., Ltd.; Suzuki Motor Corporation; Piaggio SpA.

Statistics:

Public Company
Incorporated: 1945 as M/s Bachraj Trading Ltd.
Employees: 17,200
Sales: Rs 42.16 billion ($903.36 million)(2000)
Stock Exchanges: Pune Mumbai Delhi London Berlin Frankfurt Munich
Ticker Symbols: BAJAJAUTO 490 BJATq.L 893361.BE 893361.F 893361.MU
NAIC: 336991 Motorcycle, Bicycle, and Parts Manufacturing.

Key Dates:

1945: Bajaj Auto is founded.
1960: Rahul Bajaj becomes the Indian licensee for Vespa scooters.
1977: Technical collaboration with Piaggio ends.
1984: Work begins on a second plant.
1998: Bajaj plans to build its third plant to meet demand.
2000: Thousands of workers are laid off to cut costs.

Address:
Akurdi, Pune 411035
India

Telephone: +91 20 740 2851
Fax: +91 20 740 7397
http://www.bajajauto.com

Source: http://www.fundinguniverse.com/company-histories/Bajaj-Auto-Limited-Company-
History.html

8

Equity Profile for the Year 2008-09

The details of equity distribution for the fiscal year 2008-09 are as follows:

1. Shares held by Non-Executive Directors

NAME OF DIRECTOR NUMBER OF SHARES HELD AS ON 31st
MARCH 2009
Shekhar Bajaj 693,440
Niraj Bajaj 1,114,238
Manish Kejriwal 100
D S Mehta 8,490

2. Distribution of share holding across categories

Categories 31 March 2009 3rd April 2008
No. Of % to total No. Of % to total
shares capital shares capital
Promoters 71,786,036 49.61 72,747,805 50.28
Friends and associates 16,327,478 11.28 16,454,136 11.37
of
Promoters
GDRs 181,775 0.13 768,698 0.53
Foreign Institutional 19,980,919 13.81 20,266,586 14.01
Investors
Public Financial 8,316,122 5.75 8,707,469 6.02
Institutions
Mutual Funds 4,926,547 3.41 1,123,175 0.78
Nationalised & other 110,397 0.08 251,704 0.17
banks
NRIs & OCBs 650,056 0.45 613,745 0.42
Others 22,404,180 15.48 23,750,192 16.42
Total 144,683,510 100.00 144,683,510 100.00

Source: Bajaj Auto Ltd. Annual Report for the fiscal year 2008-09 (Yahoo Finance-
www.yahoofinance.com)

9

Mergers and Acquisitions

Bajaj Holdings & Invst. Ltd.

Deals where company is target

Date Deal Type Acquirer Company Price/Cost Event Date Event Name
Swap
ratio
12-Jan-00 Sale of To Joint Venture With Kawasaki 0 00 Saturday Takeover Plans Dropped
asset (P) 0000
12-Jan-00 First media announcement

09-Apr-00 Takeover Buy-Back Of Shares 72829.2 09-Mar-00 Buy Back
09-Mar-00 First media announcement
28-Mar-00 Board meeting
29-Jul-00 AGM Date
27-Oct-00 Deal Completed

07-Mar-06 Takeover Life Insurance Corpn. Of India 60705.25 07-Mar-06 First media announcement
07-Mar-06 Preferential Allotment

17-May-07 Sale of Bajaj Auto Ltd. 150000 17-May-07 Board of Directors approval
asset
18-Aug-07 High Court Directed Shareholders Meeting
18-Aug-07 High Court Directed Unsecured creditors
Meeting
18-Aug-07 Shareholder's approval
19-Feb-08 High Court Approval Date
20-Feb-08 Merger Date w.e.f
03-Apr-08 Date of Allotment

17-May-07 Sale of Bajaj Finserv Ltd. 80000 17-May-07 Board of Directors approval
asset
18-Aug-07 High Court Directed Shareholders Meeting
18-Aug-07 High Court Directed Unsecured creditors
Meeting
18-Aug-07 Shareholder's approval
19-Feb-08 High Court Approval Date
20-Feb-08 Merger Date w.e.f

Deals where company is Acquirer

Date Deal Type Target company Price/Cost Event Date Event Name
Swap
ratio

09-Mar-99 Takeover I C I C I Ltd. [Merged] 443.84 09-Mar-99 First media announcement
12-May-99 Deal Completed

29-Jun-99 Takeover Force Motors Ltd. 0 29-Jun-99 First media announcement

08-Jun-00 Takeover I C I C I Ltd. [Merged] 0 08-Jun-00 First media announcement

15-Jul-00 Takeover Force Motors Ltd. 0 15-Jul-00 First media announcement

10

19-Jan-01 Takeover Mukand Engineers Ltd. 0 19-Jan-01 Stock Exchange Announcement

28-Mar-03 Takeover Bajaj Auto Finance Ltd. 1401.62 28-Mar-03 Stock Exchange Announcement
31-Mar-03 Inter-se Tranfer

20-Dec-04 Takeover Maharashtra Scooters Ltd. 4725 20-Dec-04 First media announcement
18-Jan-06 Deal Completed
18-Jan-06 Preferential Allotment

02-Feb-06 Takeover Bajaj Auto Finance Ltd. 5027.04 18-Jan-06 Deal Completed
18-Jan-06 Preferential Allotment
02-Feb-06 First media announcement
02-Feb-06 Stock Exchange Announcement

30-Mar-06 Takeover Mukand Ltd. 1738.73 30-Mar-06 Deal Completed
30-Mar-06 First media announcement
30-Mar-06 Open Market Purchases

08-Jul-06 Takeover I C I C I Bank Ltd. 33986.21 08-Jul-06 Deal Completed
08-Jul-06 First media announcement
08-Jul-06 Open Market Purchases

08-Jul-06 Takeover I C I C I Bank Ltd. 29296.56 08-Jul-06 Deal Completed
08-Jul-06 First media announcement
08-Jul-06 Open Market Purchases

06-Nov-07 Takeover K T M Power Sports A G 30000 06-Nov-07 First media announcement

Source: Prowess.

11

Financial Functions of the Organisation

Bajaj Auto is considered to be amongst the most conservative organisations in the Industry
and this reflects in their equity and debt structure. The company has a very efficient finance
department to take care of its investments to assure the welfare and profit maximization of its
shareholders. Headed by Kevin P D’Sa, the finance department has a gamut of
responsibilities, least of which is the book keeping and internal auditing. They are expected to
be robust and take decisions that affect every decision of the firm, from production to
marketing, distribution, sales, services and dividend distribution. In light of the modern
industry scenario, the various duties fulfilled by the finance department include-

(1) To regulate, supervise and implement a timely, full and accurate set of accounting books
of the firm reflecting all its activities in a manner commensurate with the relevant legislation
and regulation in the territories of operation of the firm and subject to internal guidelines set
from time to time by the Board of Directors of the firm.

(2) To implement continuous financial audit and control systems to monitor the performance
of the firm, its flow of funds, the loyalty to the budget, the expenditures, the income, the cost
of sales and other budgetary items.

(3) To timely, regularly and duly prepare and present to the Board of Directors financial
statements and reports as required by all pertinent laws and regulations in the territories of the
operations of the firm and as deemed necessary and demanded from time to time by the
Board of Directors of the Firm.

(4) To meet the terms with all reporting, accounting and audit requirements imposed by the
capital markets or regulatory bodies of capital markets in which the securities of the firm are
traded or are about to be traded or otherwise listed.

(5) To prepare and present for the approval of the Board of Directors an annual budget, other
budgets, financial plans, business plans, feasibility studies, investment memoranda and all
other financial and business documents as may be required from time to time by the Board of
Directors of the firm.

(6) To alert the Board of Directors and to warn it regarding any irregularity, lack of
compliance, lack of loyalty, lacunas and problems whether actual or potential concerning the
financial systems, the financial operations, the financing plans, the accounting, the audits, the

12

budgets and any other matter of a financial nature or which could or does have a financial
implication.

(7) To collaborate and coordinate the activities of outside suppliers of financial services hired
or contracted by the firm, including accountants, auditors, financial consultants, underwriters
and brokers, the banking system and other financial venues.

(8) To maintain a working relationship and to develop additional relationships with banks,
financial institutions and capital markets with the aim of securing the funds necessary for the
operations of the firm, the attainment of its development plans and its investments.

(9) To fully computerize all the above activities in a combined hardware-software and
communications system which integrates with the systems of other members of the group of
companies?

(10) Otherwise, to initiate and engage in all manner of activities, whether financial or other,
conducive to the financial health, the growth prospects and the fulfillment of investment
plans of the firm to the best of his ability and with the appropriate dedication of the time and
efforts required.

Source: Financial Management by IM Pandey

13

WORKING CAPITAL

It is a measure of both a company's efficiency and its short-term financial health. In case of
Bajaj Auto Ltd. it is related to the working capital requirements . The working capital ratio is
calculated as:

Positive working capital means that the company is able to pay off its short-term
liabilities. Negative working capital means that a company currently is unable to meet its
short-term liabilities with its current assets (cash, accounts receivable and inventory).
Also known as "net working capital", or the "working capital ratio".

Working capital management entails short term decisions - generally, relating to the next one
year period - which is "reversible".

. Working Capital Calculation of Bajaj Auto Ltd.

Particulars Rs. In crores 2008 Rs. In million 2007 Rs. In million 2006
Current Assets, Loans and 2,939.55 3,848.25 1,780.67
Advances
(Less) Current Liabilities 3,734.97 4,517.25 2,019.23
and Provisions

Working Capital ( Current (795.42) (669) (238.56)
Assets- Current
Liabilities)

Calculated Ratios Ratios(decimal) Ratios(decimal) Ratios(decimal)
Current Ratio (CA/CL) 0.7870 0.8519 0.8818
Debt/Equity Ratio 0.8405 0.2937 0.3075
Profit Margin 0.0856 0.1314 0.1455

The current ratio of a company is a measure of their short term solvency (in the next twelve
months or business cycle). Higher the Current ratio better is a company positioned to fulfil its
short term obligations. As evident from the table above, Bajaj Auto is fairly low on the
Current Ratio scale but still not a matter of immediate concern to the management.

The Debt Equity Ratio of a company is a measure of their proportionate use of debt and
equity for financing its assets. A high D/E ratio suggests that the company has financed its
growth mostly via debt. This can be a concern for the management as the company will now

14

have to bear additional interest burden of debt servicing and hence, lead to volatile earnings.
As per calculations above, the D/E ratio seems fairly decent.

The Profit Margin ratio of a company is a measure of how well the business is performing in
terms of profit. It measures the percentage of profits on per rupee of sales and is thus a
measure of efficiency of a company. It determines the company’s ability to withstand
competition and adverse conditions like rising costs, falling prices, or declining sales in the
future. As the interest burden is increasing, it could bea possible reason for the falling profit
margin ratio.

Source: www.moneycontrol.com

15

Long Term Capital

Bajaj Auto Ltd. collects its long term capital through capital market instruments. Capital
market instruments are nothing but the following:

Capital Market Instruments: Capital market securities include instruments with maturities
greater than one year and those with no designated maturity at all. The market is generally
divided according to whether the instruments contain a promised set of cash flows over time,
or offer participation in the future profitability of a company. The first sector is usually
referred to as the Fixed Income Market, whereas the second is the Equity Market. Preferred
stock is an instrument that has some of the characteristics of each of the other two types.

Equity Shares

Equity shares represent an ownership claim on the earnings and assets of a corporation. After
holders of debt claims are paid, the management of the company can either payout the
remaining earnings to stockholders in the form of dividends or reinvest part or all of the
earnings in the business. . Despite limited liability, because of the residual nature of its claim
to earnings and assets, shares as a class is the riskiest of the securities discussed to this point.

Corporate Bonds

Corporate bonds promise to pay interest at periodic intervals and to return principal at a fixed
date. Generally corporate bonds are rated as to quality by several agencies, the best known of
which are CRISIL, ICRA and CARE.

16

The following are the details for Bajaj Auto Ltd.

Mar ' 08 Mar ' 07 Mar ' 06
Sources of funds

Owner's fund
2008 2007 2006
Equity share 144.68 101.18 101.18
capital
Share application - - -
money
Preference share 0 0 0
capital
Reserves & 1,442.91 5,433.14 4,669.55
surplus
Loan funds

Secured loans 6.95 22.46 0.02
Unsecured loans 1,327.39 1,602.97 1,467.13
Total 1,334.34 1,625.43 1,467.15

Source: www.moneycontrol.com

17

Relative Valuation of the Market Price (per share)

In this method we try to estimate the value of market price of a company whose value is
unknown. For this purpose we take the values of the companies which are in similar structure
to the company for which we are trying to analysis. In our case, we compare Bajaj Auto Ltd.
With two of its closest competitors, Hero and TVS.

COMPANY NAME HERO TVS AVERAGE
HONDA MOTOR
COMPANY

SALES 15775.77 4363.11
` CRORES
NET INCOME 2231.83 88.01
` CRORES
CURRENT 1736.90 145.10
MARKET
PRICE `
EPS ` 111.34 4.58
BOOK VALUE ` 173.52 36.43
P/E 15.59 31.67 23.6300
P/BV 10.01 3.98 6.9950

BAJAJ AUTO LTD AVERAGE ESTIMATED
STOCK PRICE `
EPS ` 138.01
BOOK VALUE ` 202.40
P/E 20.81 23.6300 3261.1763
P/BV 14.19 6.9950 1415.7880
AVERAGE PRICE ` 2338.4822
Thus estimated market price of BAJAJ AUTO LTD. is Rs 2338.442 per share.

18

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model is a model that provides a framework to determine the required
rate of return on an asset and risk of the asset.The required rate of return specified by CAPM
helps in valuing an asset.One can also compare expected(estimated) rate of return on an asset
with its required rate of return and determine whether the asset is fairly valued.As we explain
in this section ,under CAPM ,the security market line (FML) exemplifies the relationship
between an asset’s risk and its required rate of return.

Assumptions of CAPM

 Market Efficiency
It implies that share prices reflect all the available information.This means that there
are a large number of investors holding a small amount of debt.
 Risk Aversion and Mean variance optimization
It evaluates a security’s return and risk,in terms of the expected return and variance or
standard deviation respectively.We prefer the highest rate of return for a given level
of risk.This implies that investors are mean variance optimizers and they form
efficient portfolios.
 Homogenous expectations
All investors have the same expectations of their risk and return
 Single Time Period
All investors decision are based on single time period
 Risk Free Rate
All investors can lend and borrow at a risk free rate of interest.

The Formula for Expected Rate of Return using CAPM is given by:-

Ke = Rf + β (Km – Rf)

Where, Ke = Expected Rate of return,

Rf = Risk Free Rate of Return, such as interest arising from government bonds

Km = Market Rate of Return,

19

Significance of Beta

In finance, the beta (β) of a stock or portfolio is a number describing the relation of its returns
with that of the financial market as a whole.

An asset with a beta of 0 means that its price is not at all correlated with the market; that asset
is independent. A positive beta means that the asset generally follows the market. A negative
beta shows that the asset inversely follows the market; the asset generally decreases in value
if the market goes up and vice versa. Here beta value for Bajaj Auto Ltd. is calculated based
on the market price structure, and using the formula which says,

(Cov(m,j))/ ²

Where, Cov(m,j) is the covariance between market price and the share price
² is the variance of the market price.
(β) Calculated is 0.875739489

For detailed calculations, please refer Tables.

Calculation of Return on Equity
From the equation for CAPM Model, we see that Return on Investments is
Return=risk free return + β(market return – risk free return)
=6.42+0.8757(16.4854-6.42)

=15.2347%

20

Weighted Average Cost of Capital (WACC)

A firm’s cost of capital is the average required rate of return on the aggregate of investment
projects. It is useful for:

Evaluating investment decisions.
Designing a firm’s debt policy
Appraising the financial performance of top management.

The component cost of capital is as follows:

Cost of Equity

A firm’s capital can be divided into internal and external equity. The internal equity
of a firm is its retained earnings. In the absence of floatation cost , the cost of retained
earnings is equal to the cost of equity .
The cost of equity of Tata Motors has been calculated as per the CAPM model
which is,
equal to 28.80% (refer to page no. )

Cost of Debt

Tata Motors debt structure as on 31st March 2010 is `16625.91 crores.The
following has been our assumption for calculation of cost of debt:
 Rate of interest on debt is calculated by taking the average of the last five
years total interest payments and the last five years total debt.
 As the maturity period cannot be determined in our case we calculate the cost
of debt by the formula
Kd = ∑I(1-t)/n
Where,
I = interest rate
t = tax rate

 Corporate dividend tax rate is 30%

Tax rate = 30%
Therefore, kd = .5033

21

Calculation of Weighted Average Cost of Capital(as per Market and Book value)

Component Weights as Weights as Cost of Weights as Weights as
per Market per Book Individual per Market per Book
Value(as per Value(as per capital (in %) Value * cost Value * cost
balance sheet balance sheet of individual of individual
,march 2010) ,march 2010)
capital capital
EQUITY .9097 .0339 15.4254 14.0325 .5229
CAPITAL
RETAINED .0610 .6524 15.4254 .9409 10.0635
EARNINGS
DEBT .0293 .3137 .5033 .0147 .1579

WACC 14.9881 10.7443

22

DIVIDEND DISCOUNT MODEL(DDM)

People hold common stocks in their portfolios for two reasons

1)A respective group of common stocks bought at a reasonable price level can be counted to
provide a higher total return than bonds.

2)Common stocks can be held at a protective measure during inflation because unlike equity ,
a bond’s value declines as inflation rises. There should be a standard value for judging
whether a stock is underpriced or overpriced in the market place. We call this standard value
the intrinsic value.

Intrinsic value is the value of a stock which is justified by the asset , earnings ,dividends,
definite prospects and the factor of the management of the issuing company. The major
components of intrinsic values are

1)The earning power and profitability of the management in the employment of assets.

2)Dividends paid and the ability to pay such dividends in the future.

3)Estimates of the growth of earnings.

4)Stability and predictability of these quantitative and qualitative projections.

Thus,in essence the intrinsic value of a firm’s shares is its economic value as a going concern,
taking account of its characteristics , the nature of its business and the investment
environment.

According to the dividend capitalization approach which is a conceptually sound
approach,the value of an equity share is the discounted present value of the dividends
received plus the present value of the resale price expected when the equity share is sold.
Therefore, to apply this approach for valuation of equity stock the following assumptions are
to be made is to

1) Dividends are paid annually which is a common practice for business firms in India.

2) The first payment of dividend is to be made 1 year after the equity share is bought.

23

Year Dividend per share Growth
2000 10 0
2001 8 (0.22314)
2002 14 0.559616
2003 14 0
2004 25 0.579818
2005 25 0
2006 40 0.470004
2007 40 0
2008 20 (0.69315)
2009 22 0.09531

ke= 0.154254

Do=40

P0(expected)= 259.3124

P0(Actual)= 2108

Dividend Growth Rate= 0.138629

24

CONCLUSION

1.) The company sold 2, 20,429 two-wheelers in December 2009 compared to 1, 19,215 units
sold in the same month of the previous year, registering a growth of 85%.

2.) The company hopes to reach a sales target of one million in the year 2010-11 with the
launch of its new Pulsar 135 LS. It is the world’s first four valve DTS i-engine bike and the
only light sports bike in the country.

3.) The company is planning to set up an assembly plant in a free trade zone in Manaus in
Brazil next financial year.

4.) To address the tight competition in the two wheeler market, the company is introducing
new models time-to-time.

5.) The company had introduced DTSi engine for better fuel efficiency and lower emissions.

6.) The company as always has been the favourite pick for investors among the auto sector
stocks. Company has been on aggressive mode to tame the competition created by its
competitors. It has been launching various new entrants in the markets recently. Considering
an expected improvement in two-wheeler industry in fourth quarter of the current fiscal on
increased liquidity, Bajaj Auto is certainly a very good option one can go for.

25

EXHIBITS

Exhibit I: Balance Sheet: Bajaj Autos
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share 101.18 101.18 144.68 144.68 144.68
Capital
Equity Share 101.18 101.18 144.68 144.68 144.68
Capital
Share 0 0 0 0 0
Application
Money
Preference 0 0 0 0 0
Share Capital
Reserves 4,669.55 5,433.14 1,442.91 1,725.01 2,783.66
Revaluation 0 0 0 0 0
Reserves
Networth 4,770.73 5,534.32 1,587.59 1,869.69 2,928.34
Secured 0.02 22.46 6.95 0 12.98
Loans
Unsecured 1,467.13 1,602.97 1,327.39 1,570.00 1,325.60
Loans
Total Debt 1,467.15 1,625.43 1,334.34 1,570.00 1,338.58
Total 6,237.88 7,159.75 2,921.93 3,439.69 4,266.92
Liabilities
Total Share 101.18 101.18 144.68 144.68 144.68
Capital
Equity Share 101.18 101.18 144.68 144.68 144.68
Capital
Share 0 0 0 0 0
Application
Money
Share Capital
Reserves 4,669.55 5,433.14 1,442.91 1,725.01 2,783.66


Application Of Funds

Gross Block 2,894.22 3,178.54 2,994.68 3,350.20 3,379.25
Less: Accum. 1,761.22 1,904.94 1,726.07 1,807.91 1,899.66
Depreciation
26

Net Block 1,133.00 1,273.60 1,268.61 1,542.29 1,479.59
Capital Work 43.33 107.62 34.74 106.48 120.84
in Progress
Investments 5,856.97 6,447.53 1,857.14 1,808.52 4,021.52
Inventories 272.93 309.7 349.61 338.84 446.21
Sundry 301.55 529.83 275.31 358.65 272.84
Debtors
Cash and 80.84 62.16 54.74 135.68 100.2
Bank Balance
Total 655.32 901.69 679.66 833.17 819.25
Current
Assets
Loans and 2,282.98 2,925.24 1,099.68 1,567.09 2,291.29
Advances
Fixed 1.25 21.32 1.33 1.19 1.21
Deposits
Total CA, 2,939.55 3,848.25 1,780.67 2,401.45 3,111.75
Loans &
Advances
Deffered 0 0 0 0 0
Credit
Current 1,419.08 1,683.46 1,185.19 1,378.20 2,218.06
Liabilities
Provisions 2,315.89 2,833.79 834.04 1,224.15 2,248.72
Total CL & 3,734.97 4,517.25 2,019.23 2,602.35 4,466.78
Provisions
Net Current -795.42 -669 -238.56 -200.9 -1355.03
Assets
Miscellaneous 0 0 0 183.3 0
Expenses
6,237.88 7,159.75 2,921.93 3,439.69 4,266.92
Total
Assets

Contingent 719.06 811.66 1,129.29 924.96 818.25
Liabilities
Book Value 471.49 546.96 109.73 129.23 202.4
(Rs)

27

Exhibit II : Profit and Loss account of Bajaj Auto


Income

Sales 8,653.83 10,741.91 9,856.66 9,310.24 12,420.95
Turnover
Excise Duty 1,081.70 1,321.67 1,029.51 610.07 607.7
Net Sales 7,572.13 9,420.24 8,827.15 8,700.17 11,813.25
Other Income 458.96 567.16 170.27 -4.52 38.76
Stock 49.01 -0.9 67.85 -24.49 47.6
Adjustments
Total Income 8,080.10 9,986.50 9,065.27 8,671.16 11,899.61

Expenditure

Raw Materials 5,446.62 6,969.50 6,760.04 6,502.10 8,187.11
Power & Fuel 59.09 79.34 69.2 60.89 70.35
Cost
Employee 282.45 310.07 350.09 366.67 411.76
Cost
Other 79.5 74.53 53.72 58.1 73.8
Manufacturing
Expenses
Selling and 299.99 457.17 390.15 383.41 423.87
Admin
Expenses
Miscellaneous 198.52 230.89 209.63 226.22 221.94
Expenses
Preoperative -24.81 -32.05 -23.04 -14.42 -15.67
Exp
Capitalised
Total 6,341.36 8,089.45 7,809.79 7,582.97 9,373.16
Expenses


Operating 1,279.78 1,329.89 1,085.21 1,092.71 2,487.69
Profit
PBDIT 1,738.74 1,897.05 1,255.48 1,088.19 2,526.45
Interest 0.34 5.34 5.16 21.01 5.98
PBDT 1,738.40 1,891.71 1,250.32 1,067.18 2,520.47
Depreciation 191 190.26 173.96 129.79 136.45

28

Other Written 3.62 0.39 1.12 0 0
Off
Profit Before 1,543.78 1,701.06 1,075.24 937.39 2,384.02
Tax
Extra-ordinary 59.03 26.6 59.32 18.72 24.25
items
PBT (Post 1,602.81 1,727.66 1,134.56 956.11 2,408.27
Extra-ord
Items)
Tax 479.11 490.09 378.78 301.61 707.5
Reported Net 1,101.63 1,237.96 755.95 656.48 1,702.73
Profit
Total Value 894.74 1,119.95 1,049.75 1,080.87 1,186.05
Addition
Dividend
Equity 404.74 404.73 289.37 318.3 578.73
Dividend
Corporate 56.76 68.78 49.18 54.1 96.12
Dividend Tax
Shares in 1,011.84 1,011.84 1,446.84 1,446.84 1,446.84
issue (lakhs)
Earning Per 108.87 122.35 52.25 45.37 117.69
Share (Rs)
Equity 400 400 200 220 400
Dividend (%)
Book Value 471.49 546.96 109.73 129.23 202.4
(Rs)

29

Exhibit III : Cash Flow Statement of Bajaj Auto

Mar '06 Mar '07 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 1580.74 1728.05 958.09 2411.13
Net Cash From Operating Activities 1072.62 681.73 411.49 2737.11
Net Cash (used in)/from -1087.5 -429.99 -207.66 -2163.6

Investing Activities

Net Cash (used in)/from Financing Activities -11.68 -250.35 -123.03 -608.95
Net (decrease)/increase In Cash and Cash -26.6 1.39 80.8 -35.46
Equivalents
Opening Cash & Cash Equivalents 108.69 82.09 56.07 136.87
Closing Cash & Cash Equivalents 82.09 83.48 136.87 101.41

Exhibit IV : Bajaj Auto & Sensex Price

NSE BAJAJ AUTO

Date Index( Prices) Percentage Share Prices Percentage
Returns Returns
1/3/2000 1592.2 0 359.75 0
2/1/2000 1549.5 -2.68182 298.25 -17.0952
3/1/2000 1712.7 10.53243 384 28.75105
4/3/2000 1534.75 -10.39 356 -7.29167
5/2/2000 1333.45 -13.1161 365 2.52809
6/1/2000 1349 1.166148 356.1 -2.43836
7/3/2000 1495.25 10.84136 354.25 -0.51952
8/1/2000 1326.85 -11.2623 357.35 0.875088
9/4/2000 1427.75 7.604477 334.3 -6.45026
10/3/2000 1282 -10.2084 264.5 -20.8794
11/1/2000 1200.8 -6.33385 262.65 -0.69943
12/1/2000 1276.2 6.279147 271.35 3.312393
1/1/2001 1254.3 -1.71603 290 6.873042
2/1/2001 1359.15 8.359244 346.1 19.34483
3/1/2001 1358.05 -0.08093 346.1 0

30

4/2/2001 1138.1 -16.196 346.1 0
5/2/2001 1137.2 -0.07908 346.1 0
6/1/2001 1148.05 0.954098 346.1 0
7/2/2001 1100.75 -4.12003 253.45 -26.7697
8/1/2001 1063.15 -3.41585 255 0.61156
9/3/2001 1048.05 -1.42031 246.05 -3.5098
10/1/2001 910.1 -13.1625 334.3 35.86669
11/1/2001 994 9.218767 382 14.26862
12/3/2001 1065.4 7.183099 378.95 -0.79843
1/1/2002 1055.3 -0.948 437.75 15.51656
2/1/2002 1081.65 2.49692 457.65 4.545974
3/1/2002 1178 8.907687 464.25 1.44215
4/1/2002 1138.95 -3.31494 487.95 5.105008
5/2/2002 1093.3 -4.00808 484.55 -0.69679
6/3/2002 1039.75 -4.89802 502.6 3.725106
7/1/2002 1068.95 2.808367 502.6 0
8/12/2002 1010.6 -5.45863 418.15 -16.8026
9/2/2002 963.15 -4.69523 389.5 -6.85161
10/1/2002 951.4 -1.21996 421.95 8.331194
11/1/2002 1049.7 10.33214 470.4 11.4824
12/2/2002 1093.5 4.172621 502.3 6.781463
1/1/2003 1041.85 -4.72337 512.95 2.120247
2/3/2003 1063.4 2.068436 516.35 0.662833
3/3/2003 978.2 -8.01204 479.65 -7.10758
4/1/2003 934.05 -4.51339 483 0.698426
5/1/2003 1006.8 7.788662 515.1 6.645963
6/2/2003 1134.15 12.64899 573.9 11.41526
7/1/2003 1185.85 4.55848 637.35 11.05593
8/1/2003 1356.55 14.39474 728 14.22295
9/1/2003 1417.1 4.463529 790.75 8.619505
10/1/2003 1555.9 9.794651 915.25 15.74455
11/3/2003 1615.25 3.814513 981.15 7.200219
12/1/2003 1879.75 16.37517 1137.35 15.92009
1/1/2004 1809.75 -3.7239 997.2 -12.3225
2/2/2004 1800.3 -0.52217 906.6 -9.08544
3/1/2004 1771.9 -1.57751 912.05 0.601147
4/1/2004 1796.1 1.365766 920.7 0.948413
5/3/2004 1483.6 -17.3988 871.9 -5.30031
6/1/2004 1505.6 1.482879 884.55 1.450854
7/1/2004 1632.3 8.41525 822.15 -7.05443
8/2/2004 1631.75 -0.03369 932.65 13.44037
9/1/2004 1745.5 6.971043 1024.65 9.864365
10/1/2004 1800.1 3.128044 963.5 -5.96789
11/1/2004 1958.8 8.816177 1010.25 4.852102
12/1/2004 2080.5 6.212988 1131.45 11.99703
1/3/2005 2057.6 -1.1007 1037.8 -8.27699
2/1/2005 2103.25 2.218604 1033.3 -0.43361
3/1/2005 2035.65 -3.21407 1081.35 4.65015
4/1/2005 1902.5 -6.54091 1090 0.799926
5/2/2005 2087.55 9.726675 1227.4 12.6055
6/1/2005 2220.6 6.3735 1373.5 11.90321

31

7/1/2005 2312.3 4.129515 1443.3 5.081908
8/1/2005 2384.65 3.128919 1413.6 -2.05778
9/1/2005 2601.4 9.089384 1692.1 19.70147
10/3/2005 2370.95 -8.85869 1705.2 0.774186
11/1/2005 2652.25 11.86444 2010.75 17.91872
12/1/2005 2836.55 6.948817 2000.8 -0.49484
1/2/2006 3001.1 5.801061 2155 7.706917
2/1/2006 3074.7 2.452434 2601.4 20.71462
3/1/2006 3402.55 10.66283 2746.85 5.59122
4/3/2006 3508.1 3.102085 2941.35 7.080838
5/1/2006 3185.3 -9.20156 2744.9 -6.67891
6/1/2006 3128.2 -1.79261 2736.85 -0.29327
7/3/2006 3143.2 0.479509 2473.65 -9.6169
8/1/2006 3413.9 8.612242 2697.5 9.04938
9/1/2006 3588.4 5.111456 2998.2 11.14736
10/3/2006 3744.1 4.338981 2751.05 -8.24328
11/1/2006 3954.5 5.619508 2644.75 -3.86398
12/1/2006 3966.4 0.300923 2618.85 -0.9793
1/2/2007 4082.7 2.93213 2762.5 5.485232
2/1/2007 3745.3 -8.26414 2616.95 -5.26878
3/1/2007 3821.55 2.035885 2425.45 -7.31768
4/2/2007 4087.9 6.969685 2445 0.806036
5/3/2007 4295.8 5.085741 2224.35 -9.02454
6/4/2007 4318.3 0.523767 2128.85 -4.29339
7/2/2007 4528.85 4.875761 2360.15 10.86502
8/1/2007 4464 -1.43193 2345.1 -0.63767
9/3/2007 5021.35 12.48544 2539.7 8.298154
10/1/2007 5900.65 17.51123 2474.2 -2.57904
11/1/2007 5762.75 -2.33703 2709.1 9.493978
12/3/2007 6138.6 6.52206 2613.3 -3.53623
1/1/2008 5137.45 -16.3091 2355.65 -9.85918
2/1/2008 5223.5 1.674955 2280.15 -3.20506
3/3/2008 4734.5 -9.36154 691.45 -69.6752
4/1/2008 5165.9 9.111839 709.2 2.567069
5/2/2008 4870.1 -5.72601 639.4 -9.84208
6/2/2008 4040.55 -17.0335 451 -29.4651
7/1/2008 4332.95 7.236639 539 19.5122
8/1/2008 4360 0.624286 588 9.090909
9/1/2008 3921.2 -10.0642 609.9 3.72449
10/1/2008 2885.6 -26.4103 540 -11.4609
11/3/2008 2755.1 -4.52246 318 -41.1111
12/1/2008 2959.15 7.406265 391 22.95597
1/1/2009 2874.8 -2.85048 473.65 21.13811
2/2/2009 2763.65 -3.86636 537 13.37485
3/2/2009 3020.95 9.310151 620 15.45624
4/1/2009 3473.95 14.99528 636.15 2.604839
5/4/2009 4448.95 28.06603 1024.9 61.1098
6/1/2009 4291.1 -3.54803 981.3 -4.25407
7/1/2009 4636.45 8.048053 1227.8 25.11974
8/3/2009 4662.1 0.553225 1217 -0.87962
9/1/2009 5083.95 9.048497 1495.05 22.84717

32

10/1/2009 4711.7 -7.32206 1391 -6.95963
11/3/2009 5032.7 6.812828 1559 12.07764
12/1/2009 5201.05 3.345123 1754.05 12.51123
1/4/2010 5225.65 0.472981 1780.05 1.482284
2/11/2010 4922.3 -5.80502 1812.1 1.800511
3/2/2010 5249.1 6.639173 2018 11.36251
4/1/2010 5278 0.550571 2108 4.459861
5/3/2010 5086.3 -3.63206 2220.2 5.322581
6/1/2010 5312.5 4.447241 2500 12.60247
7/1/2010 5367.6 1.037176 2688 7.52
8/2/2010 5402.4 0.648334 2740 1.934524
9/1/2010 5479.4 1.425292 2870 4.744526

Exhibit V
Annual results in brief :: Bajaj Auto
Mar ' 06 Mar ' 07 Mar ' 08 Mar ' 09 Mar ' 10
Sales 7,572.13 9420.24 8827.15 8700.17 11813.25
Operating profit 1279.28 1329.89 1085.21 1092.71 2487.69
Interest 0.34 5.34 5.16 21.01 5.98
EPS (Rs) 108.87 122.35 52.25 45.37 117.69

Annual results in brief :: TVS
Sales 3234.96 3854.96 3219.50 3670.92 4363.11
Interest 20.99 42.35 11.47 64.61 63.17
EPS (Rs) 4.93 2.8 1.34 1.35 3.71

33

Annual results in brief :: Hero Honda
Sales 8719.21 9905.95 10345.01 12325.38 15775.77
Interest 15.58 13.76 13.47 13.04 -20.62
EPS (Rs) 48.64 42.96 48.47 64.19 111.77

34

APPENDIX

FORMULAE USED

 Debt-Equity Ratio = Total Debt/Total Equity

 Current Ratio = Current Assets/Current Liabilities

Profitability Ratio = (Net Profit / Net Sales)*100

 Covariance XY =Standard Deviation X * Standard Deviation Y * Correlation XY

 Beta = Covariance(Kj ,Km) / Variance(Km)

 CAPM is represented mathematically by
Kj = Rf + Bj( Rm – Rf)

Where,

Kj = Expected or Required Rate Of Return on security j

Rf = Risk-Free Rate Of Return

βj = Beta Coefficient Of Security j

Rm = Return on market portfolio

 Dividend Discount Model
Single Period Valuation Model
P0= D1/(Ke-g)

Where,

P0 = Current Market Price Of Share

D1 = Expected Dividend a year hence

Ke = Required Rate Of Return

g= Growth Rate

 P/E Ratio = Market Price / EPS

 P/B Ratio = Market Price / Book Value

35

 EPS= (Expected PAT – Preference Dividend) / ( No. Of Outstanding Equity Share)

 DPS = Dividend Payout Ratio * EPS

 Enterprise Value = (Total Equity + Total Debt) - Cash In Hand and Bank

 Cost Of Term Loans

Kt=I ( 1 – T )

Where,

I = Interest Rate

T= Tax Rate

 Cost Of Equity Capital
Ke = (D1 / Pe) + g

Where,

D1 = Expected Return Of The Next Year

Pe= Price Per Equity Share

g = Growth Rate

 Cost Of Debenture
Kd = [ I(1-T) + {(F-P)/ N} ] / [ (F+P)/2 ]

Where,

Kd = Cost Of Debenture

I = Annual Interest Payment Per Debenture Capital

T = Corporate Tax Rate

F = Redemption Price Per Debenture

P = Net Amount Realized Per Debenture

N = Maturity Period

36

Weighted Average Cost of Capital= We*Ke + Wd*Kd + Wp*Kp + Wre* Kre

Where,

We= Proportion of equity in capital structure.

Wd= Proportion of debt in capital structure.

Wp= Proportion of preference shares in capital structure

Wre = Proportion of retained earnings in capital structure

Ke = Cost of equity

Kd = Cost of debt

Kp = Cost of preference share capital

Kre = Cost of retained eartnings

37

BIBLIOGRAPHY

www.yahoofinance.com

www.rediffwiz.com

www.moneycontrol.com

www.fundinguniverse.com

Financial Management by IM Pandey

Prowess

38

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