Date: May 24, 2007

BAJAJ AUTO DEMERGER

The Bajaj Auto demerger was intended to untangle cross holdings and make life simpler for investors. In the past, all demergers & spin-offs - Reliance group, Mahindra & Mahindra, Zee Telefilms and GE Shipping - have added value to shareholders. On the face of it, Bajaj Auto's demerger should do the same.

THE DEMERGER :

Two new companies will be created and each existing shareholder will get one share each in both these companies for each share held by him/her in Bajaj Auto (BAL) currently. While the auto business, along with Rs 1,500 crore cash, will be transferred to Bajaj Holdings and Investments; two insurance JVs and Bajaj Auto Holdings (BAHL) in Bajaj Auto Finance will get transferred to Bajaj Finserve. The existing Bajaj Auto will then be left with around Rs 6,000 crore worth of cash and investments. So, two new companies will get listed on the stock exchanges by the end of this year.

The demerger does give investors an option to juggle their exposure between three focused companies and the individual companies to be valued separately.

In the near term, the combined market capitalisation of three listed entities is likely to be around Rs 30,000 crore against the current market cap of around Rs 23,500 crore, up 28% from current levels. The calculation is based on the expected numbers for FY08 as new entities are likely to get listed by December this year.

INSURANCE BUSINESS:

Bajaj Auto's insurance business should be valued at around three times its trailing revenues or Rs 30,000 crore by end-FY08.

AUTOMOTIVE BUSINESS:

The proposed auto company may be valued at 15-17 times its trailing earning per share, as is the case with its peers. This pegs its market cap at between Rs 19,500 crore and Rs 22,000 crore.

INVESTMENT BUSINESS:

We expect the business to be valued at 8-10 times its trailing earning per share, which pegs its market value at anywhere between Rs 5,500 crore and Rs 7,000 crore once it gets listed.

VALUATIONS:

Based on current market price, the company is valued at around 12 times its estimated earnings for FY08. This makes it an attractive long-term buy with the bonus of additional gains that can accrue from the demerger.