Financial Management Project.

On
BAJAJ Auto

Submitted To:

Prof. Monika Chopra

Submitted By:
Vignesh V S –
Vishant Chopra – 19PGDM207
INTRODUCTION:
Bajaj Auto Ltd is one of India's leading two & three wheeler manufacturers. The
company is well known for its expertise in R&D, product development, process
engineering and low-cost manufacturing. Rahul Bajaj is the Group's Head. Since
1968, he has been Bajaj's chief executive and is regarded as one of India's most
outstanding business leaders. He was remembered for his contributions in numerous
national and international forums as innovative and visionary as his illustrious
predecessors. Bajaj group is among India's top 10 company groups. Group has a
presence across a wide range of industries, including vehicles, home appliances,
lighting, iron and steel, insurance, travel and finance. Their annual turnover of Rs. 70
million (1968) has long been left behind to record an impressive figure of $4.6 billion
now.
The flagship company of the Group, Bajaj Auto, is listed as the fourth largest
manufacturer of two and three wheels in the world and the Bajaj brand is well
established in over a dozen countries in Europe, Latin America, the USA and Asia.
Two-Wheeler Automobile Industry:
Two-wheeler sale of Indian players is dominated by the domestic market and, within
it, by motorcycles. After growing at a sharp clip from the late 1990s, motorcycle sales
witnessed a drop-in volume in 2019-20, due to falling domestic demand as a result of
rising interest rates and many private sector banks reducing their retail lending
exposures.
The major players in the industry are given in the table which contains the market
capitalization and total sales. Hero Moto corp is the market leader in the industry with
36% market share followed by Honda motorcycles with 30% of the market share
followed by TVS motor (14%) and Bajaj auto with 13% are the main competitor in the
market. (According to 2018-2019)
Ran Total units Market
k Company Name sold capitalisation
1 Hero MotoCorp Ltd 2060342 36%
Honda motorcycle and scooter
2
India (Pvt) Ltd 1690423 30%
3 TVS Motor Company Ltd 734011 13%
4 Bajaj Auto Ltd 594234 11%
5 Royal Enfield 219725 4%
6 Yamaha Motors Pvt Ltd 203335 4%
Suzuki Motorcycle India Pvt
7
Ltd 152110 3%
 4% 3%
4%
Hero MotoCorp Ltd Honda motorcycle and
11% 36% scooter India (Pvt) Ltd
TVS Motor Company Ltd Bajaj Auto Ltd
13%
Royal Enfield Yamaha Motors Pvt Ltd
Suzuki Motorcycle India Pvt
30% Ltd

Objective:

1. To calculate kd,kp and ke and wacc of Bajaj auto

2. To calculate degree of operating leverage, degree of financial leverage and degree of total
leverage and capital structure analysis
3. To calculate Dividend Rate, Payout, Dividend Yield, Dividend Policy.

COST OF DEBT (KD):

The cost of debt is the effective interest rate a company pays on its debts. It’s the
cost of debt, such as bonds and loans, among others. The cost of debt often refers
to after-tax cost of debt, which is the company's cost of debt before taking taxes into
account. However, the difference in the cost of debt before and after taxes lies in the
fact that interest expenses are deductible.
Bajaj auto is a no debt company As it is important to realize that tax shield is only
one part of debt, there are a few trades off models that talk about the other negetive
effects of debt like risk shifting and underinvestment. The MM theory ignores cost of
bankruptcy and default, which keeps on growing as debt grows. Practically, speaking
every firm might have a different reason specific to the firm and it may be a bit hard
to generalize for all the firms.

Kp

Ke

WACC
Dividend Summary

For the year ending March 2019 Bajaj Auto has declared an equity dividend of
600.00% amounting to Rs 60 per share. At the current share price of Rs 3072.05 this
results in a dividend yield of 1.95%.

The company has a good dividend track report and has consistently declared
dividends for the last two years
The Announcement date forf inal dividend was 17 th may,2019. Anyone who wants to
be entitled to receive the dividend should have held the share by the effective date of
11thJuly,2019 they gave final dividend of Rs. 60.00 per share.

Dividend Yield:
The dividend yield measures the income you earn from holding a stock. When a
company makes a profit, it has two choices. First, it can retain the earnings for future
investment. Second, it can payout those earnings to its shareholders. Most firms do
a combination of both. This means they retain a portion of earnings, and payout the
rest to shareholders.
Typically, large and stable firms tend to pay higher dividends. A mature company
does not require high levels of cash for future growth or expansion. Think of your
typical blue chip stock. Smaller firms that require cash for expansion tend to retain
most of their earnings.

Stocks that pay a high dividend yield are perceived to be safer than stocks that don't.
This is true in the sense that high dividend yield stocks tend to be large and stable
companies. However, it isn't the dividend that makes them safe. Rather, they pay
good dividends because they are safe. If you are looking for stocks that generate
regular income, then high dividend yield stocks are what you want.
Bajaj Auto dividend yield = 100% * (Rs 60 / Rs 3072.05) = 1.95%

Dividend Yield
Market top 25%;
2.40%

Bajaj Auto; 1.95%

Industry Average;
1.50%

Market bottom
25%; 0.60%

Bajaj Auto Market bottom 25% Industry Average Market top 25%
BAJAJ-AUTO's dividend (1.95%) is higher than the Industry average and higher than
bottom 25% of dividend payers in the Indian market (0.57%).But it is lower than the
top 25% of dividend payers in the Indian market.
Dividend rate
The dividend rate is the total expected dividend payments from an investment,
fund or portfolio expressed on an annualized basis plus any additional non-
recurring dividends that an investor may receive during that period.
For the year ending March 2019 Bajaj Auto has declared an equity dividend of 600.00%
amounting to Rs 60 per share.

Dividend Pay out ratio

This is ratio is of major concern to the investors. This ratio tells us what part of the
earnings per share is actually given as a dividend to shareholders. The more it is the
better it is.
Dividend payout ratio (Dividend per
share(DPS)/Earnings per share(EPS)) 2018 2019
Hero Moto Corp 39.9% 47.58%
Bajaj Auto 37.7% 35.2%
Honda Motors 16.45% 32.14%

A company that is likely to distribute roughly half of its earnings as dividends means
that the company is well established and a leader in its industry. It’s also reinvesting
half of its earnings for growth, which is welcome. As in the case of Hero Moto corp,
as it has a dividend payout ratio of almost 48%. We can see that Bajaj Auto has a
dividend payout ratio of 35.2% in 2019 which is more than that of Honda motors and
less than that of Hero moto corp. It the last two years it’s dividend payout ratio hasn’t
changed significantly. A range of 35% to 55% is considered healthy and appropriate
from a dividend investor’s point of view. So, in all the company has a payout ratio
that is equal by the industry average and it gives a positive outlook to the investors.

Bonus and split Share:

The last time Bajaj Auto Ltd (now known as Bajaj Holdings and Investments Ltd) had
made an announcement of the sort was in 2010 when it issued bonus shares in the ratio
of 1:1. Bajaj Auto had also issued bonus shares in the 1:1 ratio in 1994, 1991, 1988,
1984 and 1976. In 1971 , 1973 and 1997 the company had issued bonus shares in the
1:2 ratio. The biggest bonus share from the company till date was in 1967, when it
issued five new shares for every one held in the company.

Bajaj Auto Ltd. Has never gone for split share.

Cash Flows
Dividends are paid from a company's cash flow. Free cash flow (FCF) tells
investors the actual amount of cash a company has left from its operations to
pay for dividends, among other things, after paying for other items such as
salaries, research and development, marketing, etc.
To calculate Free Cash Flows, for the Bajaj Auto we see their cash flow
statement. It shows that for the year 2019 its net cash flow provided by
operating activities (operating cash flow) totalled Rs.2,489.53. which is less
from last year which was Rs4,260. This is due to increase in Inventory and
trade receivables during that period.

Cash Flow from Operations - Capital Expenditure = FCF

Still in the year 2019 the company paid more dividend as it was generating sufficient
cash flow to cover its dividend payments.

Another important factor to consider in relation to cash flow is debt. If a cash-

flow crunch forces a company to choose between paying dividends and
paying interest, invariably shareholders lose out since failure to pay interest
could force a company into bankruptcy. As bajaj auto debt free we can see
that they have been giving constant dividend throughout,
Degree of Operating Leverage:
Operating Leverage is an accounting metric that helps the analyst in analyzing how a
company’s operations are related to the company’s revenues; the ratio gives details
about how much of a revenue increase will the company have with a specific
percentage of sales increase – which puts the predictability of sales into the
forefront.
Operating leverage can be defined as the capability of the firm to use its fixed
expenses to generate better returns.
DOL = % Change in EBIT / % Change in Sales

Degree of operating leverage

  2019 2018
% change in ebit 0.10 0.06
% change in sales 0.20 0.16
Degree of operating leverage 0.53 0.42

As in our study Bajaj auto’s sales increased from 24700.3 in 2018 to 29567.25 in
2019 which was a 19.7% change this change in sales was matched by a 10%
increase in EBIT, due to which there was a increase in the operating leverage of the
firm from .42 to .53. The reason for low Degree of operating leverage of Bajaj is due
to lower Fixed Costs and Higher Variable Costs. As during the last year due to
economic slowdown there was variability in the industry that led to an increase in the
variable cost in the system.
For Bajaj in case of adverse situations of Sales decrease, Operating Income will see
only a proportional change in Operating Income, whereas for a firm with high
operating leverage if its sales decrease it’s operating income will fall drastically.
Degree of Financial Leverage:
The degree of financial leverage (DFL) is a ratio used in corporate finance to
measure the sensitivity of earnings per share (EPS) to the fluctuation in the
operating income (also called earnings before interest and taxes or EBIT). The effect
of financial leverage emerges if a company uses debt financing. Interest payments
on fixed-income securities are fixed and affect the EPS (the higher they are, the
lower the EPS). Thus, the fluctuation of EPS varies to a greater extent than
fluctuation of EBIT.

DFL = % Change in EPS / % Change in EBIT

Degree of financial leverage

  2019 2018
% change in PBT 0.17 0.06
% change in ebit 0.10 0.06
Degree of financial leverage 1.64 0.91
For Bajaj the degree of financial leverage for the year 2019 is 1.64 which has
increased from .91 in 2018. Still when compared to other automotive companies in
the industries is at par , as companies like Hero motor corp, Bajaj Auto do not have
debt in there operations. As a low financial leverage indicates a low proportion of
debt in a company’s capital structure, which means both lower financial risk and
lower sensitivity of EPS to fluctuation in EBIT. Other things being equal, such
companies are more stable and less sensitive to changes in operating income.These
companies want to refrain from High financial leverage as due to high financial
leverage companies are exposed to greater financial risk, and stockholders’ return is
highly volatile.
Degree of Total Leverage:
This ratio summarizes the effects of combining financial and operating leverage, and
what effect this combination, or variations of this combination, has on the
corporation's earnings. Not all corporations use both operating and financial
leverage, but this formula can be used if they do.

A firm with a relatively high level of combined leverage is seen as riskier than a firm
with less combined leverage because high leverage means more fixed to the firm.

DTL = %Change in EPS / %Change in Sales = DOL * DFL

Degree of total leverage

2019 2018
0.86 0.38

For every 1% change in Bajaj Auto’ sales, its EPS would change by .86% as
compared to .38% last year. When we compare the financial statements for the two
years we can see that due to more fixed cost in the system the operating leverage
has increased due to which there has been an increase in the total leverage.
CAPITAL STRUCTURE ANALYSIS:
Structural ratios are based on the allocation of debt and equity in the financing
pattern of firm‟s assets. Capital structure of the borrower has strong implications
 Total debt equity ratio
 Financial leverage Ratio
 Net Fixed Assets to Net-Worth Ratio
 Proprietary Ratio
 Interest coverage ratio
HERO MOTOCORP
  Bajaj Auto LTD
RATIOS 2019 2018 2019 2018
DEBT-EQUITY RATIO 0.01 0.01 0 0
INTERESTCOVERAGE
1497.24 4415.18 583.64 840.07
RATIO
0.9489057 1.0058999 0.995239
Financial leverage ratio 0.996
39 61 31
 Net Fixed Assets to Net-Worth 0.0779898 0.0925082 0.298588 0.4440880
Ratio 3 7 44 42
Proprietary Ratio 79.71% 80.35% 7.09% 6.88%

1. Total debt equity ratio:

The Total debt Equity Ratio of the Bajaj Auto Ltd during the year 2018 and 2019-
2004 was almost negligible and same was the case with Hero MotoCorp Ltd.
This shows a low debt-to-equity ratio which indicates a lower amount of financing by
debt via lenders, versus funding through equity via shareholders. It shows that both
the company do not want to take risk b using debt as a mode of financing. As more
the company's operations rely on borrowed money, the greater the risk of
bankruptcy, if the business hits hard times. This is because minimum payments on
loans must still be paid--even if a company has not profited enough to meet its
obligations. For a highly leveraged company, sustained earnings declines could lead
to financial distress or bankruptcy.

Debt to equity ratio = Total liabilities/Stockholders’ equity

2. Financial leverage Ratio

This ratio indicates the firm’s ability to use fixed financial charge to magnify the effect
of changes in Earnings before interest tax on the firm’s Earning per share. An
enterprise should have neither a very high nor a very low ratio; it should have a
satisfactory ratio. To judge whether the ratio is satisfactory or not, it should be
compared with its own past ratio or with the ratio of similar firm in the same industry
or with the industry average.
From the table it is evident that for both Bajaj auto and Hero motor corp the financial
leverage ratio is 1(Approximately) for both the years, which is a good sign for the
companies.

Financial leverage =Total debt / Shareholders Equity

3. Net Fixed Assets to Net-Worth Ratio:

This ratio indicates the extent to which the owners' cash is frozen in the form of fixed
assets, such as property, plant, and equipment, and the extent to which funds are
available for the company's operations.
Fixed assets to net worth ratio of 0.75 or higher is usually undesirable, as it indicates
that the firm is vulnerable to unexpected events and changes in the business
climate.
An enterprise should have neither a very high nor a very low ratio, it should have a
satisfactory ratio. To judge whether the ratio is satisfactory or not, it should be
compared with its own past ratio or with the ratio of similar firm in the same industry
or with the industry average. From the table the Net Fixed Assets to Net-Worth Ratio
for Bajaj is 0.07 in 2019 and 0.09 in 2018 which when compared to Hero mot corp is
0.29 in 2019 and 0.44 in 2018.

4.Fixed
Proprietary Ratio:
assets to Net Worth = Net fixed assets / Net worth
This ratio indicates the extent to which the assets of the enterprise have been
financed out of proprietors‟ funds. A high proprietary ratio indicated the larger safety
margin for creditors and the enterprise is not talking the benefit of trading on equity.
A low proprietary ratio indicates the greater it’s to creditors and the enterprise is
talking the befit of trading on equity. An enterprise should have neither a very high
nor a very low ratio; it should have a satisfactory ratio. To judge whether the ratio is
satisfactory or not, it should be compared with its own past ratio or with the ratio of
similar firm in the same industry or with the industry average.
The Proprietary ratio of Bajaj auto has decreased marginally from 80.35% in 2018 to
79.71% in 2019. It shows that the management is not utilising shareholder’s funds
properly as the ratio is high when compared to hero moto corp.

Proprietary Ratio =Shareholders' equity /Total tangible assets

5. Interest coverage ratio:

This ratio shows the number of times the amount of interest on long term debts is
covered by the profit out of which that will be paid it indicates the limit beyond which
the ability of the firm to service its debt would be adversely affected. For instance,
interest coverage of five times would imply that even if the firm‟s net profit before
interest and tax decrease by 80% of the present level. the firm will still be able to pay
interest out of profit. Higher the ratio greater the firm‟s ability to pay interest but very
high ratio may imply lesser use of debt and very efficient operations.
The interest coverage ratio of Bajaj auto is reduced from 4415.18 in 2018 to 1497.24
in 2019. Still this ratio shows that the firm is not using debt and is having a efficient
operations.

Interest Coverage Ratio= EBIT/Interest Expense