Course Code: FIN542 Course Title: Financial Management

Course Instructor: Anuja Rastogi Section: 1946

Academic Task No.: 2 Academic Task Title: Bajaj Auto

Date of Allotment: 07-12- 2019 Date of submission: 25-1-2020

Student’s Roll no: A23, A25, A26, A27, A28 Student’s Reg. no:

Evaluation Parameters:

Learning Outcomes:

 We have learnt to analyse and interpret different sources of finance of Bajaj Auto Ltd.
 We have done a comparative study of their cost of capital in comparison with Hero MotoCorp Ltd.
 We have interpreted cost of equity, cost of debt, weighted average cost of capital of company.
 We have analysed the capital structure of company by interpreting Debt to Equity Ratio.
Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other students work or from
any other source except where due acknowledgement is made explicitly in the text, nor has any part been written
for me by any other person.

Student’s Signature:

Evaluator’scomments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: Max. Marks: ____________________

 PEER RATING

NAME ROLL NO. RATING

Subhagya Pargal RQ1946A23 10

Vir Bhadra Singh RQ1946A25 10

Sarthak Jindal RQ1946A26 10

Ishaan Behera RQ1946A27 10

Jetta Karthik RQ1946A28 10

 BAJAJ AUTO
1. Company Profile:
Bajaj Auto Limited is an Indian global two-wheeler company and three-wheeler
manufacturing company based in Pune, Maharashtra. It
manufactures motorcycles, scooters and auto rickshaws. Bajaj Auto is a part of the Bajaj
Group. It was founded by Jamnalal Bajaj in Rajasthan in the 1940s. It is based
in Pune, Maharashtra, with plants in Pune, Aurangabad and Pantnagar in Uttarakhand.
The oldest plant at Pune now houses the R&D centre. Bajaj Auto is the world's third-
largest manufacturer of motorcycles and the second-largest in India. It is the world's
largest three-wheeler manufacturer.
Bajaj Auto was established on 29 November 1945 as M/s Bachraj Trading Corporation
Private Limited. In 1959, it obtained a license from the Government of India to
manufacture two-wheelers and three-wheelers. With the launch of motorcycles in 1986, the company has
changed its image from a scooter manufacturer to a two-wheeler manufacturer. Bajaj manufactures and sells
motorcycles, scooters, auto-rickshaws and most recently, cars.
Bajaj Auto is India's largest exporter of motorcycles and three-wheelers. Bajaj Auto's exports accounted for
approx. 35% of its total sales. 47% of its exports are made to Africa. Boxer motorcycle is the largest selling
single brand in Africa. Bajaj is the world's largest manufacturer of auto rickshaws and accounts for almost
84% of India's three-wheeler exports. The total revenue of the Bajaj Auto in the 2019 was about Rs. 31,804
Crore, Operating Income was about Rs. 6,613 Crore, net income was about Rs. 4,927 Crore.
 Company’s Vision: To attain world class Excellency by demonstrating value added product to costumers.
 Company’s Mission:
 Focus on value-based manufacturing.
 Continual Improvement
 Total elimination of wastes
 Pollution free and safe environment
2. Financial sources of the company analysis:
 Sources of finance state that, how the companies are mobilizing finance for their requirements. Main motive
of companies is to consider all possible sources of capital and select the one that will provide the needed
funds at the minimal cost and loss of control. The companies need sum amount of finance to meet the long-
term and short-term requirements such as purchasing of fixed assets, construction of office building, purchase
of raw materials and day-to-day expenses.
 Types of Financial sources based on sources of generation:
Internal financial Sources include
 Retained earning
 Depreciation funds
 Surplus
 external financial sources include
 Share Capital
 Debentures
 Public deposits
 Loans from Banks and financial institutions
 Sources of finance analysis for last five years: (Bajaj Auto Ltd.)

BALANCE SHEET OF BAJAJ AUTO (in Rs. Cr.) MAR '19 MAR '18 MAR '17 MAR '16 MAR '15

12 mths 12 mths 12 mths 12 mths 12 mths

SOURCES OF FUNDS

Total Share Capital 289.37 289.37 289.37 289.37 289.37

Equity Share Capital 289.37 289.37 289.37 289.37 289.37

Reserves 22,944.44 20,135.87 17,567.20 13,730.94 10,805.95

NETWORTH 23,233.81 20,425.24 17,856.57 14,020.31 11,095.32

Secured Loans 0.00 0.00 0.00 0.00 0.00

Unsecured Loans 0.00 0.00 0.00 0.00 111.77

TOTAL DEBT 0.00 0.00 0.00 0.00 111.77

Minority Interest 0.01 0.02 0.03 0.04 0.04

TOTAL LIABILITIES 23,233.82 20,425.26 17,856.60 14,020.35 11,207.13

APPLICATION OF FUNDS

Gross Block 4,271.60 4,506.25 4,502.46 4,450.68 4,631.70

Less: Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Less: Accum. Depreciation 2,507.66 2,627.92 2,500.67 2,364.58 2,183.67

NET BLOCK 1,763.94 1,878.33 2,001.79 2,086.10 2,448.03

Capital Work in Progress 48.02 56.47 42.17 52.24 254.94

INVESTMENTS 20,602.85 18,894.57 15,477.04 11,006.80 8,985.25

Inventories 961.51 742.58 728.38 719.07 814.15

Sundry Debtors 2,559.69 1,491.87 953.29 717.93 716.96

Cash and Bank Balance 933.07 792.66 301.36 867.03 592.74

Total Current Assets 4,454.27 3,027.11 1,983.03 2,304.03 2,123.85

 Loans and Advances 1,965.33 1,284.52 2,133.59 1,791.20 2,153.53

Total CA, Loans & Advances 6,419.60 4,311.63 4,116.62 4,095.23 4,277.38

Current Liabilities 5,445.41 4,477.95 3,581.96 3,059.50 2,766.46

Provisions 155.18 237.79 199.06 160.52 1,992.01

Total CL & Provisions 5,600.59 4,715.74 3,781.02 3,220.02 4,758.47

NET CURRENT ASSETS 819.01 -404.11 335.60 875.21 -481.09

TOTAL ASSETS 23,233.82 20,425.26 17,856.60 14,020.35 11,207.13

Contingent Liabilities 0.00 0.00 0.00 1,980.12 1,594.74

Book Value (Rs) 802.92 705.86 617.09 484.52 383.43

 Interpretation: amount in Crore

Particulars 2019 2018 2017 2016 2015

Shareholder fund 23,233.81 20,425.24 17,856.57 14,020.31 11,095.32

Long-term fund 726.81 604.34 568.18 438.96 393.38

Short-term fund 4,873.78 4,111.40 3,212.84 2,781.06 4,476.86

Equity and Liabilities 28,834.41 25,141.00 21,637.62 17,240.37 15,965.60

 As the Shareholder fund of Bajaj Auto increases in last five years, that might have two reasons.
Reason1: Retained earning
If Bajaj auto chooses to hold onto its profits and either hold them as cash or use them to invest
internally in its business, then shareholder fund goes up. That’s because the earning of the business
will cause the value of cash or assets to rise without any corresponding increase in the company’s
liabilities. The company’s retained earning line item will rise on its balance sheet, and that figure
directly feeds into overall shareholder equity.
Reason2: Raising Capital
The other situation in which stockholder equity goes up is when a company obtains additional equity
financing by selling stocks.

 As the Long-term fund of Bajaj Auto has been increasing, that clearly shows that company is using
more long term borrowed fund throughout the last five years. Long term financing is usually used to
purchase major assets such as building and equipment. Long term debt is a common source of
financing for businesses.

 Bajaj Auto has been using short term funds more effectively from 2016. The reason behind this might
be the company planned to raise working capital to cover temporary deficiencies in funds so they can
 meet payrolls and other expenses. May be the payment delay of credit customers forced them to go
for short term loans.

3. Cost of Capital comparison with Hero MotoCorp ltd:

A firm’s cost of capital is the average required rate of return on the aggregate of investment projects. It is
useful for
 Evaluating investments decisions.
 Designing a firm’s debt policy
 Appraising the financial performance of the top management
The component cost of capital is as follows:
 Cost of Equity:
The cost of equity is the return a company requires to decide if an investment meets capital return requirements.
Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity
represents the compensation the market demands in exchange for owning the asset and bearing the risk of
ownership. The traditional formula for the cost of equity is the dividend capitalization model and the capital
asset pricing model (CAPM).
Formula:
Using the dividend capitalization model, the cost of equity is:

Cost of Equity=(CMV/DPS) + GRD

where:
DPS=dividends per share, for next year
CMV=current market value of stock
GRD=growth rate of dividends
Cost of Equity comparison: (Year Wise)

 Cost of Debt:
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.
Formula:
Effective interest rate = (Annual Interest / Total debt Obligation) * 100
Cost of Debt = Effective interest rate * (1- Marginal Tax Rate)
Now let’s break the WACC equation down into its elements and explain it in simpler terms. The WACC
calculation is pretty complex because there are so many different pieces involved, but there are really only
two elements that are confusing: establishing the cost of equity and the cost of debt. After you have these two
numbers figured out calculating WACC is a breeze
 WACC Value comparison: (Year Wise)

Company 2019 2018 2017 2016 2015

Bajaj Auto ltd. 6.19 % 6.21% 6.22% 6.22% 6.23%

Hero MotoCorp 30.20% 33.54% 32.58% 33.33% 40.28%

 Interpretation:

It has been clarified from the above the table that Hero MotoCorp has higher weighted average cost of
capital compared to Bajaj Auto ltd. so it is typically a signal of the higher risk associated with Hero
MotoCorp’s operation and they are spending a comparatively large amount of money in order to raise
capital. At the meantime, Bajaj Auto’s low WACC value indicates that the company acquires capital
cheaply.

WACC value of Bajaj auto decreases throughout the last five years as the beta and rate of return on equity
decrease because a decrease in WACC denotes an increase in valuation and a decrease in risk. Similarly,
WACC value of Hero MotoCorp has been decreasing throughout the years.

 Suggestion:

Both companies are effectively controlling the cost of capital from last five years. But Hero MotoCorp
needs to find different ways to decrease their WACC through cheaper sources of financing. They may go
for Debt Financing rather than going for equity or they may go for cheapest source of finance, that is
retained earnings.

As it turns out, Bajaj Auto improved its operations in what can be seen as a lacklustre quarter. Besides, a
benign cost environment and lower tax rates resulted in an improvement in its profit. Net profit surged
21.7% to ₹1,402 crore in Q2 FY20, compared to the year-ago quarter, on a stand-alone basis. One reason
for this spike was the company’s decision to opt for the lower corporate tax rate. Additionally, lower raw
material prices meant the company could control its operating expenses. As a result, Ebitda (earnings
before interest, tax, depreciation and amortization) stood at 16.6%, an improvement of about 120 basis
points quarter-on-quarter.
4. Capital structure analysis:

 The capital structure is the particular combination of debt and equity used by a company to finance its
overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in
the form of common stock, preferred stock, or retained earnings. Short-term debt such as working capital
requirements is also considered to be part of the capital structure. The Debt-to-Equity (D/E) ratio is useful
in determining the riskiness of a company's borrowing practices.

 Debt-to-Equity ratio analysis: (2019)

Debt/Equity Ratio = (Total Liabilities / Total Shareholder Equity)

= (5,600.59 Cr / 23,233.81 Cr)

= 0.24

In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to
satisfy its debt obligations. Lenders and investors usually prefer low debt-to-equity ratios because their
interests are better protected in the event of a business decline.

As the debt to equity ratio of Bajaj Auto is lower- closer to zero (0.24)-this often means the business hasn’t
relied on borrowing to finance operations. Investors are unlikely to invest in a company with a very low
ratio because Bajaj Auto ltd. isn’t realizing the potential profit or value it could gain by borrowing and
increasing operations.

5. Conclusion:

Bajaj Auto improved its operations in what can be seen as a lacklustre quarter. Besides, a benign cost
environment and lower tax rates resulted in an improvement in its profit. One reason for this spike was the
company’s decision to opt for the lower corporate tax rate. Additionally, lower raw material prices meant
the company could control its operating expenses. operating income during the year rose 19.9% on a year-
on-year (YoY) basis. The company's operating profit increased by 4.0% YoY during the fiscal. Operating
profit margins witnessed a fall and stood at 17.6% in FY19 as against 20.3% in FY18.Depreciation charges
decreased by 15.6% and finance costs increased by 242.0% YoY, respectively. other income grew by
34.3% YoY. Net profit for the year grew by 16.8% YoY. Net profit margins during the year declined from
16.0% in FY18 to 15.5% in FY19.