A PROJECT REPORT

ON
Capital Structure Analysis of
“Bajaj Auto Ltd.

Submitted to:

Submitted by:

Name of the Institue & University

 ABSTRACT

The two principal sources of finance for a company are equity and debt. Capital
structure is the mix of the various types of debt and equity capital maintained by a firm. Any
firm tries to plan an optimum capital structure for itself. . The optimum capital structure is one
that maximises the market value of the firm

Capital Structure decision is the most crucial decision for any organization.
Structuring the capital of any organization in one way or other plays a major role in the
growth of any company. The optimal capital structure is the one that strikes a balance
between risk and return to achieve our ultimate goal of maximizing the price of the stock. A
number of factors influence the capital structure decision of a company. The Financial
Manager who is going to form capital structure for any particular company, be it small firm or
large organization, has to look upon every little aspect very carefully. Lots of ratios,
calculations have to be carefully examined before coming out with any particular output.

Thus, capital structure analysis is a very interesting as well as very important field to
work upon. The main objective of the study of capital structure analysis is to know about
various factors- ratios, trends, and other calculations- that are used for making any prediction
about capital structure of any organization. We’ve also focussed upon factors that affects the
growth prospect of any organization in terms of choosing its finance between Equity or Debt.

The methodology that has been used for the study is mainly depending upon
secondary datas. Reference from various books has been taken regarding the calculations, and
prediction about the company. Company’s data has been mainly taken from company’s
Annual Report of last five years, and based upon that various analysis has been done.
ACKNOWLEDGEMENT

An extra-ordinary work cannot be done through a single man’s effort. It is only possible with
continuous and constant suggestion and guidance that he receives from others.

With due respect and regards I wish to express my deep sense of gratitude and sincere praise
of thanks for Mrs Seema Dogra , IIPM, New Delhi, for being my thesis guide and for all his
counsel making the process of learning an enjoyful one. I would like to thanks him from all
his valuable time and suggestion that he devoted to me without which; the process would have
been a Herculean Task.

Finally I would like to thank all others who provided me valuable suggestion which helped
me in completion of my project .

Thanking You,
 TABLE OF CONTENT

S. No. Content Page Number

1. Abstract 1
2. Acknowledgement 3
3. List Of Contents 4
4. List Of Tables 4
5. Introduction 5–6
6. Definition 7
7. Factors Affecting Capital 8 – 12
Structure
8. Bajaj Auto Limited 13 – 29
9. Ratios & Trends 30 – 41
10. Altman’s Z – Score 42 – 45
10 Recommendations 46
11. Bibliography 47
12. Annexture 48 - 52

S. No. Name of Table Page No.

1. Shareholding Pattern of Bajaj Auto 29

Ltd.
2. Financial Leverage Index 33
3. Financial Leverage Ratio 35
4. Debt – Equity Ratio Trend 36
5. Equity Capital to Total Debt Ratio 38
6. Time- Interest Coverage Ratio 40
7. Interest Coverage Ratio 41
8. Altman’s Z – Score 44
 INTRODUCTION

Capital Structure refers to the way a corporations finances itself through some

combination of equity sales, equity options, bonds, and loans. Optimal capital structure refers

to the particular combination that minimizes the cost of capital while maximizing the stock

price. Capital structure is the mix of the various types of debt and equity capital maintained by

a firm. The more debt capital a firm has in its capital structure, the more highly leveraged the

firm is considered to be. The permanent long term financing of a company, including long-

term debt, common stock and preferred stock, and retained earning.

One of the key issues in the capital structure decision is the relationship between the

capital structure and the value of the firm. The capital structure or financial leverage decision

is examined from the point of view of its impact on the value of the firm. The optimum capital

structure is one that maximizes the market value of the firm.

Analysis of capital structure is an important task which financial managers of every

organization go through before formulating capital structure decisions of their company. Even

the investors and promotors has to take every important measure so as to lead their

organization towards growth as well as reap maximum profit alongwith maximization of

company’s value. These all actions need careful watch of their company, which is helped by

capital structure analysis.

 Capital structure analysis even helps an organization to decide whether it should go for

debt financing or whether it should it finance itself with their own sources of reserves and

surplus.

CAPITAL STRUCTURE
DEFINITION

Capital Structure refers to the way a corporations finances itself through some
combination of equity sales, equity options, bonds, and loans. Optimal capital structure refers
to the particular combination that minimizes the cost of capital while maximizing the stock
price. . A capital structure that is leveraged more has a greater proportion of debt versus
equity. Capital structure refers to a mixture of a variety of long term sources of funds and
equity shares including reserves and surpluses of an enterprise.

The two principal sources of finance for a company are equity and debt. Capital
structure is the mix of the various types of debt and equity capital maintained by a firm. The
more debt capital a firm has in its capital structure, the more highly leveraged the firm is
considered to be. The permanent long term financing of a company, includes long- term debt,
common stock and preferred stock, and retained earning. It differs from financial structure,
which includes short– term debt and accounts payable. It is the mix of long-term debt and
equity used to finance or capitalize a business enterprise. This may include long-term debt,
common stock, preferred stock, warrants, pension, and lease liabilities. It hardly takes in its
structure, all the complex quantitative factors as well as qualitative attributes affecting
investment decisions. One of the key issues in the capital structure decision is the relationship
between the capital structure and the value of the firm. The capital structure or financial
leverage decision is examined from the point of view of its impact on the value of the firm.
The optimum capital structure is one that maximizes the market value of the firm.

Capital structure is the mix of long-term debt and equity used to finance or capitalize a
business enterprise. This may include long- term debt, common stock, preferred stock,
warrants, pension, and lease liabilities. A capital structure that is leveraged more has a greater
proportion of debt versus equity. The permanent long-term financing of a company, including
long-term debt, common stock and preferred stock, and retained earnings. It differs from
financial structure, which includes short-term debt and accounts payable.

Capital structure normally includes common and preferred stock, long-term debt and
retained earnings. It does not include accounts payable or short-term debt.

Capital structure is by definition the cumulative outcome of past financing decisions.

Past financing decisions are known to depend on past market valuations. Therefore it is
possible that capital structure itself depends on the historical path of market valuations. We
find this to be the case. We find that unlevered firms tend to be those that raised funds when
their market valuations were high, as measured by the market-to-book ratio. Levered firms
tend to be those that raised funds when their market valuations were low.
\
 FACTORS AFFECTING CAPITAL STRUCTURE

Firms can choose whatever mix of debt and equity they desire to finance their assets,
subject to the willingness of investors to provide such funds. And, there exist many different
mixes of debt and equity, or capital structures - in some firms, such as Chrysler Corporation,
debt accounts for more than 70 percent of the financing, while other firms, such as Microsoft,
have little or no debt.

A firm should attempt to determine what its optimal, or best, mix of financing should
be. Determining the exact optimal capital structure is not a science, so after analyzing a
number of factors, a firm establishes a target capital structure it believes is optimal, which is
then used as a guide for raising funds in the future. This target might change over time as
conditions vary, but at any given moment the firm's management has a specific capital
structure in mind, and individual financing decisions should be consistent with this target. If
the actual proportion of debt is below the target level, new funds will probably be raised by
issuing debt, whereas if the proportion of debt is above the target, stock will probably be sold
to bring the firm back in line with the target debt/assets ratio.

Capital structure policy involves a trade-off between risk and return. Using more debt
raises the riskiness of the firm's earnings stream, but a higher proportion of debt generally
leads to a higher expected rate of return; and, we know that the higher risk associated with
greater debt tends to lower the stock's price. At the same time, however, the higher expected
rate of return makes the stock more attractive to investors, which, in turn, ultimately increases
the stock's price. Therefore, the optimal capital structure is the one that strikes a balance
between risk and return to achieve our ultimate goal of maximizing the price of the stock.

Four primary factors influence capital structure decisions:

1. The first is the firm's business risk, or the riskiness that would be inherent in the firm's
operations if it used no debt. The greater the firm's business risk, the lower the amount of debt
that is optimal.

2. The second key factor is the firm's tax position. A major reason for using debt is that
interest is tax deductible, which lowers the effective cost of debt. However, if much of a
firm's income is already sheltered from taxes by accelerated depreciation or tax loss carry-
forwards, its tax rate will be low, and debt will not be as advantageous as it would be to a firm
with a higher effective tax rate.

3. The third important consideration is financial flexibility, or the ability to raise capital on
reasonable terms under adverse conditions. Corporate treasurers know that a steady supply of
capital is necessary for stable operations, which, in turn, are vital for long-run success. They
also know that when money is tight in the economy, or when a firm is experiencing operating
difficulties, a strong balance sheet is needed to obtain funds from suppliers of capital. Thus, it
might be advantageous to issue equity to strengthen the firm's capital base and financial
stability.

4. The fourth debt-determining factor has to do with managerial attitude (conservatism or

aggressiveness) with regard to borrowing. Some managers are more aggressive than others;
hence some firms are more inclined to use debt in an effort to boost profits. This factor does
not affect the optimal, or value- maximizing, capital structure, but it does influence the target
capital structure a firm actually establishes.

These four points largely determine the target capital structure, but, operating
conditions can cause the actual capital structure to vary from the target at any given time.

Empirical Determinants - Capital Structure

There is a direct kinship between the debt equity ratio of a firm and the
collateralization of its debt. Since all projects are seldom collateralized, firms often go in for
equity finance rather than borrowed capital. The issue of debt buttressed by assets with known
values, do away with the costs associated with the issue of new shares. A firm can maximize
the value of its equity by disposing secured debts to unsecured creditors. At a higher debt
level a firm that is exposed to the threat of bankruptcy is burdened with rising agency costs.
This cripples its ability to garner additional funds. The collateral value attribute is captured by
the ratio of intangible assets to total assets, and the ratio of inventory (plus gross plant and
equipment in money terms) to total assets. The first ratio is negatively related to the collateral
value of assets while the second is positively related to it.

Enterprises with large tax benefits relative to their expected cash inflows, prefer less
debt in their capital structure. When a levered firm prospers, owing to its increasing agency
costs, its growth will have a negative relationship with the long term debt. To mitigate the
effect of bulging agency costs, when enterprises mobilize short term debts, growth will
cultivate a positive relationship with it. Convertible debentures can also cut agency costs to
size. Hence growth will assume a direct relationship with convertible debt ratios. Capital
expenditure to total assets, and the increase in total assets measured by its percentage change,
can also be indicators of growth. Since progressive enterprises earmark more funds for R&D
to innovate and generate new investment opportunities, the ratio of the above to sales too can
be a proxy for growth..

Firms manufacturing specialized products to meet the specific needs of the customers
normally go for equity financing. In such cases a negative relationship between equity and
debt is plausible. In certain empirical studies the ratios of selling expenses to sales and R&D
to sales are treated as proxies for uniqueness of a firm. Larger firms with greater degree of
diversification are less prone to bankruptcy and liquidation. Such firms are hence highly-
levered. The size of a firm is often gauged by the natural log of sales. Some financial analysts
believe that the optimum debt level is a decreasing function of the volatility of earnings. Such
firms prefer more equity and less debt. The Standard Deviation of the percentage of change in
operating income can capture this attribute.

When debt level is low at higher profitability, promising firms rely more on equity and
less on debt for their expansion and diversification, since they can easily mobilize equity
funds on attractive terms. Even debt on a massive scale with soft terms can knock at their
doors. The relationship between profitability and debt hence can be both direct as well as
indirect. Profitability is measured by the ratio of operating income to sales, and operating
income to assets. Thus determinants of capital structure of a firm are governed by a myriad of
factors which make the identification of optimal capital structure an uphill task.

OPTIMUM CAPITAL STRUCTURE

Theoretically, the financial manager should plan an optimum capital structure for his
company. The optimum capital structure is one that maximises the market value of the firm.
There are significant variations among industries and among companies within an industrry in
terms of capital structure. Since a number of factors influence the capital structure decision of
a company, the judgement of the person making capital structure decision plays a crucial part.
Two similar companies may have different capital structures if the decision- maker differ in
their judgement of the significance of various factors.

The Board of Directors or the Chief Financial Officer (CFO) of a company company
should develope an appropriate or target capital structure, which is most advantageous to the
company. This can be done only when all those factors, which are relevent to the company’s
Capital structure decision, are properly analysized and balanced. The capital structure should
be planned generally keeping in view the interests of the equity shareholders and the financial
requirements of a company. The equity shareholders, being the owners of the company and
the providers of risk capital ( equity), would be concerned about the ways of financing a
company’s operations. However, the interests of otgher groups, such as employees,
customers, creditors, society, and government, shopuld also be iven reasonable consideration.
When the company lays down its objective in terms of the shareholder’s wealth maximization
it is generally compatible with the interest of other groups. Thus, while developing an
apprpriate capital structure for its company, the financial manager should inter- alia aim at
maximizing the long term market price oer share.

ELEMENTS OF CAPITAL STRUCTURE

A company formulating its long term financial policy should, first of all, analyse its
current financial structure. The following are the important elements of the company’s
financial 6structure that need proper scrutiny and analysis.

Capital Mix
 Firms have to decide about the mix of debt and equity capital. Debt capital can be
mobilized from a variety of sources. The firms and analysts use debt ratios, debt service
coverage ratios, and the fund flow statements to analyse the capital mix.

Maturity and Priority

The maturity of securities used in the capital mix may differ. Equity is the most
permanent capital. Within debt, commercial paper has the shortest maturity and public debt
longest. Similarly, the priorities of securities also di=ffer. Capitalize Debt like lease or hire-
purchase finance is quiet safe from the lender;s point of view and the value of assets backing
the debt provides the protection to the lender. Colleteralised or secured debts are relatively
safe and have priority over unsecured debt in the event of insolvency. A firm may obtain a
risk- neutral position by matching the maturity of assets and liabilities; that is, it may use
current liabilitries to finance current assets and short- medium and long- term debt for
financimg the fixed asstes in that order of maturities. In practice, firms do not perfactly match
the sources and uses of funds. They may show preference for retained earnings. Within debts,
they may use long- term funds to finance current assets and assets with shorter life. Some
firmas are more aggresive, and they use short- term funds to finance long- term assets.

Terms & Conditions

Firms have choices withregard to the basis of interest payments. They may obtain
loans either at fixed or floating rates of interest. In case of equity, the firm may like to return
income either in the form of large dividends or large capital gains. The firm’s choice of the
basis of payments indicates the management’s assessment about the future interest rates and
the firm’s earnings.

Currency

Firms in a number of countries have the choice of raising funds from the overseas
markets. Overseas financial market provide opportunities to raise large amount of funds.
Accessing capital internationally also helps company to globalize it’s operations fast. Because
international financial markets may not be perfact and may not be fully integrated, firms may
be able to issue capital overseas at lower costs than in the domestic markets.

Financial Innovations

Firms may raise capital either through the issues of simple securites or through the
issues innovative sercurities. Financial innovations are intended to make the security issue
attractive to investors and reduce cost of capital. A firm can issue varieties of option- linked
securities; it can also issue tailor- made securities to large suppliers of capitals.
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for
modern thinking on capital structure. The basic theorem states that, under a certain market
price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency
costs, and asymmetric information, and in an efficient market, the value of a firm is
unaffected by how that firm is financed.[1] It does not matter if the firm's capital is raised by
issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore,
the Modigliani–Miller theorem is also often called the capital structure irrelevance
principle.
Modigliani was awarded the 1985 Nobel Prize in Economics for this and other contributions.
Miller was a professor at the University of Chicago when he was awarded the 1990 Nobel
Prize in Economics, along with Harry Markowitz and William Sharpe, for their "work in the
theory of financial economics," with Miller specifically cited for "fundamental contributions
to the theory of corporate finance."

The theorem was originally proven under the assumption of no taxes. It is made up of two
propositions which can also be extended to a situation with taxes.
Consider two firms which are identical except for their financial structures. The first (Firm U)
is unlevered: that is, it is financed by equity only. The other (Firm L) is levered: it is
financed partly by equity, and partly by debt. The Modigliani–Miller theorem states that the
value of the two firms is the same.

Without taxes
Proposition I: where VU is the value of an unlevered firm = price of buying a firm
composed only of equity, and VL is the value of a levered firm = price of buying a firm that is
composed of some mix of debt and equity. Another word for levered is geared, which has the
same meaning[2].
To see why this should be true, suppose an investor is considering buying one of the two
firms U or L. Instead of purchasing the shares of the levered firm L, he could purchase the
shares of firm U and borrow the same amount of money B that firm L does. The eventual
returns to either of these investments would be the same. Therefore the price of L must be the
same as the price of U minus the money borrowed B, which is the value of L's debt.
This discussion also clarifies the role of some of the theorem's assumptions. We have
implicitly assumed that the investor's cost of borrowing money is the same as that of the firm,
which need not be true in the presence of asymmetric information or in the absence of
efficient markets.
Proposition II:
Proposition II with risky debt. As leverage (D/E) increases, the WACC (k0) stays constant.

• ke is the required rate of return on equity, or cost of equity.

• k0 is the company unlevered cost of capital (ie assume no leverage).
• kd is the required rate of return on borrowings, or cost of debt.
• D / E is the debt-to-equity ratio.

A higher debt-to-equity ratio leads to a higher required return on equity, because of the higher
risk involved for equity-holders in a company with debt. The formula is derived from the
theory of weighted average cost of capital (WACC).
These propositions are true assuming the following assumptions:

• no taxes exist,
• no transaction costs exist, and
• individuals and corporations borrow at the same rates.

These results might seem irrelevant (after all, none of the conditions are met in the real
world), but the theorem is still taught and studied because it tells something very important.
That is, capital structure matters precisely because one or more of these assumptions is
violated. It tells where to look for determinants of optimal capital structure and how those
factors might affect optimal capital structure.

With taxes
Proposition I:

where

• VL is the value of a levered firm.

• VU is the value of an unlevered firm.
• TCD is the tax rate (TC) x the value of debt (D)
• the term TCD assumes debt is perpetual
This means that there are advantages for firms to be levered, since corporations can deduct
interest payments. Therefore leverage lowers tax payments. Dividend payments are non-
deductible.
Proposition II:

where

• rE is the required rate of return on equity, or cost of levered equity = unlevered equity
+ financing premium.
• r0 is the company cost of equity capital with no leverage(unlevered cost of equity, or
return on assets with D/E = 0).
• rD is the required rate of return on borrowings, or cost of debt.
• D / E is the debt-to-equity ratio.
• Tc is the tax rate.

The same relationship as earlier described stating that the cost of equity rises with leverage,
because the risk to equity rises, still holds. The formula however has implications for the
difference with the WACC. Their second attempt on capital structure included taxes has
identified that as the level of gearing increases by replacing equity with cheap debt the level
of the WACC drops and an optimal capital structure does indeed exist at a point where debt is
100%
The following assumptions are made in the propositions with taxes:

• corporations are taxed at the rate TC on earnings after interest,

• no transaction costs exist, and
• individuals and corporations borrow at the same rate

Miller and Modigliani published a number of follow-up papers discussing some of these
issues.
The theorem was first proposed by F. Modigliani and M. Miller in 1958.
 The Bajaj Group came into existence during the turmoil and the heady euphoria of
India's freedom struggle. Jamnalal Bajaj, founder of the Bajaj Group, was a confidante and
disciple of Mahatma Gandhi, and was deeply involved in the effort for freedom. The integrity,
dedication, resourcefulness and determination to succeed which are characteristic of the
Company today, are often traced back to its birth during those long days of relentless devotion
to a common cause.

Today, Rahul Bajaj is the Head of the Group. He has been the Chief Executive Officer
of Bajaj since 1968 and is recognised as one of the most outstanding business leaders in India.
As dynamic and ambitious as his illustrious predecessors, he has been recognised for his
achievements at various national and international fora.

Bajaj is currently India’s largest two and three- wheeler manufacturer and one of the
biggest in the world. They have long left behind their annual turnover of Rs. 70 million
(1968), to currently register an impressive figure of Rs. 40 billion.

COMPANY’ s HISTORY :

1945

- The company was incorporated on the 29th of November in the name of "Bachraj Trading
Corporation, Ltd.".

1960

- On 21st June, the name was changed to Bajaj Auto Pvt Ltd. On 24th August the name again
changed to Bajaj Auto Ltd.

- The Company's main object is to manufacture and marketing of `Bajaj' scooters,

motorcycles and three-wheelers and spare parts thereof.

1966

- 25 forfeited shares reissued. In Jan. 1967, 17,375 Rights shares issued at par in prop. 1:4. In
March 1967, 17,357 Bonus shares issued in prop. 1:5. 65 forfeited shares reissued
subsequently.

1970
- 55 forfeited shares reissued, 52,185 Bonus shares issued in prop. 1:2. 5 forfeited shares
reissued.

1971

- On 31st March the technical collaboration with M/s. Piaggio & Co. expired and the brand
name of the vehicles manufactured by the company was changed from Vespa to Bajaj from
April.

1972

- 120 forfeited shares reissued. 78,340 Bonus Equity shares then issued in prop. 1:2.

1975

- Under the an agreement with Western Maharashtra Development Corporation Ltd., a joint
sector company was incorporated under the name Maharashtra Scooters Limited on 11th June.
Its plant has started manufacture of Scooter in the brand name "PRIYA". A three wheeler
with rear engine was developed and marketed in this period.

- On 2nd February, the company entered into a technical collaboration with P.T. Tunas Bekasi
Motor Co. of Jakarta for providing technical know-how for the manufacture of two wheelers
and three wheelers in Indonesia. It also entered into an agreement with Paijifa Industrial Co.
of Taiwan for manufacture of scooters in Taiwan. 1976- 25 forfeited shares reissued in 1974-
75. In 1976-77, 2, 35, 045 Bonus shares issued (prop. 1:1) Forfeiture of 10 shares annualled.

1979

- Company entered into a technical know how agreement with Menoka Motors Ltd., of
Chittagong for setting up an assembly plant for scooters and three wheelers in Bangalore.

- During the year company's erstwhile collaborators Piaggio & Co. s.p.A, Italy, filing a suit
along with Vespa of America Corporation U.S.A. for damages for alleged breach of contract,
trade mark laws, etc. amounting to Rs. of $ 50 million (equivalent to Rs. 44.15 crores).

- A suit was also filed against the distributors of the company, Zweirad Raoth Gmbh in West
Germany by Vespa GmbH, a subsidiary of Piaggio, praying for prohibiting the distributors
from selling Bajaj Scooters in West Germany.

1980

- During the year the company invested U.S. $ 15,000 in the equity capital of Bajaj America
Incorporated.

- Bajaj Auto Holdings Ltd. and Bajaj Auto Finance Ltd. are subsidiaries of the Company.

1981

- The Bajaj M80 was entirely developed by the company and introduced in the market. The
licensed capacity of 2 wheelers was increased from 80000 to 160000 vehicles per year and
that of 3 wheelers from 15000 to 20000 numbers per annum and scooter CKD packs from
30000 to 32000 numbers per annum.

- During the year the company made a further investment of U.S. $ 15000 in the equity capital
of Bajaj America Incorporated. 1983

- The licensed capacity was increased to 3, 00,000 scooters during the year. The company
entered into two agreements for technical know how. One with Kawasaki Heavy Industries
for the manufacture of motorcycles upto 100cc engines. Another with Vigel Spa of Italy for
the manufacture of special purpose machine tools for Company's own use. During the year the
company issued 15% NCDs worth Rs. 23.40 crores as rights for augmenting long term
resources for working capital requirements. The same is to be redeemed on 31st December

1998.

- 4, 70,000 bonus shares issued in prop. 1:1.

1984

- A suitable electronic ignition system for scooters was developed and introduced on the
"Bajaj-Cub".

- The Company received a Letter of Intent for manufacturing 50,000 three-wheelers at a

location in Uttar Pradesh.

- During the period International Finance Corporation, Washington (USA) sactioned a foreign
currency loan of U S $ 22 million.

- During August-September the company offered 15% non-convertible debentures for Rs.
23.40, crores. The issue was oversubscribed and the Company was allowed to retain an
additional amount of Rs 11.70 crores out of the oversubscribed portion for financing non-
project capital expenditure for replacement, modernization, etc.

- During the period, settlement with Piaggia & Co. s.p.A of the disputes pending in USA was
arrived at and the same was entered in U S District Court of San Fransisco. The settlement
agreement did not provide for any monetary payment by the Company.

1987

- The operations of the Waluj unit was hit on account of suspension of operations from 7th
November followed by lockout strike by workmen. Normal operations were resumed after 6th
July 1988.

- The company signed two agreements for technical assistance, one for electronic components
like magneto and electronic ignition system and another for restyling of rear engine three
wheeler body.

- Shares sub-divided in January 1988. 94, 06,400 bonus shares issued in prop. 1:1 in April

1988.
- The Kawasaki-Bajaj `RTZ' model was launched in February 88. 1988

- The licensed capacity was increased to 10, 00,000 numbers of two wheelers and three
wheelers per annum, through a letter of intent. There was a 7 month strike by the workmen at
the Waluj plant.

1989
- During this period company undertook a project of metal replacement by polymeric
materials in association with Department of Science & Technology and National Chemical
Laboratory.

- A new generation magneto was also under development in collaboration with a Spanish
company and work on the initial design had commenced.

- During this year it entered into a technical collaboration with Orbital Engine Co., Australia
for development of fuel injection system for 150cc scooters to reduce fuel consumption and
emissions.

- The Company developed on its own an 80cc motorcycle under the brand name "Bajaj M-
80".

1990

- The production of `Bajaj Sunny' the new 50cc scooter commenced in March.

- During the year, commercial production of special purpose machine tools for the company's
requirements commenced at Waluj.

- During the year a settlement was arrived at between the company's distributors in West
Germany, Zweirad Raoth Gmbh and Vespa Gmbh which was objecting to the distributors
selling the scooters in W. Germany. They finally agreed to, Scooters being sold with littering
"Made in India".

- The letter of intent for expansion of the licensed capacity at Waluj from 3,00,000 to
10,00,000 two and three wheelers per annum was converted into an industrial license.

1991

- During this period production of a 4 stroke motor cycle in collaboration with Kawasaki
Heavy Industries Ltd. Japan was started at Waluj.

- 188, 12,800 bonus shares issued in prop. 1:1.

1992

- Sales volume dropped by 5% from the previous year due to the transporters' 10 day strike in
July and intermittent labour problems at Waluj.
- Bajaj-Sunny and Kawasaki 4S, were launched at some more centers. Also, an economy
version of KB-100 RTZ, called, "COLT", a 2-stroke 100cc motorcycle was introduced in the
market.

1993

- Bajaj Stride, will be launched with certain improvements based on initial feed back. During
the year `Chetak Classic' a powerful and fuel efficient 4S Champion a highly fuel efficient 4-
Stroke Motorcycle and M-80 Motorcycle with additional utility features were introduced.

1994

- Bajaj Auto is planning to produce two new models in the motorcycle and scooter segment
each. Bajaj Trotter, an 80cc, three gear motorcycle would soon be in the market at an
estimated price of Rs. 20,000.

- 376, 25,600 bonus shares issued in prop. 1:1. 43, 42,676 No. of equity shares underlying
Euro issues allotted.

- The Company proposed to increase the production capacity of two and three wheelers from
12, 72,000 to 20, 00,000 units per year by 1998.

- The company made a GDR issue of US $ 110 million by offering 43, 42,676 equity shares at
an issue price of US $ 25.33 or 794.60 per share. - Bajaj Auto entered into an agreement with
Kubota Corporation of Japan, for technical know-how to manufacture diesel engines
exclusively for 3 wheeler application and non-exclusively for other applications.

- The Golden Jubilee year of the Company, production in two-wheeler alone surpassed the
target and led to a scale of operations only second to Japan in the world.

- The Company entered into an agreement with a Japanese, R & D firm for design of a 74 cc
4-stroke variomalic vehicle

- Some specific technical assignments and/or joint development projects were also undertaken
with AVL, Austria, CSIR, New Delhi and Indian Institute of Petroleum; Dehra Dun.

1995

- During this period Sunny-Zip a 60cc upgraded version of `Bajaj sunny' was launched.
1996

- Company was planning to set up a third manufacturing plant near Pune to house
manufacturing facilities for production of new generation two-wheelers with a production
capacity of 10 lakh vehicles per annum.
- The Company had a busy product development agenda in addition to the present range
include - Cygnet Scooterette, upgraded classic and 4 stroke scooters, up-graded M80, up-
grades and variants of its Kawasaki Motorcycle, on all new 4 stroke Kawasaki motorcycle and
Diesel and 4 stroke petrol engined three wheelers.

- On January a 74cc new look step-through motorcycle was introduced in Pune under the
name `Rave'. During year Co. also launched Bajaj classic and Bajaj Super Excel.

- The Company developed and implemented new 150cc 3-port 2 stroke engines on all
scooters and three wheelers.

- The Bureau Veritas Quality Internationals (BVQI) has awarded ISO 9001 certificate to the
Akurdi Plant. The Motorcycles and Moped Division in Waluj has already received the
certificate in 1994.

- Bajaj Auto Ltd., developed a new four-stroke-motorcycle in collaboration with Kawasaki

Heavy Industries (KHI) Japan.

1997

- The classic SL scooter with anti-dive braking and electric start option was launched
gradually at various centers since September.

- The Company has introduced during the year under review, "Boxer", a 4-stroke motorcycle,
targeted at semi-urban and rural markets.

- 39,796,938 Bonus Equity shares issued in prop. 1:2.

1998

- During the year the Company launched its diesel autoriksha in Andhra Pradesh. The product
was having the features like, high fuel economy, low noise level and better riding comfort.
The engine is manufactured in collaboration with M/s Kubota of Japan. - During the year
company offered attractive financing scheme for purchases of two-wheelers.

- Two-wheeler giant Bajaj Auto Ltd is set to revamp its entire supply chain which would
involve trimming down the number of vendors and a possible relook at the existing dealer
chain.

- Bajaj Auto Ltd., the two and three wheeler major, has for the first time, entered into a
marketing tie-up for scooters with the Italian company, Cagiva.

- Bajaj Auto Ltd., will be launching Classic SL scooters in Karnataka.

- Japan's Kawasaki Heavy Industries (KHI), the technical collaborator of India's largest two
wheeler manufacturer Bajaj Auto Ltd, is likely to source its latest four stroke motorcycle
Kawasaki Caliber from Bajaj's Waluj plant in Aurangabad for Kawasaki's export
requirements.
- The management of Bajaj Auto signed a wage agreement with the Bharatiya Kamgar Sen,
the union representing majority of its workforce, on 21st July.

- The Company has introduced during the year under review, "Boxer", a 4-stroke motorcycle,
targeted at semi-urban and rural markets.

- The Company has entered into an Agreement with National Securities Depository Ltd
(NSDL), for enabling investors to hold and trade in Company's shares in electronic form.

- Bajaj Auto Ltd has tied up with Zee TV to impart maintenance training through television
programmes.

- Bajaj Auto Ltd (BAL), has tied up with Zee Education for a unique six month-long tele-
training programme for lakhs of scooter mechanics across the country.

- Bajaj Auto launched its latest four-stroker, the Caliber motorcycle at its Waluj plant, in
Aurangabad, early last month. Named Kawasaki Caliber, it is the largest-engined Indo-
Japanese four-stroker in India.

- The first four stroke geared scooter in the world, "Legend" was developed in 36 months
from the concept of production.

- "Caliber" a 111 cc four stroke motorcycle took the market by storm and "Spirit" designed in-
house, a two wheeler with an innovative two speed automatic transmission was introduced in
October.

- The Company apart from the introduction of two new 4 stroke vehicles has developed
catalytic converters for its entire range of 2 stroke and three wheelers. Styling upgrades for
Chetak, Super and Classic scooters was introduced in the market.

1999

- Bajaj auto Limited (BAL) is working on a long-term marketing strategy to re-enter the
export market.

- Bajaj Auto Ltd., came out with a new scooter model Bravo.

- The Company received All India Trophy award for highest exporter in 1997-98 -
New/Difficult Market-Non-SSI from Engineering Export Promotion Council.

- Export Excellence Trophy - from Mahratta Chamber of Commerce, Industries and

Agriculture jointly with Joint Director General of Foreign Trade, Pune.

- The company has received National Productivity Award for Automobile Industry instituted
by National Productivity Council consistently for six years from 1991-92.

2000

- Bajaj Auto decided to buy back up to 15 per cent of the paid-up share capital of the company
at a maximum price of Rs. 450 per share.
- Bajaj Auto Ltd launched "India's first three speed, automatic, four stroke Scooter" `Saffire'.

- Bajaj Auto Ltd launched its indigenous, emission-friendly auto rickshaw with a four-stroke
compressed natural gas (CNG) engine.

- Bajaj Auto has stopped production of two-stroke three-wheelers as it has developed four-
stroke auto rickshaws.

- Bajaj Auto was to set up an assembling and painting plant in Italy to market its dominant
brands in Europe.

- Two-wheeler major Bajaj Auto Ltd will be investing Rs 170 crores on promoting new
models of scooters and motorcycles, including upgrades, launched between January 2000 and
June

2001.

- Shareholders of two and three-wheeler major Bajaj Auto Ltd approved the buyback of up to
1.8 crores equity shares of Rs. 10 each at a price of Rs. 400 per share, involving a total outgo
of Rs. 720 crores.

- Due to slow down in demand for scooters, the Company's plant at Akurdi has started a 5 day
week from June 30 and it resumed a six-day week from September, 29 at Akurdi Plant in
Maharashtra.

- The Company had offered to buy-back around 1.8 crores equity shares of Rs 10 each at a
price of Rs 400/- per share.

- The Company has signed an agreement with the workers' union at Waluj on October 11.

- Bajaj Auto has entered into a tie-up with Kasanki of Brazil to set-up a two-wheeler assembly
line in Brazil that will produce and sell its motorcycles for the entire South American market.

2001

- Bajaj Auto has acquired 12 lakh equity shares of Mukand Engineers (MEL) from group
company Mukand Ltd, at a price of Rs 46.50, involving a total outgo of Rs 5 crores.

- Bajaj Auto launched `Kawasaki Bajaj Eliminator', the country's first cruiser motorcycle.

- Bajaj Auto Ltd and Allianz AG have submitted a joint application to the Insurance
Regulatory and Development Authority for joint venture in life insurance.

- Bajaj Auto Ltd has launched Saffire, the 92cc, 4-stroke engine two-wheeler, in Guwahati.

- Bajaj Auto Ltd has launched its Bajaj M-80 Major 4S with a four-stroke engine.

- Bajaj Auto Ltd will launch six new two-wheeler models, including three new motorcycles,
by September-end in a bid to boost sales in the current fiscal.
- The Company bought back 1,82,07,304 No. of equity shares at Rs. 400 per share on 21st
October. - Bajaj Auto has launched a new voluntary retirement scheme to trim its 3000-strong
junior management cadre by a staggering over 40 per cent as part of efforts to boost
profitability.

- Bajaj Auto has hit a major road block with the Bombay High Court asking the company to
reinstate 1,197 temporary workers who were earlier retrenched from its Waluj factory in
Aurangabad.

- Allianz Bajaj Life Insurance Company, a joint venture of Pune-based scooter major Bajaj
Auto and Germany's Allianz Insurance, has launched three products, with the most
competitive premia among all players.

-The Insurance ventures of Allianz, one of the world's leading financial services groups and
Bajaj Auto, India's leading two and three-wheeler manufacturer, announced the launch of
their life and general insurance operations in Pune on October 28.

- Shareholding of foreign institutional investors (FIIs) in Bajaj Auto stands increased at 12.99
per cent as on March 31, 2001, against 10.05 per cent in the previous year.

- Bajaj Auto Ltd (BAL) is expected to reduce its employee strength by around 1,000 at lower
as well as executive levels, after the completion of the recently announced voluntary
retirement scheme (VRS).

2002

- Bajaj Auto is setting up a new product development and testing complex at its Akurdi plant
in Pune, to consolidate its in-house research and development (R&D) capability.

-Bajaj Auto unveiled the 'Boxer AR'touting the bike's ability to "tame any terrain, no matter
how challenging. The revolutionary Kawasaki technology engine (K-TEC) ensures optimum
air-fuel mixture through a new intake and exhaust system. The bike also offers a mileage of
91 kilometers per litre. The bike offers the features such as opto-prism tail light, side
indicators, twin pod speedo-console, stylish graphics and a striking petrol tank,

- Shri Atul Kirloskar has resigned from the Board of Bajaj Auto Ltd and in the casual vacancy
caused by his resignation, Smt Suman Kirolskar has been appointed a Director at the Board
meeting held on October 23, 2002.

2003

-Bajaj Auto Ltd has informed that Shri Naresh Chandra has been appointed as an additional
director at the board meeting held on January 15, 2003.

- Bajaj Auto Limited has floated an overseas office to expand its international business. The
Dubai office, which was opened in Jan '03, will deal with the Middle East and African
markets. The company expects Rs 325 crores exports this year as against previous year's Rs
160 crores.
- Bajaj Auto Ltd has informed the Exchange that Shri D S Mulla has resigned from the board
of Bajaj Auto Limited effective from the closing hours of March 31, 2003.

- Bajaj Auto Ltd has informed that Shri D S Mulla has resigned from the Board of the
company with effect from March 31, 2003.

-Launches Wind 125 bike

-Bajaj tied up with SBI for two-wheeler loans

-Bajaj moves up from number 11 to number 10 in the BS Billionaire rankings in India

-Bajaj Auto Ltd has informed that the shares of the company have been delisted from the
Pune Stock Exchange Ltd (PSE) w.e.f. October 06, 2003 and Delhi Stock Exchange
Association Ltd (DSE) w.e.f. December 10, 2003.

2004

-Bajaj Auto on January 15 unveiled its new corporate logo.

-Bajaj Auto enters global alliance with Kawasaki for Asean safari

-Signs MoU with Andhra Bank to finance two wheeler loans

-Ties up with Corporation Bank to finance two-wheelers of the company

-Baja Auto appoints Sanjiv Bajaj as new Executive Director.

- Bajaj ties up with Orbital Engine for fuel injection systems

-Bajaj Auto Ltd (BAL) has created a network in Japan and Europe

-Bajaj Auto has unveiled its latest offering - the Bajaj 'CT 100', a four- stroke, 100 cc
motorcycles

-Bajaj Auto and Bank of Maharashtra (BoM) have signed a strategic alliance to offer two-
wheeler loans in India.

- Bajaj Auto ropes in popular comedian of Tamil films Vivek to promote entry level model
'Bajaj CT 100' in Chennai.

-Bajaj Auto launches CT 100 in Gujarat

-Sri Siddi Vinayaka Automobiles Ltd (SSVAL), the Hyderabad-based leading dealer of Bajaj
Auto Ltd, has launched `Bajaj CT-100' motorcycle in the Andhra Pradesh market

-Bajaj rolls out 125 cc mobike

-Aptech Ltd has won an order from Bajaj Auto Ltd for its training programme

-BAL ties up with State Bank of Travancore

-Bajaj Auto launches Discover

2005

-Bajaj Auto inks agreement with Approva Corpn

- Bajaj Auto launched its automatic scooter, Wave, in the city at Varun Bajaj on June 4, 2005.
Wave is aggressively priced at Rs 32,700. It is Rs 6,000 less than Honda Activa and Rs 1,000
more than the 60 cc Scooty.

2006

-Bajaj unveils new bike Platina

Company’s Philosophy & belief’s

” We approach our responsibilities with ambition and resourcefulness. We organise ourselves

for a transparent and harmonious flow of work. We respect sound theory and encourage
creative experimentation. And we make our workplace a source of pride.”

Transparency - a commitment that the business is managed along transparent lines.

Fairness - to all stakeholders in the Company, but especially to minority shareholders.

Disclosure - of all relevant financial and non-financial information in an easily understood

manner.

Supervision - of the Company’s activities by a professionally competent and independent

management and board of directors.

Company Overview—

Company belongs to bajaj group, which is amongst the top 10 business houses in India.
Group has presence over a wide range of industries, spanning automobiles, home appliances,
lighting, iron and steel, insurance, travel and finance. 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 in over a dozen countries in Europe, Latin America, the US and Asia.
Company was incorporated on the 29th of November in the name of "Bachraj Trading
Corporation, Ltd on 1945. On 24th August 1960 the name of the company changed to Bajaj
Auto Ltd. Technical collaboration with M/s. Piaggio & Co. expired in 1971 and the brand
name of the vehicles manufactured by the company was changed from Vespa to Bajaj from
April. New generation magneto was developed in collaboration with a Spanish company.
It entered into a technical collaboration with Orbital Engine Co., Australia for development
of fuel injection system for 150cc scooters to reduce fuel consumption and emissions.
Company also developed on its own an 80cc motorcycle under the brand name "Bajaj M-80".
Chetak Classic a powerful and fuel-efficient 4S Champion a highly fuel efficient 4-Stroke
Motorcycle and M-80 Motorcycle with additional utility features were introduced. Company
also launched Bajaj classic and Bajaj Super Excel in 1996. Bureau Veritas Quality
Internationals (BVQI) has awarded ISO 9001 certificate to the Akurdi Plant. Motorcycles and
Moped Division in Waluj already has this certificate from 1994. Company introduced
"Boxer", a 4-stroke motorcycle for semi-urban and rural markets in 1997. Company launched
its diesel auto riksha in Andhra Pradesh in 1998, which was having the features like, high fuel
economy, low noise level and better riding comfort and engine is manufactured in
collaboration with M/s Kubota of Japan. Company has introduced "Boxer", a 4-stroke
motorcycle, to target the semi-urban and rural markets. The first four stroke geared scooter in
the world, "Legend" was developed in 36 months from the concept of production. In 1999 it
came out with a new scooter model Bravo. In 2000, it launched "India's first three speed,
automatic, four stroke Scooter" “Saffire”. It also launched indigenous, emission-friendly
auto rickshaw with a four-stroke compressed natural gas (CNG) engine. Company also
launched four stroke bike“Kawasaki Caliber” motorcycle at its Waluj plant. Later, it launched
“Kawaski Bajaj Eliminator”, the country's first cruiser motorcycle. Company also launched
Saffire, the 92cc, 4-stroke engine two-wheeler, in Guwahati and upgraded version of Bajaj M-
80 Major 4S with a four-stroke engine also launched. In 2003 company launched Wind 125
bike. Company made a tie up with Orbital Engine for fuel injection systems and also launched
its latest offering the Bajaj “CT 100” & “Discover”. Company launched its automatic scooter
Wave last year.

Milestones of the company ----

2005

December Bajaj Discover launched

June Bajaj Avenger launched
February Bajaj Wave launched

2004

Sept/Oct Bajaj Discover DTS-i launched

August New Bajaj Chetak 4 stroke with Wonder Gear launched
May Bajaj CT100 Launched
January Bajaj unveils new brand identity, dons new symbol, logo and
brandline

2003

October Pulsar DTS-i is launched

October 107,115 Motorcycles sold in a month
July Bajaj Wind 125,The World Bike, is launched in India
February Bajaj Auto launched its Caliber115 "Hoodibabaa!" in the
executive motorcycle segment
2001

November Bajaj Auto launches its latest offering in the premium bike
segment ‘Pulsar’
January The Eliminator is launched

2000

The Bajaj Saffire is introduced

1999

Caliber motorcycle notches up 100,000 sales in record time of

12 months
Production commences at Chakan plant.

1998

June 7th Kawasaki Bajaj Caliber rolls out of Waluj

July 25th Legend, India’s first four-stroke scooter rolls out of Akurdi
October Spirit launched

1997

The Kawasaki Bajaj Boxer and the RE diesel Autorickshaw are

introduced

1995

November 29 Bajaj Auto is 50

Agreements signed with Kubota of Japan for the development of

diesel engines for three-wheelers and with Tokyo R&D for
ungeared Scooter and moped development

The Bajaj Super Excel is introduced while Bajaj celebrates its

ten millionth vehicle

One million vehicles were produced and sold in this financial

year
Management Group of Bajaj Auto Ltd.

Chairman Rahul Bajaj

Vice Chairman Madhur Bajaj
Managing Director Rajiv Bajaj
Director Kantikumar R Podar
Director Shekhar Bajaj
Director D J Balaji Rao
Whole- Time Dirctor J N Godrej
Director D S Mehta.
Director J N Godrej
Director S H Khan
Director Suman Kirloskar
Director Naresh Chandra
Director Nanoo Pamnani
Company Secretary J Sridhar
Director Manish Kejriwali
Executive Director Sanjiv Bajaj
Group Companies

Bajaj Auto is the flagship of the Bajaj group of companies. The group comprises of 27
companies and was founded in the year 1926. The companies in the group are:

Bajaj Auto Ltd.

Mukand Ltd.
Bajaj Electricals Ltd.
Bajaj Hindustan Ltd.
Maharashtra Scooters Ltd.
Bajaj Auto Finance Ltd.
Hercules Hoists Ltd.
Bajaj Sevashram Pvt Ltd.
Bajaj Sevashram Pvt Ltd.
Hind Lamps Ltd.
Bajaj Ventures Ltd.
Bajaj International Pvt Ltd.
Hind Musafir Agency Pvt Ltd.
Bajaj Allianz General Insurance Company Ltd.
Bajaj Allianz Life Insurance Company Ltd
Mukand International Ltd.
Mukand Engineers Ltd.
Mukand Global Finance Ltd.
Bachhraj Factories Pvt. Ltd.
Bajaj Consumer Care Ltd.
Bajaj Auto Holdings Ltd.
Jamnalal Sons Pvt. Ltd.
Bachhraj & Company Pvt. Ltd.
Jeevan Ltd.
The Hindustan Housing Co Ltd.
Baroda Industries Pvt Ltd.
Stainless India Ltd.
Bombay Forgings Ltd.
SHAREHOLDING PATTERN OF BAJAJ AUTO LIMITED

[ Share Holding Patterns as on : 31/12/2005 ]

Share Holding Patterns No. Of SharesPercentage (%)

Total Foreign 21086196 20.84

Total Institutions 8819731 8.72
Total Govt Holding 0 0
Total Non Promoter Corporate Holding 13924230 13.76
Total Promoters 30144517 29.79
Total Public & Others 27208836 26.89

Totals 101183510 100

Share Holding Pattern as 31/03/2006 31/12/2005 30/09/2005

on :
FaceValue 10.00 10.00 10.00
No. Of % No. Of % No. Of %
Share Holder
Shares Holding Shares Holding Shares Holding
PROMOTER'S HOLDING
Foreign Promoters 0 0.00 0 0.00 0 0.00
Indian Promoters 30135802 29.78 30135802 29.78 30135977 29.78
Person Acting in Concert 8490 0.01 8490 0.01 8490 0.01
Sub Total 30144292 29.79 30144292 29.79 30144467 29.79
NON PROMOTER'S HOLDING
Institutional Investors
Mutual Funds and UTI 2360340 2.33 2169476 2.14 1633590 1.61
Banks Fin. Inst. and 5633513
5.57 5413199 5.35 5843290 5.77
Insurance
FII's 19648242 19.42 20076196 19.84 20128565 19.89
Sub Total 27642095 27.32 27658871 27.34 27605445 27.28
Other Investors
Private Corporate Bodies 13680744 13.52 13596384 13.44 13542330 13.38
NRI's/OCB's/Foreign 622989 0.62 607818 0.60 598882 0.59
Others
GDR/ADR 2320561 2.29 2304793 2.28 2513139 2.48
Directors/Employees 0 0.00 0 0.00 0 0.00
Government 0 0.00 0 0.00 0 0.00
Others 0 0.00 0 0.00 0 0.00
Sub Total 16624294 16.43 16508995 16.32 16654351 16.46
General Public 26772829 26.46 26871352 26.56 26779247 26.47
GRAND TOTAL 101183510 100.00 101183510 100.00 101183510 100.00
FINANCIAL LEVERAGE
 Financial Leverage refers to the amount of debt financing (that pays a fixed return) in a
company’s capital structure. Companies with financial leverage are said to be TRADING ON
THE EQUITY. This indicates that the company is using equity capital as a borrowing base in
a desire to reap excess returns. The main findings of financial leverage are :–

1. An unlevered company’s return on aassets is identical to its return on equity.

2. A levered company successfully trades on equity when return on assets exceeds the
after- tax cost of debt ( or return on assets is less than return on equity ).

3. A levered company treads unsuccessfully on the equity when the return on assets is
less than the after- tax cost of debt ( i.e. return on assets exceeds return on equity ).

4. Effect of leveraging are magnified in both good and bad years ( for example, when
return on assets drops below the after- tax cost of debt, a levered company’s return on
equity drops even farther ).

Other reason for the advantageous position of debt is the tax deductibility of interest.
Beyond the advantages of excess return to financial leverage and the tax deductibility of
interest, a long- term debt position can yield other benefits to equity holders. For example, a
growth company can avoid earnings dilution through issuance of debt. In addition, if the
interest rate are increasing, a levered company paying a fixed lower interest rate is more
profitable than its nonlevered competitors. Strategically increasing debt capital prior to
adverse operating perfomance is often advantageous to the borrower because availbility or
cost of debt financing likely changes. Finally, in times of inflation, monetary liabilities ( like
most debt capital ) yield price- level gains.

The effect of financial leverage on operating results is positive when the return on
equity capital exceeds the return on assets.

FINANCIAL LEVERAGE INDEX

 One measure of the effect financial leverage is the financial leverage index. It is
calculated as :

Financial Leverage Index = Return On Common Equity / Return On Assets

A financial leverage index greater than 1.0 indicates favorable effects from leverage, a
value less than 1.0 suggests unfavorable effects from leverage, and a value of exactly 1.0
suggests neither favorable nor unfavorable effects.

Here, in case of Bajaj Auto Ltd., their financial leverage index in all the five years is
more than 1.0. This indicates that the company is leveraging effectively.
FINANCIAL LEVERAGE INDEX

Financial Leverage
Index= ReturnOn Comman Equity
Return On
Assets

Year 2000-01 2001-02 2002-03 2003-04 2004-05

Return On Equity 10.33 15.94 17.63 21.1 19.59

8.333809 14.9229 13.1939 15.566228

Return On Assets 4 5 2 4 14.30258

Year 2000-01 2001-02 2002-03 2003-04 2004-05

1.239529 1.06815 1.33622 1.3554985 1.36968295

Financial Leverage Index 2 3 2 5 2
FINANCIAL LEVERAGE RATIO

The financial leverage measures the ralation between total assets and the coomon equity
capital that finances assets. It is expressed as :

Financial Leverage Ratio = Total Assets / Common Equity Capital

For a company successfully utilizing leverage, higher financial leverage ratio enhances return
on equity. Concurrently, the risk inherent in a change in profitability is greater when the
financial leverage ratio is higher.
FINANCIAL LEVERAGE RATIO

Financial Leverage
Ratio == Total Assets
Comman
Equity Capital

Year 2000-01 2001-02 2002-03 2003-04 2004-05

Total Assets (%) 3150.24 3491.87 4080.82 4699.34 5361.34

Comman Equity Capital (%) 2636.53 2865.77 3240.6 3693.62 4134.35

Year 2000-01 2001-02 2002-03 2003-04 2004-05

Financial Leverage 1.19484 1.218475 1.259279 1.272285 1.296779

Ratio 3 3 1 7 4
DEBT – EQUITY RATIO TREND OF BAJAJ AUTO LTD.

2003- 2004-
Year 2002-01 2001-02 2002-03 04 05

Debt-Equity ratio 0.17 0.21 0.24 0.27 0.29

The debt- equity trend of companies show what exactly is the amount of debt in
comparison of equity present in their capital structure. Here the Debt- Equity ratio of Bajaj
Auto Ltd. is increasing year by year. This show that by the passing of year the company is
relying more on equity in their Capital Structure as compared to debt. So the amount of debt
as compared to equity is increasing.
TOTAL EQUITY CAPITAL TO DEBT RATIO

Capital structure ratios are another means of solvency analysis. Ratios measures of capital
structure relate components of capiatl structure to each other or their total. When we look
upon creditors point of view, they prefer lesser Equity Capital to Debt Equity ratio. Smaller
total equity to debt equity ratio emphaiszes that owners contribute a smaller share of financing
as compared to the debtors.

Equity Capital to Total Debt Ratio is calculated as :--

E.Q. to T.D. Ratio = Shareholder’s Equity

Total Debt

For example, here in the case of Bajaj Auto Ltd., total equity capital to debt ratio shows that
the contribution of shareholder’s equity is much more in the company as compared to the
debtor’s contribution. This implies that the company believes in the policy of financing its
project by using most of their own funds.

As for example ratio in the year 2000-01 is 3.3695; this means that for every one crore of debt
financing company is utilizing 3.3695 crores of its own equity and funds. Same is the case in
rest of the years.

But alongside we can see that total equity capital to total debt ratio is decreasing year by year.
This trend shows that year by year company is increasing share of debt in their capital
structure. The reason might be that by passing of time company is getting debt at a cheaper
rate in the market, it is utilizing this opportunity and therby reaping rich profit.
EQUITY CAPITAL TO TOTAL DEBT RATIO

Equity Capital
To
Total Debt Shareholder's
Ratio = Equity
Total Debt

2000- 2001- 2002- 2003-

Year 01 02 03 04 2004-05

Shareholder's 2636.5 2836.7 3693.6

Equity 3 7 3240.6 2 4134.35

1055.7
Total Debt 513.71 626.1 840.22 2 1226.99

2000- 2001- 2002- 2003-

Year 01 02 03 04 2004-05

5.1323 4.5308 3.8568 3.4986 3.36950586

Equity Capital To Total Debt Ratio 3 6 5 7 4
TIME INTEREST EARNED RATIO

In situations, where fixed charges not yet incurred are recognized in computing the earning to
fixed charge ratio ( such as interest costs under a prospective debt issuance ), it is acceptable
to estimate ofsetting benefits expected from these future cash inflows and include them in pro
forma earnings. Benefits derived from prospective debt can be measured in several ways,
including interest savings from a planned refunding activity, income from short- term
investments where proceeds can be invested, or other reasonable estimates of future benefits.

Another earnings coverage measure is the times interest earned ratio. This ratio considers
interest as the only fixed charge needing earnings coverage :

Times Interest Earned Ratio = Income + Tax Expense + Interest Expense

Interest Expense

The times interest earned ratio is a simplified measure. It ignores most adjustments to both the
numerator and denominator. While its computation is simple, it is potentially misleading and
not as effective an analysis tool as the earning to fixed charges ratio.

TIME INTEREST EARNED RATIO

Time Interest Earned Ratio = Income + Tax Expense + Interest Expense

Interest Expense

2000-
Year 01 2001-02 2002-03 2003-04 2004-05

Income 3978.1 4489.3 5103.58 5944.17 712.32

Tax Expense 26.64 183.32 249.84 228.55 319.27

Interest Expense 7.39 3.38 1.12 0.94 0.67

 T im e In te re s t C o v e rag e R a tio

8000
6000
Ratio

4000
2000
0
20 20 20 20 20
00- 01- 02- 03- 04-
01 02 03 04 05 Tim e Interes t
E arned R atio
Ye a r ==
INTEREST COVERAGE RATIO

Interest coverage ratio shows how any company has been maintaining its debt- servicing
ability and how it has been employing debt to take advantage of interest tax shield. The
companies whose interest coverage ratio is high is supposed to have very good debt servicing
ability.

Here, in case of Bajaj Auto Ltd., their interest- coverage ratio is increasing in multiples year
after year. This shows that the company is using its debt very effectively so as to take
advantage of interest tax shield. The company has been leveraging its debt cleverly and been
able to reap high profit.

INTEREST COVERAGE RATIO

Year 2000-01 2001-02 2002-03 2003-04 2004-05

Interest Cover Ratio 45.97 176.39 704.8 1022.34 1622.01

ALTMAN’S Z -- SCORE

A common use of financial statement analysis is identifying the areas that needs
further investigation or analysis. One of these is predicting FINANCIAL DISTRESS. Models
of financial distress, commonly referred to as BANKRUPTCY PREDICTION MODELS,
examine the trend and behavior of selected ratios. Characteristic of these ratios are used in
identifying the likelihood of future financial distress. Models presume that evidence of
distress appears in financial ratios and that we can detect it sufficiently early for us to take
actions to avoid risk of loss or to capitalize on this information.

The most well-known model of financial distress is ALTMAN’s Z – Score. Altman’s

z- score uses multiple ratios to generate a predictor of distress. Altman’s z- score uses a
statistical technique (multiple discriminant) to produce a predictor that is a linear function of
several explanatory variables. This predictor classifies or predicts the likelihood of
bankruptcy or non-bankruptcy. Five financial ratios are included in the Z – score :

1. X 1 = Working Capital / Total Assets.

2. X 2 = Retained Earning / Total Assets.
3. X 3 = Earning Before Interest & Tax / Total Assets.
4. X 4 = Shareholder’s Equity / Total Liability.
5. X 5 = Sales / Total Assets.

X1, X2, X3, X4, and X5 are viewed as reflecting :

 1. Liquidity,
2. Age of Firm & Cumulative Profitability,
3. Profitability,
4. Financial Structure, and
5. Capital Turnover Rate, respectively.

The Altman’s Z – score is computed as :

Z = 0.717 *X 1 + 0.827 * X 2 + 3.107 * X 3 + 0.420 * X 4 + 0.998 X 5

A Z- score of less than 1.20 suggests a high probability of bankruptcy, while Z- score
above 2.90 imply a low probability of bankruptcy. Scores between 1.20 and 2.90 are in the
gray or ambiguous area.

Although Altman’s Z- score is a useful mean of predicting financial distress, yet it is

not proved evidence that a Z- score is a better means of analyzing long-term solvency than is
the integrated use of other analysis tools.

ALTMAN's Z -- SCORE

Altman's
Z --
score = 0.707 * X 1 + 0.847 * X 2 + 3.107 * X 3 + 0.420 * X 4 + 0.998 * X 5

Year 2001 2002 2003 2004 2005

Working Capital 587.3 335.3 214.4 273 437.5

Total Asset 3150.24 3491.87 4080.82 4699.34 5361.34

Retained Earning 2535.35 2764.59 3139.42 3592.44 4033.17

Earning Before Interest & Tax 269.59 707.79 789.38 961 1086.75

Shareholde's Equity 2636.53 2865.77 3240.6 3693.62 4134.35

Total Liabilities 3150.24 3491.87 4080.82 4699.34 5361.34

Sales 3588 4125.6 4744.4 5418.5 6541.6

X1= Working Capital 0.18643 0.096023 0.05253846 0.05809326 0.0816027
Total Asset

X2= Retained Earning 0.804812 0.791722 0.76931107 0.76445629 0.752269

Total Asset

Earning Before Interest &

X3= Taxes 0.085578 0.202697 0.19343661 0.2044968 0.2027012
Total Asset

X4= Sharehlder's Equity 0.83693 0.820698 0.79410511 0.78598697 0.7711412

Total Liabilities

X5= Sales 1.138961 1.181487 1.16260948 1.15303426 1.2201427

Total Asset

Altman's
Z -- score 2.569429 2.893032 2.78409251 2.80536162
---->> 1 5 1 1 2.86705535

In the case of Bajaj Auto Limited company their Altman’s Z- score comes in between
1.2 to 2.9 i.e. it lies in the region of gray area. However the score is nearly equal to 2.9.
However the score is nearly equal to 2.9 which shows its low probability of bankruptcy. Also
the score is increasing year by year which means that the company is going towards safer side
day by day. So we can predict that Bajaj Auto Ltd. is a growing company which will give
better result in the future.
RECOMMENDATIONS & CONCLUSION :

After going through such a lively thesis which gave me an inside picture of “Bajaj Auto Ltd.”
I came to know about various capital structure policies that the company have been following
since it came into existence on 29th of November 1945 in the name of "Bachraj Trading
Corporation, Ltd.". Bajaj Auto Ltd. is mainly a family owned and run business which is doing
excellent in two- wheeler market ever since its incorporation. Though the company is taking
more debt from market now, but company’s retained earning ( Reserves & Surplus ) has been
increasing year by year. Where in the financial year 2000-01 it was Rs. 2535.35 crores, it has
increased to Rs. 4033.17 crores in the financial year 2004-05. Shareholder’s equity has also
increased considerably ( from Rs. 2636.53 crores in financial year 2000-01 to Rs. 4134.35
crores in financial year 2004-05. If we look upon all these factors then I would suggest that
the company should try to utilize its reserves & surpluses for financing its future projects
which it is going to undertake. Recently the company is planning to expand its business to a
large extent. In that case my recommendation would be that first of all the company should try
to use its own funds rather than going for debt. After utilizing its retained income the second
preference for the company should be going from debt from market. The company has got
very good Time- Interest coverage ratio. So it can avail debt from market at a very cheap
interest rate.

But, in no case, the company should collect funds by diluting its own equity. As the profit of
the company is very high, so by doing so the company would be bound to share there own
share of profit. Also, since Bajaj Auto Ltd. is a family owned business, by liquidating their
equity they would expose their own control in the hands of others, which nobody wants to do
as every human on earth wants to have power lying on its own hands. So, the company should
not liquidate its shareholder’s equity for collection of funds to promote its future projects.

BIBLIOGRAPHY

 www.Bajajauto.com

 www.indiainfoline.com

 www.equitymaster.com

 www.valuenotes.com

 www.geojit.com

 www.myiris.com

 www.ventureline.com

 www.investorwords.com

 www.EzineArticles.com

 www.TheManageMentor.com

 www.maharishiinstituteofmanagement.com
  www.InvestorDictionary.com

 www.investsmartindia.com

 Fundamenals Of Corporate Finance [Ross-Weterfield-Jordan]

 Corporate Finance [Khan & Jain]

 Financial Staement Analysis [I.M. Pandey]

 Financing & Dividend Decisions

 Bajaj Auto Ltd.’s Anuual Reports

ANNEXTURE

Balane Sheet

(Rs. In Crores)
Particulars Mar 05 Mar 04 Mar 03 Mar 02 Mar 01
Share Capital 101.18 101.18 101.18 101.18 101.18
Reserves & Surplus 4,033.17 3,592.44 3,139.42 2,764.59 2,535.35
Total Shareholders Funds 4,134.35 3,693.62 3,240.60 2,865.77 2,636.53
Secured Loans 0.00 0.00 53.91 31.83 55.97
Unsecured Loans 1,226.99 1,005.72 786.31 594.27 457.74
Total Debt 1,226.99 1,005.72 840.22 626.10 513.71
Total Liabilities 5,361.34 4,699.34 4,080.82 3,491.87 3,150.24
Gross Block 2,747.68 2,710.66 2,632.86 2,536.13 2,467.82
Less: Accum. Depreciation 1,611.14 1,479.18 1,327.97 1,171.79 1,127.89
Net Block 1,136.54 1,231.48 1,304.89 1,364.34 1,339.93
Capital Work in Progress 8.35 8.27 4.01 3.96 22.42
Investments 4,560.58 3,855.44 2,729.89 1,966.07 1,184.58
Inventories 224.17 202.56 207.98 179.10 253.44
Sundry Debtors 176.35 133.95 167.04 198.17 120.72
Cash and Bank Balance 108.68 79.37 30.03 25.20 21.34
Loans and Advances 2,153.44 1,753.38 1,818.14 1,632.82 1,666.12
Current Liabilities 997.87 911.64 695.37 690.99 467.55
Provisions 2,008.90 1,653.47 1,485.79 1,199.60 1,006.79
Net Current Assets -344.13 -395.85 42.03 144.70 587.28
Miscellaneous Expenses not w/o 0.00 0.00 0.00 12.80 16.03
Total Assets 5,361.34 4,699.34 4,080.82 3,491.87 3,150.24
Contingent Liabilities 540.89 509.32 508.81 470.72 359.56

Key Ratios

Bajaj Auto Ltd

Change Company

Liquidity Ratios
Year Mar 05 Mar 04 Mar 03 Mar 02 Mar 01
Debt-Equity Ratio 0.29 0.27 0.24 0.21 0.17
Long Term Debt-Equity Ratio 0.29 0.26 0.23 0.19 0.15
Current Ratio 0.87 0.92 1.02 1.19 1.32
Turnover Ratios
Fixed Assets 2.41 2.04 1.85 1.66 1.60
Inventory 30.78 26.53 24.67 19.17 13.98
Debtors 42.32 36.18 26.15 26.01 23.48
Interest Cover Ratio 1622.01 1022.34 704.80 176.39 45.97
Operating Profit Margin(%) 19.37 20.95 20.12 18.71 14.37
Profit Before Interest And Tax Margin(%) 16.55 17.65 16.53 14.38 9.44
Cash Profit Margin(%) 14.50 16.74 14.86 14.91 13.31
Adjusted Net Profit Margin(%) 11.68 13.43 11.28 10.58 8.39
Return On Capital Employed(%) 21.60 21.89 20.88 18.03 9.94
Return On Net Worth(%) 19.59 21.10 17.63 15.94 10.33
Profit & Loss Account

(Rs. In Crores)

Mar 03Mar 02Mar 01Particulars

Sales Turnover Mar 05Mar 04 6,566.54 5,444.87 4,774.48 4,146.75 3,597.95
Other Income 573.88 488.71 296.53 372.95 365.99
Stock Adjustments -11.10 10.59 32.57 -30.40 14.13
Total Income 7,129.32 5,944.17 5,103.58 4,489.30 3,978.07
Raw Materials 4,077.25 3,192.47 2,709.78 2,269.29 2,026.03
Excise Duty 818.99 680.66 600.80 532.25 574.83
Power & Fuel Cost 54.79 62.51 61.12 63.64 71.03
Other Manufacturing Expenses 121.27 102.29 97.77 144.40 171.97
Employee Cost 298.09 264.02 283.84 237.95 324.37
Selling and Administration Expenses 379.23 348.42 307.43 265.42 263.96
Miscellaneous Expenses 127.43 176.73 102.81 112.07 99.58
Less: Preoperative Expenditure Capitalised 19.84 23.82 20.51 23.21 27.58
Profit before Interest, Depreciation & Tax 1,272.11 1,140.89 960.54 887.49 473.88
Interest & Financial Charges 0.67 0.94 1.12 3.38 7.39
Profit before Depreciation & Tax 1,271.44 1,139.95 959.42 884.11 466.49
Depreciation 185.36 179.89 171.16 179.70 177.29
Profit Before Tax 1,086.08 960.06 788.26 704.41 289.20
Tax 319.27 228.55 249.84 183.32 26.64
Profit After Tax 766.81 731.51 538.42 521.09 262.56
Adjustment below Net Profit -37.65 6.88 -3.78 -2.93 -12.61
P & L Balance brought forward 0.00 0.00 0.00 0.00 0.00
Appropriations 729.16 738.39 534.64 518.16 249.95
P & L Bal. carried down 0.00 0.00 0.00 0.00 0.00
Equity Dividend 252.96 252.96 141.66 141.66 80.95
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Corporate Dividend Tax 35.48 32.41 18.15 0.00 8.26
Equity Dividend (%) 250.00 250.00 140.00 140.00 80.00
Earning Per Share (Rs.) 72.28 69.09 51.42 51.50 25.13
Book Value 408.61 365.05 320.28 283.23 260.58
Extraordinary Items 65.36 30.30 -18.20 82.56 -39.15

Financial Summary

(Rs. In Crores)
Key Financials
Year End MMMM
aaaa
rrrr

0000
5432

Net SalesMar 01 6,566.54 5,444.87 4,774.48 4,146.75 3,597.95

Operating Profit 1,272.11 1,140.89 960.54 887.49 473.88
Net Profit 766.81 731.51 538.42 521.09 262.56
Equity Cap.Pd 101.18 101.18 101.18 101.18 101.18
Cashflow Analysis
MMMM
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Year End
0000
5432

NOPATMar 01 767.28 732.23 539.19 523.59 269.27

Operating Cash Flow 455.49 837.21 573.38 660.67 206.02
Free Cash Flow 707.29 979.00 714.51 741.41 324.94
Key Operating Ratios
MMMM
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rrrr
Year End
0000
5432

EPS(Rs)Mar 01 72.28 69.09 51.42 51.50 25.13

Book Value(Rs) 408.61 365.05 320.28 283.23 260.58
CEPS(Rs.) 90.60 86.87 68.34 69.26 42.66
NPM(%) 11.68 13.43 11.28 10.58 8.39
OPM(%) 19.37 20.95 20.12 18.71 14.37
ROCE(%) 21.60 21.89 20.88 18.03 9.94
ROE(%) 19.59 21.10 17.63 15.94 10.33
Debt/Equity 0.29 0.27 0.24 0.21 0.17
Interest Cover 1,622.01 1,022.34 704.80 176.39 45.97
Valuation Ratios
MMMM
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rrrr
Year End
0000
5432

P/EMar 01 14.96 13.20 9.33 9.10 10.25

P/BV 2.65 2.50 1.50 1.66 0.99
P/CEPS 11.94 10.50 7.02 6.77 6.04
EV/EBIDTA 9.48 8.90 5.90 6.02 6.54
Market Cap./Sales 1.67 1.69 1.02 1.14 0.72
Dupont Model
MMMM
aaaa
rrrr
Year End
0000
5432

PBIDT/Sales(%)Mar 01 19.37 20.95 20.12 21.40 13.17

Sales/Net Assets 1.22 1.16 1.17 1.19 1.15
PBDIT/Net Assets(%) 0.24 0.24 0.24 0.26 0.15
PAT/PBIDT(%) 60.28 64.12 56.05 58.72 55.41
Net Assets/Net Worth 1.30 1.27 1.26 1.21 1.19
ROE(%) 19.59 21.10 17.63 15.94 10.33