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. Name of Table Page No.

1. Shareholding Pattern of Bajaj Auto Ltd.

29

2. Financial Leverage Index 333. Financial Leverage Ratio 354. Debt – Equity Ratio Trend 365. Equity Capital to Total Debt Ratio 386. Time- Interest Coverage Ratio 407. Interest Coverage Ratio 418. Altman’s Z – Score 44

S. No. Content Page Number

1. Abstract 12. Acknowledgement 33. List Of Contents 44. List Of Tables 45. Introduction 5 – 66. Definition 7 7. Factors Affecting Capital

Structure8 – 12

8. Bajaj Auto Limited 13 – 299. Ratios & Trends 30 – 4110. Altman’s Z – Score 42 – 4510 Recommendations 4611. Bibliography 4712. Annexture 48 - 52

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.

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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 taxesProposition 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 developmentof 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-friendlyauto rickshaw with a four-stroke compressed natural gas (CNG) engine. Company alsolaunched 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 launchedJune Bajaj Avenger launchedFebruary Bajaj Wave launched

2004

Sept/Oct Bajaj Discover DTS-i launchedAugust New Bajaj Chetak 4 stroke with Wonder Gear launchedMay Bajaj CT100 LaunchedJanuary Bajaj unveils new brand identity, dons new symbol, logo and brandline

2003

October Pulsar DTS-i is launchedOctober 107,115 Motorcycles sold in a monthJuly Bajaj Wind 125,The World Bike, is launched in IndiaFebruary 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 monthsProduction commences at Chakan plant.

1998

June 7th Kawasaki Bajaj Caliber rolls out of WalujJuly 25th Legend, India’s first four-stroke scooter rolls out of AkurdiOctober 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 BajajVice Chairman Madhur BajajManaging Director Rajiv BajajDirector Kantikumar R PodarDirector Shekhar BajajDirector D J Balaji RaoWhole- Time Dirctor J N GodrejDirector D S Mehta.Director J N GodrejDirector S H Khan Director Suman Kirloskar Director Naresh Chandra Director Nanoo PamnaniCompany Secretary J SridharDirector Manish KejriwaliExecutive 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 LtdMukand 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 20.84Total Institutions 8819731 8.72Total Govt Holding 0 0Total Non Promoter Corporate Holding 13924230 13.76Total Promoters 30144517 29.79Total Public & Others 27208836 26.89

Totals 101183510 100

Share Holding Pattern as on :

 31/03/2006  31/12/2005  30/09/2005

FaceValue  10.00  10.00  10.00

Share HolderNo. Of Shares

% Holding

No. Of Shares

% Holding

No. Of Shares

% Holding

PROMOTER'S HOLDINGForeign 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 HOLDINGInstitutional InvestorsMutual Funds and UTI  2360340  2.33  2169476  2.14  1633590  1.61

Banks Fin. Inst. and Insurance

 5633513  5.57  5413199  5.35  5843290  5.77

FII's  19648242  19.42  20076196  19.84  20128565  19.89

Sub Total  27642095  27.32  27658871  27.34  27605445  27.28

Other InvestorsPrivate Corporate Bodies  13680744  13.52  13596384  13.44  13542330  13.38

NRI's/OCB's/Foreign Others

 622989  0.62  607818  0.60  598882  0.59

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

Return On Assets 8.3338094 14.92295 13.19392 15.5662284 14.30258

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

Financial Leverage Index 1.2395292 1.068153 1.336222 1.35549855 1.369682952

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 Ratio 1.194843 1.2184753 1.2592791 1.2722857 1.2967794

DEBT – EQUITY RATIO TREND OF BAJAJ AUTO LTD.

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.

Year 2002-01 2001-02 2002-032003-04

2004-05

Debt-Equity ratio 0.17 0.21 0.24 0.27 0.29

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 EquityTotal 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 Ratio =

Shareholder's Equity Total Debt

Year2000-01

2001-02

2002-03

2003-04 2004-05

Shareholder's Equity 2636.53 2836.77 3240.6 3693.62 4134.35

Total Debt 513.71 626.1 840.22 1055.72 1226.99

Year2000-01

2001-02

2002-03

2003-04 2004-05

Equity Capital To Total Debt Ratio 5.13233 4.53086 3.85685 3.49867 3.369505864

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 ExpenseInterest 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

Year2000-01 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

Time Interest Coverage Ratio

02000400060008000

2000-01

2001-02

2002-03

2003-04

2004-05

Year

Ratio

Time InterestEarned Ratio==

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, and5. 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

X 1 = Working Capital 0.18643 0.096023 0.05253846 0.05809326 0.0816027

Total Asset

X 2 = Retained Earning 0.804812 0.791722 0.76931107 0.76445629 0.752269

Total Asset

X 3 =Earning Before Interest & Taxes 0.085578 0.202697 0.19343661 0.2044968 0.2027012

Total Asset

X 4 = Sharehlder's Equity 0.83693 0.820698 0.79410511 0.78598697 0.7711412

Total Liabilities

X 5 = Sales 1.138961 1.181487 1.16260948 1.15303426 1.2201427

Total Asset

Altman's Z -- score ---->> 2.5694291 2.8930325 2.784092511 2.805361621 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 01Share 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 RatiosYear Mar 05 Mar 04 Mar 03 Mar 02 Mar 01Debt-Equity Ratio 0.29 0.27 0.24 0.21 0.17Long Term Debt-Equity Ratio 0.29 0.26 0.23 0.19 0.15Current Ratio 0.87 0.92 1.02 1.19 1.32Turnover RatiosFixed Assets 2.41 2.04 1.85 1.66 1.60Inventory 30.78 26.53 24.67 19.17 13.98Debtors 42.32 36.18 26.15 26.01 23.48Interest Cover Ratio 1622.01 1022.34 704.80 176.39 45.97Operating Profit Margin(%) 19.37 20.95 20.12 18.71 14.37Profit Before Interest And Tax Margin(%) 16.55 17.65 16.53 14.38 9.44Cash Profit Margin(%) 14.50 16.74 14.86 14.91 13.31Adjusted Net Profit Margin(%) 11.68 13.43 11.28 10.58 8.39Return On Capital Employed(%) 21.60 21.89 20.88 18.03 9.94Return On Net Worth(%) 19.59 21.10 17.63 15.94 10.33

Profit & Loss Account

(Rs. In Crores)

Mar 03Mar 02Mar 01ParticularsSales 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 FinancialsYear End M

ar

Mar

Mar

Mar

05

04

03

02

Net SalesMar 01 6,566.54 5,444.87 4,774.48 4,146.75 3,597.95Operating 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 101.18 101.18 101.18 101.18 101.18Cashflow Analysis

Year End

Mar 05

Mar 04

Mar 03

Mar 02

NOPATMar 01 767.28 732.23 539.19 523.59 269.27 Operating Cash Flow 455.49 837.21 573.38 660.67 206.02Free Cash Flow 707.29 979.00 714.51 741.41 324.94 Key Operating Ratios

Year End

Mar 05

Mar 04

Mar 03

Mar 02

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

Year End

Mar 05

Mar 04

Mar 03

Mar 02

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 6.04EV/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 ModelYear End MMMM

ar 05

ar 04

ar 03

ar 02

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