BAJAJ AUTO LIMITED
ANNUAL REPORT 2006-2007
CHAIRMAN'S REPORT
To
Dear Shareholder,
Over two years have passed since I handed over the management of your
Company to Rajiv rural as the Managing Director, Sanjiv Bajaj as the
Executive Director, and their team. I am happy to say that the team has
continued to perform well - as I expected they would. The management has
unveiled a challenge that of being 'Distinctly Ahead', and their philosophy
has been outlined in this year's Management Discussion and Analysis
As always, I shall begin by highlighting the key elements of your Company's
performance.
* Bajaj Auto sold over 2.72 million vehicles in 2006-07 - a record in
itself, and 19 per cent higher than the previous year.
* Your Company sold 238 million motorcycles in 2006-07 - an increase of
over 24 per cent compared to the previous year, versus an overall market
growth of 14.5 per cent.
* Consequently, For the seventh successive year, Bajaj Auto raised its
market share in motorcycles this time from under 31 per cent in 2005-06 to
over 33 per cent in 2006-07.
* Gross sales increased by 24 per cent to an all time high in excess of
Rs.106 billion.
* Operating EBITDA (earnings before interest, taxes, depreciation and
amortisation) increased from Rs.13.7 billion in 2005-06 to Rs.143 billion
in 2006-07. Your Contrary's operating EBITDA margin of 15 per cent of
operating income continues to be the highest in the industry
* Profit after tax (PAT) increased by over 12 per cent to Rs.12.38 billion
in 2006-07, and earnings per share (EPS) grew from Rs.111 in 2005-06 to
Rs.122 in 2006-07
These are good results especially so in a market that was beset by high
input costs in the first half and then slowed down considerably in the last
quarter of the year. The first three quarters of 2006-07 showed buoyant
growth, much in line with what the industry experienced over the last four
years. Thereafter, because of the sharp tightening of non-food credit by
the Reserve Bank of India and all commercial banks and non banking finance
companies, demand growth slackened.
I think of this slaw down as a temporary aberration India has grown in
excess of 9 per cent over the last two years, the compound annual GDP
growth over the last four is well over 8 per cent, and I expect the country
to continue growing equally rapidly over the foreseeable future. Thus, as
inflation eases off, non-food credit growth will perforce bounce back to
its 30 per cent annual growth rates And your Company with its brand new 1
million motorcycles per annum capacity at Pantnagar (Uttarakhand) will be
ideally placed to ride this growth.
In my letter to you last year, I had outlined my vision for Bajaj Auto by
2010. It involved:
* Mobilising India - by supplying 4 million motorcycles out of a projected
market of 10 million
* Globalising India by rapidly enhancing exports and international
facilities to become among the three largest global players in two
wheelers.
* Financing India by ramping up Bajaj Auto Finance's operations
* De-Risking India - by expanding the group's insurance business across the
land.
Let me share with you how far we have progressed on each of these
In 2006-07, your Company sold over 238 million motorcycles. We have to,
therefore, significantly ramp up sales Is achieve the 4 million target in
the next few years. I believe that it can be done Bajaj Auto has an
excellent portfolio of products - from the 100 cc Platina, to the 125 cc
and 135 cc Discover, to the 150 cc, 180 cc, 200 cc and 220 cc Pulsar to
name some. A new bike will be launched shortly which the management
believes could well be a block-buster. My kudos to the R&D team for having
created a portfolio of well accepted products that allows your Company to
occupy key positions at all price points. And, with the Pantnagar plant, it
now has the capacity to substantially increase production.
I need to share with you my admiration for the management team in the way
in which it has set up your Company's Pantnagar plant. With an investment
of only Rs.1.5 billion (R5.150 crore), Real Auto set up a state-of the-art
1 million motorcycle per year unit in lust eleven months' time. Moreover,
in a pioneering manufacturer vendor relationship, the Pantnagar plant is
being supported by a cluster of 16 key vendors who are wholly integrated
with the manufacturing process. Consequently, Pantnagar mill operate as a
sees inventory plant. I compliment your Company's process engineering team
to have conceived such an excellently integrated project, and to have
implemented it in record time.
Regarding 'Globalising India', I am truly proud of your Company's
international achievements Exports, which formed a mere 4 per cent of sales
in 1999-2000 have now grown to 18 per cent, or Rs.16.9 billion Your Company
continues to be India's largest exporter or two - and three-wheelers. In
volume terms, Bajaj Auto's motorcycle exports grew by 82 per cent to
300,656 In 2006 07, and three-wheelers increased by 87 per cent to 140,645
vehicles. There have been many firsts sales of over 150,000 two and three-
wheelers in Sri Lanka, and of over 100,000 vehicles within a single
financial year in Latin America. Moreover, in addition to an assembly plant
in Nigeria, Bajaj Auto has established a 95 per cent owned joint venture in
Indonesia which, in the coming years, will play a key role in expanding the
Company's footprint in South-East Asia. Exports will continue to grow, and
I am confident of the management achieving the target for 2010 that I had
set out last year
As far as 'Financing India' is concerned, I believe that the group is yet
to adequately leverage the enormous business opportunities in the retail
and consumer lending space. Towards the end of this letter, I will share
with you how this value can be unlocked in the years ahead, and what is
needed to enable Banal Auto Finance to substantially widen its operations
in the country.
Insofar as 'De-Risking India' goes, I am very happy with the performance of
the group insurance companies. Both Banal Allianz Life and Bajaj Allianz
General have grown rapidly, and occupy the number two position in the
industry within the private sector Banal Allied, General has been earning
profits. My compliments to the two CEOs for their excellent performance,
along with my exhortation that they must do even better in the years to
come.
That brings me to something that I have been occasionally thinking aloud
over the last few years - separation of your company's financial assets
from its auto business. The case for doing so rests on three linked
propositions.
* First, that there is substantial additional value to be unlocked in
having a lean and purely focused auto business.
* Second, in today's economic environment, that there are significant
Truces in having a pure play consumer finance bus new which, in addition to
the traditional auto loans, also operates in other parts of the growing
retail financing space.
* Third, that the sum of the values of de-merged entities will be greater
than that of the whole.
On 17 May 2007, your Board of Directors concurred with all the three
propositions and recommended a de-merger subject to the approval of
shareholders and the Bombay High Court.
The gist of the be merger is as follows:
1. The auto business with all its assets will be hived off as a separate
listed entity. This pure play auto company will retain the name Bajaj Auto
Limited
2. There will be a new financing business, which will have in its
portfolio Bajaj Auto's holdings of the two insurance companies as well as
Bajaj Auto Finance and few other assets like the wind power project. This
company is going to be called Bajaj Finserv Limited
3. The existing company - minus its de-merged auto and finance assets -will
coexist and retain most of your Company's surplus cash and investments to
either financially support the auto and / or finance businesses, or explore
newer business opportunities. The company will be named Bajaj Holdings and
Investment Limited.
Full details of the proposed de-merger and scheme of arrangement will be
made available to you shortly, for you to express your opinions at the
appropriate shareholders' meeting.
On your behalf, allow me to once again congratulate your Company's
management team and all its employees for achieving good results. But, as I
always do, let me also remind them that their self stated task of being
'Distinctly Ahead' has just begun.
Rahul Bajaj
Chairman