Recommendation: Hold
CMP = Rs 2,080
Price target: Rs 2,635
Key points:
- The courts have approved Bajaj Auto Ltd (BAL)'s demerger. March 14, 2008 is the ex-date for the price adjustment and March 25, 2008 is the record date for finalisation of the list of shareholders to be allotted shares in the two other companies. From March 14 BAL would trade on the price attributed to Bajaj Holdings & Investments Ltd (BHIL; also the new name for BAL).
- For every one share held in the existing BHIL, the shareholders would get one share of the new BAL of Rs 10 each and one share of Bajaj Finserv Ltd (BFSL) of Rs 5 each. The new BHIL will hold 30% stake in both the new BAL and BFSL, which are expected to get listed by May 2008.
- From 14 March 2008 the price of the existing BAL will get adjusted to that of the existing BHIL. Sum-of-the-parts (SOTP) calculation attributes a value of Rs 1,044 per share to the existing BHIL.
- I have fine-tuned estimates for FY2008 and FY2009 on account of a change in the company's product mix, its higher other income and lower tax rate. The stock is currently trading at 16.6x its FY2009E earnings and 11.6x its EV / EBITDA.
- I continue to value the stock using the SOTP valuation method and maintain Hold recommendation with a price target of Rs 2,635.
