Introduction

Bajaj Auto is a major India Automobile manufacturer. It is India's largest and the world's 4th

largest two- and three-wheeler maker. It is based in Pune, Maharashtra, with plants in Akurdi and

Chakan (near Pune),Waluj and Patnagar in Uttaranchal. Bajaj Auto makes and exports motor

scooters, motorcycles and the auto rickshaw.

Over the last decade, the company has successfully changed its image from a scooter

manufacturer to a two wheeler manufacturer. Its product range encompasses scooters and

Motorcycles. It’s real growth in numbers has come in the last four years after successful

introduction of a few models in the motorcycle segment.

The company is headed by Rahul Bajaj who is worth more than US$1.5 billion.

Bajaj Auto came into existence on November 29, 1945 as M/s Bachraj Trading Corporation

Private Limited. It started off by selling imported two- and three-wheelers in India. In 1959, it

obtained license from the Government of India to manufacture two- and three-wheelers and it

went public in 1960. In 1970, it rolled out its 100,000th vehicle. In 1977, it managed to produce

and sell 100,000 vehicles in a single financial year. In 1985, it started producing at Waluj in

Aurangabad. In 1986, it managed to produce and sell 500,000 vehicles in a single financial year.

In 1995, it rolled out its ten millionth vehicle and produced and sold 1 million vehicles in a year.

Quick facts

•Founder - Jamnalal Bajaj

•Year of Establishment -1926

•Industry Automotive - Two & Three Wheelers Business

•Group -The Bajaj Group

•Listings & its codes BSE - Code: 500490; NSE - Code: BAJAJAUTO

•Presence: Distribution network covers 50 countries.

SWOT Analysis

Let's analyze the position of Bajaj in the current market set-up, evaluating its strengths,

weaknesses, threats and opportunities available.

Strengths

Highly experienced management.

Product design and development capabilities.

Extensive R & D focus.

Widespread distribution network.

High performance products across all categories.

High export to domestic sales ratio.

Great financial support network (For financing the automobile)

High economies of scale.

High economies of scope.

Weaknesses

Hasn't employed the excess cash for long.

Still has no established brand to match Hero Honda's Splendor in commuter segment.

Not a global player in spite of huge volumes.

Not a globally recognizable brand.

Threats

The competition catches-up any new innovation in no time.

Threat of cheap imported motorcycles from China.

Margins getting squeezed from both the directions (Price as well as Cost)

TATA Ace is a serious competition for the three-wheeler cargo segment.

Opportunities

Double-digit growth in two-wheeler market.

Untapped market above 180 cc in motorcycles.

More maturity and movement towards higher-end motorcycles.

The growing gearless trendy scooters and scooterette market.

Growing world demand for entry-level motorcycles especially in emerging markets.

Manufacturing Locations

1. Akurdi, Pune

This is one of the oldest plant of bajaj auto ltd with production capacity of 0.6 million vehicles/

year. The plant has been closed in order to equip for four wheeler production

2. Bajaj Nagar, Waluj Aurangabad

This is second plant with production capacity of 0.86 million/ year.products manufactured here

are Kristal, XCD and platina andcommerial GC series

3. Chakan Industrial Area, Chakan , Pune

This is the biggest plant of bajaj auto Production Capacity of 1.2 million/ year , Product

manufactured here are pulsar and avenger and commercial Ge series

4. Pantnagar , Uttarakhand

The most advanced plant of bajaj auto .It has Capacity of 0.9 million vehicles per year . product

manufactured here are platina and XCD.

Exports (Geographically)

The increased presence in Africa was primarily due to growth in Nigeria, Uganda, Angola and

Kenya. Bajaj Auto has initiated a major brand-building effort in Africa for the Boxer, which

involves creating exclusive branded outlets for the customers in terms of sales and after-sales

services.

Sales in South Asia (excluding India) grew by 4%. The slowdown in Sri Lanka for three of the

four quarters was more than compensated by growth in Bangladesh. Due to the fall-out of the

financial crisis, South-East Asia had a negative growth of 14%. The Company’s subsidiary in

Indonesia, PT BAI, clocked sales of 11,954 units.

Working Capital

Working capital is a financial metric which represents operating liquidity available to a business,

organization, or other entity, including governmental entity. Along with fixed assets such as

plant and equipment, working capital is considered a part of operating capital. Net working

capital is calculated as current assets minus current liabilities.

It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs

(Discounted cash flows). If current assets are less than current liabilities, an entity has a working

capital deficiency, also called a working capital deficit.

Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities

A company can be endowed with assets and profitability but short of liquidity if its assets cannot

readily be converted into cash. Positive working capital is required to ensure that a firm is able to

continue its operations and that it has sufficient funds to satisfy both maturing short-term debt

and upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

Working capital management involves the relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital management is to ensure that a firm is able to

continue its operations and that it has sufficient ability to satisfy both maturing short-term debt

and upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable, and cash.

Factors determining the working capital requirements

1. Nature or Character of the Business: The working capital requirements of a firm basically

depend upon the nature of the business. For instance, Public utility undertakings require small

amount of working capital, while, trading and financial firms require relatively large amounts of

working capital and manufacturing undertakings require sizable amount of working capital

2. Size of the Business/Scale of Operations: The working capital requirement of a company is

directly influenced by its size of the business or scale of the operations. The larger the size of a

business unit, greater is the amount of working capital required

3. Production Policy: The amount of working capital required also depends on the production

policy of the company. If the policy is to keep steady flow of production by accumulating

inventories, then it requires high amount of working capital

4. Manufacturing Process/Length of Production Cycle: In a manufacturing business, the amount

of working capital increases in direct proportion to length of manufacturing process. Longer the

manufacturing process, larger is the amount of working capital required

5. Seasonal Variations: In certain industries raw material is not available throughout the year.

Generally, during the peak season, a firm requires larger working capital than in the slack season

6. Working Capital Cycle: The length of the operating cycle determines the working capital of a

company. If the operating cycle is lengthy, then the amount of working capital required is large

and vice versa

7. Rate of Stock Turnover: There is a high degree of inverse co-relationship between the

quantum of working capital and the speed with which the sales are affected

8. Credit Policy: A concern that purchases its requirements on credit and sells its

products/services on cash requires lesser amount of working capital as there is immediate cash

generated from sales

9. Business Cycles: During the boom period, larger amount of working capital is required due to

increase in sales, rise in prices, optimistic expansion of business, etc., and vice versa

10. Earning Capacity and Dividend Policy: Company with good earning capacity requires less

working capital cash inflows. In case of high dividend paying firms more working capital is

required, as dividends are always paid in cash to the shareholders resulting in cash outflows.

Significance of Working Capital Management of Bajaj Auto

There are two concepts of working capital – gross working capital and net working capital. Gross

working capital refers to the firm’s investment in current assets (assets which can be converted

into cash within an accounting year. For example, cash, short-term securities, debtors’ bills

receivable and stock). The difference between current assets and current liabilities can be termed

as net working capital. There can be a negative working capital or positive working capital. A

negative working capital occurs when a company’s current liabilities exceed current assets or

which means that the company is unable to clear off its current obligations on due date. When

current assets exceed current liabilities, it can be termed as positive working capital.

Working capital management refers to the management of all the components like – cash,

marketable securities, receivables and payables, etc., which are short-term in nature. The main

purpose of working capital is to determine the level and composition of current assets and to

ensure that the current liabilities are paid off on time. As such, it depends on the nature of the

industry and company’s size as to what amount of working capital should be maintained by the

company. However there are some ratios which can be used to estimate the working capital

requirements

On observing the working capital of Bajaj Auto Ltd., from 2005–2009; it is evident that the

company had a negative trend, i.e., (-6770) in 2005, (-12258.5) in 2006, (-17345) in 2007 and (-

2157.8) in 2008) and in 2009, it showed (-1561.80).

Estimating Bajaj Auto Ltd.’s Working Capital Requirements

The basic formulae for calculating working capital is the difference between current assets and

current liabilities (working capital = current assets – current liabilities). However, there are few

approaches which have been successfully applied in practice.

1. Current assets holding period: To estimate working capital requirements on the basis of

average holding period of current assets and relating them to costs based on the company’s

experience in the previous years. This method is essentially based on the operating cycle

concept.

2. Ratio to sales: To estimate working capital requirement as a ratio of sales on the assumption

that current assets change with sales.

3. Ratio to fixed investment: To estimate working capital needs as a percentage of fixed

investment.

Note: All the amounts are mentioned in million.

1. Current assets holding period:

Calculating the 12 months average holding period of current assets,

(a) Inventory:

• Raw material (one month’s supply)

= Raw material consumed in a year (2009)/12

= 1,077.5/12 = 89.79 or 90

• Work-in-progress (2009) (one month’s supply)

= Work-in-progress/12

=120.3/12 = 10.025

• Finished goods3 (2009) (one month’s supply)

=Finished goods/12

= 2206.4/12 = 183.86

Total inventory needs are = 90 + 10.025 + 183.86 = 283.885

(b) Sundry Debtors (2009) (one month’s sales):

= Annual sales/12

Sales (2008–2009) = 90,497

Therefore, 90,497/12 = 7,541.4

(c) Cash and bank balances (one month’s total cost):

=Total Product cost4/12

It is assumed that 50% of other expenses and depreciation are directly related to production,

= (64,615.7 + 6216.75 + 653.10)/12

= 71,485.55/12

= 5957.12

Therefore, by adding (a), (b) and (c), we get the working capital requirement

= 283.885 + 7541.4 + 5957.12

= 13,782.405

However, this method is subject to error if the business is prone to seasonal fluctuations.

2. Ratio to Sales:

The average percentage is calculated based on the assumption that sales of next FY

2010 will grow by 4%

It is assumed that in FY 2010, increase in sales is 4%. Hence, the sales in FY 2010 is 90,497 ×

104% = 94,117 million

Average sales growth = Sales growth rate over past three years/number of years

= [4.0 (FY2009) + (7.8) (2008) + 14.5 (2007)]/3

= 3.56 or 4%

Therefore, the amount of working capital requirement is 29% of sales (2009), INR 94,117

million, which is 27,294 million.

This approach has limited reliability because it depends on the accuracy of sales estimation. In

case of inaccurate sales estimation, the percentage calculation of current assets to sales will go

wrong and hence the working capital requirement will also go wrong.

3. Working capital ratio of Fixed Investment:

This method is generally not used in practice as this method also depends on the level of

accuracy of fixed investments calculation. However, it is observed that every approach of

estimating working capital requirements have some limitations. It depends on the nature of the

industry and company’s capability in managing current assets which determine the working

capital requirements.

Profits during recession

2008-09 has been a tumultuous year for the global economy. The year began with a continuation of a world-wide inflationary spiral and ended with the worst slowdown since the Great Depression of the 1930s. While India did not face a contraction in GDP growth like the USA, the Euro zone, the UK and Japan, it has witnessed a 250 basis point compression in growth rate - from 9% in 2007-08 to an expected 6.5% or thereabout in 2008-09.

The second half of 2008-09 has seen severe financial distress across broad sections of Indian industry-especially the manufacturing sectors. Companies have got re-rated; have scrapped investment plans and capital expenditure; cut down capacities; struggled with finances because of their earlier over- leveraged positions; delayed payments to vendors; and had to borrow funds at prohibitive interest rates.

Cash Flow Statement

Cash, the most liquid asset, and also referred to as the life blood of a business enterprise is of

vital importance to the daily operation of business firms. Its efficient management is crucial to

the solvency of business because cash is the focal point of the fund flow in a business. ‘Cash’

refers to the cash as well as bank balance of the company to the end of the accounting period, as

reflected in the balance sheet of the company. While the profits reflects the earning capacity of

the company and cash reflects its liquidity position.

Cash Flow is the movement of cash and its equivalents. It includes the inflow and the outflow of

cash during a particular period. All transactions which lead to increase in cash and cash

equivalents are classified as inflows of cash and all those transactions which lead to decrease in

cash and cash equivalents are classified as outflows of cash.

Introduction of Cash Flow Statement

Cash Flow Statement is a statement that shows flow of cash and cash equivalents during a

period. Cash Flow Statement is prepared with an objective to highlight the sources and uses of

cash and cash equivalents for a period. Cash Flow Statement is classified under operating

activities, investing activities and financing activities.

Cash from operating activities includes the cash effects of those transactions which lead to

calculation of net profit or loss such as cash receipts from sale of goods & rendering of services,

royalties, fees, commission & other revenue and cash payments to suppliers, employees, and

cash relating to future contracts for dealing purposes.

Cash from investing activities include transactions involving purchase and sale of long-term

productive assets like machinery, land and building and cash payments for capitalized research

and development costs.

Cash from financing activities includes cash proceeds from issue of shares, debentures and other

short-term borrowings, payment of dividend and cash repayments of the amounts borrowed.

The Cash Flow statement of Bajaj Auto Ltd. shows that net cash at the end of financial year is

increasing at a deliberate pace. This is because Cash from operating activities are increasing due

to increase in non-cash and non-operating items such as depreciation, preliminary expenses,

goodwill written off, interest on borrowing and debentures, loss on sale of fixed assets etc. and

decrease in current assets and increase in current liabilities. Cash from investing activities depicts

that more cash is invested in the Purchase of an asset (assets can be land, building, equipment,

marketable securities, etc.) for last 3 years. Cash from financing activities is increasing which

depicts that the company is raising its funds through bonds and stock.