Ever since the Bajaj Auto management announced details of the ‘call option’ that its insurance joint ventures partner Allianz SE has, the sentiment on the stock has turned bearish.
MUMBAI: Ever since the Bajaj Auto management announced details of the ‘call option’ that its insurance joint ventures partner Allianz SE has, the sentiment on the stock has turned bearish.
The company’s share price has tumbled almost 15% or about Rs 500, since the announcement around 3 pm on Thursday, as a flurry of brokerages pressed the ‘Sell’ button.
To wit:
Manishi Raychaudhuri and Govind Agarwal, analysts at UBS, downgraded the share, as did Govindarajan Chellappa of Credit Suisse.
Citigroup’s Jamshed Dadabhoy cut the price target by 10% to Rs 2,600, while Amit Kasat of Motilal Oswal said the demerger will dilute value for minority shareholders.
Balaji Jayaraman and Deepak Gupta of Morgan Stanley said the call option was disappointing, but they were not revising earnings estimates for the current fiscal “as the management guidance was in line with our estimates.”
Anupam Gupta of CLSA Asia Pacific Markets keeps an ‘Outperform’ on the share, with a sum-of-parts value of Rs 2,529. He said though the stock may correct in the short term, the auto and insurance companies will re-rate later.
The reasons for those disappointed were not hard to seek. The stakes are very high considering that the two insurance businesses were being valued anywhere between Rs 10,000-15,000 crore (based on 2007-08 earnings and certain assumptions on profit margins). In other words, it reflected a value of over Rs 900 per share of Bajaj Auto, considering Bajaj’s stake at 74% each in the two businesses.
Rajeev Varma and Aashish Agarwal of Merrill Lynch, in a February 2, 2007 report, had valued the life insurance business at Rs 12,384.30 crore, based on certain assumptions and performance of 2007-08.
Who’s right on the button here?
ICICI Securities analyst Shilpa Gupta is a contrarian. In a report titled “Golden Opportunity” on Friday, she has maintained a ‘buy’ on Bajaj Auto.
“We believe the stock price overreacted…. We believe a 74% foreign equity stake is highly unlikely even as the regulation allowing an increase to 49% foreign equity stake — which has met strong opposition from the Left — may eventually come through.”
That’s exactly what Abhijeet Naik and Amit Agarwal of Kotak Institutional Research, in their report on Friday, said. Naik and Agarwal have set a price target of Rs 2780 for the share, quite close to what yet another broking house, First Global, has estimated -- Rs 2800.
This includes a core business value of Rs 1861 per share, Bajaj Alliance Life Insurance stake value at Rs 467 per share, Bajaj Alliance General Insurance stake value at Rs 102 per share, and equity investments at Rs 350 per share.
ICICI Securities’ Gupta values the life and general insurance businesses at Rs 597 and Rs 74, respectively. (Earlier, at 74% stake each in the two insurance businesses, the values were Rs 866 and Rs 99, respectively, according to her.)
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