Date:20/05/2007 URL: http://www.thehindubusinessline.com/2007/05/20/stories/2007052003830200.htm

Two negative surprises in Bajaj demerger

D. Murali

Chennai May 19 There is sufficient anecdotal evidence to suggest that any demerger normally unlocks value. However, the Bajaj announcement has two key negative surprises, Mr Amitabh Chakraborty, President (Equity), Religare Securities Ltd, Mumbai, told Business Line.

Firstly, the three-way split instead of a vertical demerger was not expected, he says. "More importantly, the call option to Allianz in the insurance business, is a big negative surprise."

Allianz has a call option to increase its stake in their life insurance joint venture from 26 per cent currently to 74 per cent at a pre-determined formula (at par value plus annual interest of 16 per cent on the invested capital). "Allianz has time to exercise the call option until 2016 and it is likely the option will be exercised," he reasons.

"Bajaj Allianz is the second largest private insurance company in India. Its value to Bajaj shareholder, as per our calculation was close to Rs 800, which now will fall by about Rs 500," estimates Mr Chakraborty. "All along we have factored an effective holding of Bajaj Auto in the insurance joint ventures at 50 per cent (assuming Allianz had a call option to increase the stake to 50 per cent)."

Post this announcement, his outlook for the stock is that it should trade at about Rs 2,200. "A good level to buy the stock," says Mr Chakraborty.

"We see value in individual entity and recommend our clients to buy the stock at around Rs 2,200, for about 20-25 per cent upside over a 12-month period."