Sucheta Dalal :The curious case of Maharashtra Scooters (30 September 2002)
Sucheta Dalal

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The curious case of Maharashtra Scooters (30 September 2002)  

Maharashtra Scooters Ltd (MSL) is a joint sector company in which the Maharashtra government owns a 27 per cent stake through Western Maharashtra Development Corporation (WMDC). Bajaj Auto is the private sector partner with a 24 per cent stake and Rahul Bajaj has been its chairman for decades. In line with the national trend, the State has indicated that it wants to get out of scooter manufacturing and encash its equity. That ought to be simple enough. All joint sector companies give the private sector partner the first right to buy out the State. And Rahul Bajaj has made it clear that he wants to buy out the WMDC holding.

In fact, WMDC cannot get a buyer other than Bajaj Auto. That’s because MSL, merely assembles Bajaj scooters from CKD kits supplied by Bajaj Auto. The latter also carries out all product development, innovation, sales and distribution. But there is a catch. The catch is in valuing WMDC’s 27 per cent stake. MSL not only operated like a division of Bajaj Auto but like its investment firm.

Over the years, it has invested 50 per cent of its networth and nearly 65 per cent of its intrinsic value into buying Bajaj Auto shares through open market purchases. Its Rs 154 crore investment portfolio now holds 33,87,036 shares of Bajaj Auto along with some minor investment in mutual funds and debt securities. If the decision is controversial, it is one that Rahul Bajaj defends vehemently. That’s because MSL has only benefited from those investments.

But the divestment by WMDC is attracting attention for two reasons. First, that a bunch investors from Kolkata invested heavily in the stock based on Rahul Bajaj’s comment to the media that MSL may be merged with Bajaj Auto after he acquired control. The scrip shot up from a paltry Rs 18.80 in August 2001 to a high of Rs 107. Later, Bajaj said that he might only transfer MSL’s assets to Bajaj Auto. And then, at MSL’s annual general meeting in July, he categorically ruled out a merger. He also said at the meeting that, “The future of MSL is bleak. The delay in selling government’s stake to Bajaj Auto is only eroding the marketcap of Maharashtra Scooters”.

MSL’s price immediately began to dip and is now around Rs 64. Retail investors are now hoping to realise some value from MSL’s large holding of Bajaj Auto shares when WMDC divests its holding. They point out that unless the value of this holding is taken into account, Bajaj Auto gets access to a Rs 200 crore cashflow, most of it neatly invested in its own stock. But they may be arguing a weak case. Bajaj argues that the price that Bajaj Auto pays WMDC is to be decided between him and the corporation; retail investors have no say in the matter. This too is correct. Unless Bajaj pays WMDC a 25 per cent premium to market price, the transaction is an inter se transfer between promoters and does not require an open offer to minority shareholders.

The Maharashtra government however seems to have wanted independent advice and roped in CRISIL to value MSL shares. CRISIL has valued the shares at Rs 200 each on the basis of a break-up valuation. The rating agency has pointed out that the sale of Bajaj Auto stock held by MSL would greatly enhance the value of MSL’s equity and has factored this into its valuation. (MSL’s average purchase cost for Bajaj Auto shares is under Rs 240 while its market price is around Rs 400). But there is another catch. The Memorandum of Association signed between WMDC and Bajaj Auto says [154 (2)] that the Board of Directors of MSL cannot decide on certain specified matters if either the Bajaj nominee or the WMDC nominee objects to it.

Rahul Bajaj is very clear that he will indeed veto any move to sell Bajaj Auto stock from MSL’s investment portfolio. In which case the entire holding would have little value. He has also disagreed with CRISIL’s valuation (which is not binding on him) saying that since MSL is not going to be liquidated a break-up valuation is unfair. While Crisil has valued MSL shares at Rs 200, it has noted the nature of the Bajaj Auto—WMDC agreement and has recommended that the two promoters negotiate the final price by themselves. But Bajaj has opened his negotiations with an offer of Rs 50 per share, which is about a quarter of the CRISIL valuation. He has even ruled out paying a three-digit price for MSL shares, but is willing to permit WMDC to gradually sell its holding in the open market.

After all, he has nothing to lose by setting such terms. WMDC cannot find another buyer for its holding and if it sells in the market, the price is bound to collapse. The only losers will be the large Kolkata investors who rushed to buy MSL stocks in the hope that a merger or divestment would give them a bonanza. Incidentally, Bajaj justifies his stand on another count too. MSL not only has a bleak future, but it has almost no future without Bajaj Auto. The slow down in the scooter industry and the shift in consumer preference to motorcycles has had its impact and MSL can stay afloat only if Bajaj has the flexibility to rationalise and restructure its production facilities. In which case, MSL’s large cash reserves, built up by investing in Bajaj Auto shares will help it weather the downturn and restructure operations.

There is another issue. Scooters assembled at MSL attract an additional sales tax of Rs 384 on supplies of completely knocked down kits but have to be sold at an identical prices to those made at Bajaj Auto—and this is such a constant irritant that he had even threatened to stop supplying CKDs to MSL. But he hasn’t done so. Just as he is clear, that no matter what the problems, there will be no question of taking MSL into liquidation. In the end, WMDC may be forced to hang on to its investment in MSL and forever regret not having negotiated an exit when MSL was quoting a four times the price today and Bajaj had actually offered to buy it out.

-- Sucheta Dalal