Bajaj Auto: Evaluating the Working Capital Requirements


Themes: Strategy
Pub Date : 2009
Countries : India
Industry : Financial Management & Corporate Finance

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Case Code : FM0021
Case Length : 13 Pages
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Bajaj Auto: Evaluating the Working Capital Requirements

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"Companies operating in industries like FMCG and automobiles have been able to manage working capital efficiency and, thus, create value for shareholders by way of high ROCE."1

- Jigar Shah, Director, KR Choksey (Brokerage firm)

Bajaj Auto: Evaluating the Working Capital Requirements

Over the past two decades, the Indian automobile industry has grown leaps and bounds, at a Compound Annual Growth Rate (CAGR) of 9%. At present, it is the second-largest two-wheeler and fourth-largest commercial vehicle manufacturer in the world. The automotive industry in India is intensely competitive and highly fragmented, with number of players operating in more than one segment of the industry. The nature of the industry accounts for high capital expenditures and may not generate high returns on the capital invested, but over the past few years, the players in this industry have been giving high returns to shareholders and operating on negative working capital. One such dominant player in the auto industry, Bajaj Auto is experiencing negative working capital for the past 5 years and giving high returns to its shareholders. However, since the impact of working capital fluctuations depends on the nature of the industry, for how long can Bajaj Auto continue to have negative working capital?

Indian Automobile Industry: An Overview

The automobile sector is a key driver of industrial growth in the global and Indian economy. According to the Organization International des Constructeurs d'Automobiles,s 2006, annual turnover of the global auto industry is around $5.09 trillion, which is equivalent to the sixth largest economy in the world.2 Moreover, the industry is an indirect contributor to several other sectors of the economy and it is treated as a leading economic sector. The Indian automotive industry is distinguished as a key component and core driver of national economy. Over the decades, the industry has undergone rapid transformation, witnessed enormous prospects and emerged as most attractive markets in the world.

During 1980s, there were very few players in the Indian automotive sector with low volumes of production, old and substandard technologies. The industry took a new dimension when Indian government de-licensed and opened up the industry to Foreign Direct Investments (FDIs) in 1993 which encouraged many global players to enter the Indian auto industry. Further, economic liberalisation reforms contributed to the robust growth of the industry. At that time, a total of 17 new ventures came up which included General Motors, Ford, Toyota, Honda, Hyundai and Fiat, resulting in rapid expansion and growth of the industry.

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1]"Investing in working capital management";,, April 2nd2006
2]Narayanan Badri G. and Vashisht Pankaj, "Determinants of Competitiveness of the Indian Auto Industry1",, January 2008