The KTM – Bajaj Auto Crisis: Some Insights

If you are a motorcycle enthusiast like me, you may like this brief analysis, and more so, if you are interested in corporate strategy or investing.

Bajaj Auto, the two-wheeler giant, is one of the many Indian multinationals that have expanded their footprint in the Western markets through acquisitions or equity partnerships with global brand leaders.

It counts motorcycle makers - the 300-year-old Swedish brand Husqvarna and the iconic Austrian brand KTM as its part ownerships and significant manufacturing successes on Indian soil.

Lately, KTM motorcycles have been in the news for technical issues and dropping sales. Of course, KTMs are made not only in India but also in China (by CF Moto) and at its two plants in Austria. So this is not necessarily an Indian production problem, but it certainly is an Indian corporate problem with its potentially dire financial and strategic repercussions.

KTM AG is now in self-administration, and facing insolvency.

My note provides some insights into what this means for Bajaj Auto.?

(1)???Bajaj Auto ownership in KTM

Bajaj Auto Ltd. effectively owns 39% equity capital of Pierer Mobility AG, which includes KTM, Husqvarna, GASGAS and the other motorbike businesses at the current value of A$ 876 million.

The details are as follows:

As per the last financial report (YE 31/3/2024), Bajaj Auto Ltd. had in its books investment worth Rs.48.2 billion (A$ 876 million) in 49.9% equity capital of Pierer Bajaj AG.

Pierer Bajaj AG owns 78.2% equity capital of in Pierer Mobility AG, which owns not only KTM, but also Husqvarna, MV Agusta and GasGas motorcycles and some other businesses like FELT bicycles and 49% ownership of KTM China in partnership with CF Moto to manufacture sub 1000cc KTM bike manufacture cum European distribution rights.

Remember that BAL part-owns several motorcycle brands of Pierer Mobility AG, not just KTM.

(2)???How the Financials Look Like?

We already know about KTM’s technical issues and dropping sales. So let’s jump over to the dollars.

First have a look at a quick historical comparison of Bajaj Auto and Pierer Mobility:

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The table shows that BAL has been historically larger and tremendously more profitable than KTM’s parent company Pierer Mobility.

In 2024, Pierer Mobility’s sales growth has been negative 27% (mostly contributed by KTM, Husqvarna and GasGas selling lesser units). In the six month period Jan-Jun 2024, it made a loss of A$ 279 million in that period.

On the contrary, Bajaj Auto has continued doing well in 2024. Its first half year current financial year performance has shown sales increase of 11% and profit increase of 18%.

Pierer Mobility’s other weakness is it’s A$ 2,400 million debt which bears an average interest cost of 4.3% i.e. an annual interest burden of A$ 104 million. To pay this interest, it will have to borrow more money.

(3)???What is the Damage for Bajaj Auto?

The ongoing KTM crisis has four implications for Bajaj Auto:

(i) Accounting for Share of Loss in Pierre Mobility. Bajaj Auto has already accounted for its share of loss in Pierre Mobility ?- this sum is A$ 106 million. This is not a one-off item, but it is an operating loss, which will continue to recur until things are set right.

(ii) Investment Write-off. A part of this A$ 876 million investment will face a write-off in Bajaj Auto balance sheet because the loss-making Pierer Auto will be valued lower at the year end.

(ii) Further Risky Investment. If Bajaj Auto and their 50.1% Austrian partners decided to revive KTM AG, then such effort will need a further investment of hundreds of millions of dollars – no specific estimate of which is available right now.

(iii) Correction in Share Price. Bajaj Auto share price has crashed from a high of INR 12,650 (27/9/2024) to INR 9,087 (2/12/2024). That’s a sharp 28% fall.

It should be noted that much of this fall was attributed to the lower-than-expected sales in Diwali 2024 shopping season. The Pierer Mobility loss may have been lost in the fine print (and for the time being not captured by most media reports in India) because that is how subsidiary company financials are reported as per global accounting standards!

Even after this loss of value, it still trades at A$ 46 billion!!

Just for perspective, Bajaj Auto is still bigger than Telstra, Woolworths and Macquarie Capital in terms of market value. ?

Even after the recent price correction, Bajaj Auto has provided a 32% capital gain on a one-year basis – one year ago the share price was INR 6,889.

By the way, Pierer Mobility AG’s share price has fallen from €89.60 in September 2021 to €10 - pretty frightening, because a loss of market value leads to the loss of its ability to borrow further money to restructure and turn around the company.

(4)???What are the Options for Bajaj Auto?

Option 1: Sell KTM. Bajaj Auto can influence its Austrian partners to find a buyer for the troubled KTM, which will be a clean solution. Of course, the value of KTM may be pittance or even zero, but it saves Bajaj Auto and Pierer Mobility from further funding and efforts to revive the business. From a buyer’s point of view, even a zero-value buy is a tough ask, because they would be required to infuse hundreds of millions of dollars to do so.

Option 2: Revive KTM. Bajaj Auto could find debt and equity financiers for KTM and try to turn the business around. That’s a long and troublesome path with Bajaj Auto required to put in at least a part of the for further funding for KTM and keep taking its share of losses for several quarters.

Option 3: Kill KTM. Clear the debts and shut down the business. This could be a realistic scenario. In the past, iconic brands with glorious histories have been shot.. er.. shut. For example, GM’s Hummer division was closed down in 2010; in 2016, the Nokia mobile phone business, at that time owned by Microsoft, was shut down; in 2010, Blockbuster videos shut down; other iconic names that disappeared are Lehman Brothers, AIG insurance and Royal Bank of Scotland, among many more.

Whatever the way forward, Bajaj Auto books will take significant write-offs.

PS: Forbes has a decent article on KTM’s problems if you wish to know more - https://www.forbes.com/sites/billroberson/2024/12/01/pierer-owner-of-ktm-and-mv-agusta-teeters-on-the-brink-of-insolvency/

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