Bajaj Group ET 1st July

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How Bajaj Group is scaling new heights after

split

By Lijee Philip| 01 July 2014, 12:03 PM ISTNewsletterAA

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In June 2013, when Sanjiv Bajaj put in an application with India's banking regulator to transformhis growing consumer-loan company into a bank, it created a mild flutter at brother Rajiv's autobusiness. Sanjiv's finance company is one of the main provider of loans to customers who buy

Rajiv's motorcycles, and the regulator is particular that Indian banks limit such inter-group

transactions.

It's partly why the Mahindra Group, even with its impeccable credentials and its interest in

financial services, cried off. But Sanjiv didn't. Although he lost out in the first round of licences,

Sanjiv remains keen on banking, and the brothers might still have to deal with the maths at somepoint of time.

At the Bajaj Group, a difference of opinion between family members on approach and strategy isalright, acceptable. How they choose to express it is another matter. Straight-talking father Rahul

Bajaj and even more straight-talking son Rajiv can respectfully disagree on national TV, and

make for great viewing.

But equation between the two brothers was different. Even when there was no meeting of minds,

neither Rajiv, 46, nor Sanjiv, 44, would voice it publicly. They never have. And, family insiders

say, they never will. (Rajiv declined to participate in this story, while Sanjiv declined commenton questions about his brother.) After 2006, they also have less reason to. Eight years ago, when

father Rahul carved out two distinct businesses from a monolith called Bajaj Auto, and handed

operational control of one apiece to the brothers, he did so on the pretext of unlocking

shareholder value. With that one corporate stroke, he also managed to quell the possibility of
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familial discord harming businesses and reputation.

Eight years on, the move has proven to be smart from multiple standpoints -- successionplanning, ambition management, business growth and shareholder wealth creation -- and makes a

telling statement about family businesses: a division can be good.

The sum total of the Bajaj parts shows a 70% growth in revenues and a seven-fold increase in netprofit. There's a five-fold increase in wealth creation, with the combined market worth nearing

Rs 1,00,000 crore. The parts have together delivered a compounded annual shareholder return of

28.4%, against the 8.5% delivered by the BSE Sensex index (See graphic).

Rajiv and Sanjiv have taken forward the businesses built by their father in their own ways. "The

kids are similar (to their father) in determination, commitment and ethical values," says Niraj

Bajaj, an uncle to the brothers, and chairman and MD of Mukand. But they are also differentfrom each other.

Sanjiv and Rajiv remain united by blood, but divided by personality. They don't share the closestof professional relationships, but they reconcile to that truth well and let the other be. "In a sense,

they would kill for each other," says Niraj Bajaj. "But taking help in business decisions, that

would be a rarity." Yet, the Bajaj family keeps this complex set up simple. The two disparate

parts are thriving -- and they sum up well, as their 76-year-old father would have liked them towhen, after a fair amount of consideration, he gave his assent to break up the family business.

The Demerger

In 2006, Rahul recommended to the board of Bajaj Auto -- back then, the entity where the entire

business interests of the group were housed -- that the company begin the process of creating

parts from the whole. The main objective, says Rahul, was to unlock shareholder value. "ManyFIIs (foreign institutional investors) had been telling me that Bajaj Auto has a lot of cash/cash

equivalents on its balance sheet, and this is putting pressure on its return on capital employed and

return on net worth," he recounts.

Although Rahul maintains the demerger was not done to tackle inheritance and succession

issues, it addressed them implicitly -- and succinctly. Before the demerger, Rajiv was in chargeof vehicle manufacturing, engineering, R&D and domestic marketing/sales, while Sanjiv looked

at finance and vehicle exports. This separation of responsibilities was largely in line with their

respective interests, and the subsequent carveup maintained those alignments. It also opened up

new possibilities. "The demerger also allowed them to attract best-in-class managers for eachbusiness, which may not have happened if it was one combined conglomerate," says Manish

Kejriwal, the son-inlaw of Rahul.

"Separating the businesses has worked and it perfectly matches their (the brothers') DNAs," says

Anil Singhvi, founder and director of Institutional Investor Advisory Services, a proxyshareholder-advisory firm. "This was one of the few demergers that has worked very well. It has

been equally good for the family (promoters) and minority shareholders." But there was a time


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when the chairman was wavering and wanted to put the demerger on the "backburner", according

to Kejriwal. It took a bit of challenging the status quo with Rahul, by Kejriwal and others, to

revive it, own it and see it through.

Father and Sons

It was one of the smoother family handovers seen in India Inc. And part of the reason was theauthoritative hand and the progressive mindset of Rahul, who took charge of Bajaj Auto after his

father, Kamal Nayan Bajaj, passed away in 1972, and turned it into an iconic Indian two-wheeler

company.

When the time came, he could hand over the reins to his two sons. "Some in the older generation

don't transfer governance to the next generation till it's too late," feels Kejriwal, who is the

managing partner at Kedaara Capital, a private equity fund that, among other things, helpsfamily-owned businesses unlock value. "Rahul Bajaj has the unique, and often under-

appreciated, ability to let go, and to have passed the leadership baton to the next generation very

early and at the right time."

More importantly, in the balance between freedom and control, between stepping in and staying

a bystander, Rahul has struck different equations with each of his two sons. "They are different

personalities," says Niraj, of the two brothers. "Sanjiv is soft-spoken, while Rajiv is sober andnot easily excitable," he says.

Their approach to the demerger process was quite different. According to Niraj, though Rajivwas fully aware of the demerger process, "he was not too involved as temperamentally he is not

interested in routine stuff". By comparison, Sanjiv was spearheading the demerger, along with

Rahul and Kevin D'Sa, a senior executive who has been with the group since 1978 and who

works with both brothers but primarily in Rajiv's company.

They have different sets of friends: Rajiv has a close-knit group, while Sanjiv is more inclined to

socialising. "Sanjiv is the more extrovert of the two, spending a lot of time with outsiders andinvestors. He goes on roadshows," says D'Sa. While Sanjiv stays in the family house, with his

father, in the factory premises at Akurdi, 25 km from Pune, Rajiv moved out a few years ago and

stays in Pune city with his family. Because of that locational proximity, and also the nature oftheir relationship, Sanjiv seeks out his father more often than Rajiv does. "My father and I share

an excellent relationship and he is also my fondest critic," says Sanjiv.

Rahul feels both brothers are managing their respective companies well. Further, Rahul adds,unless he wants to bring a particular issue to their attention, he gives them advice only when

asked. "Both are highly competent and, with the help of their outstanding management teams, are

doing a great job," he says. "I try not to interfere in their functioning, but they are accountable to

their respective boards and the chairman."

Rajiv: His Own Man

That chairman is Rahul himself and he has changed from the time he was running the show. In


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company for three group companies in the financial services business, namely Bajaj Allianz Life

Insurance, Bajaj Allianz General Insurance, and Bajaj Finance.

Against a loss of Rs 33 crore in 2007-08, Bajaj Finserv posted a net profit of Rs 1,544 crore in

2013-14. In the same period, Bajaj Auto's net profit has grown from Rs 756 crore to Rs 3,243

crore. "With great entrepreneurial skills, Sanjiv has managed to create a huge financial empirefrom nothing," says Goenka.

Sanjiv's philosophy is to focus on the long term without losing sight of profitability. So, for

instance, while most life insurers initially focused on larger cities, Bajaj Allianz Life fanned outto 850 cities and towns. Similarly, in order to build the largest consumer-durable lending

business, Bajaj Finance used technology and processes to reduce loan approval time from three

days in 2007 to onthe-spot loans now.

"Not only is Bajaj Auto Finance reaping the benefits of healthy consumer demand, it is among

the few companies doing well in this space," says Sunesh Khanna, analyst at Motilal Oswal

Securities, an equity research firm. Long-term thinking also runs through Sanjiv's ambition ofbanking.

"A banking licence, in the short term, would have resulted in a drop in RoE (return on equity) for

our financing business, increased our regulatory and compliance requirements, and dilutedpromoter group shareholding," he says. "But we went for it because we believe it is a significant

long-term value-creation opportunity."

While Rajiv and Sanjiv are firmly in control of their respective companies, the promoter

shareholding is scattered and not with them. For example, as of March 2014, the promoter

holding in Bajaj Auto was divided between Rahul and his three cousins (Niraj, Madhur and

Shekhar), directly and through investment companies.

Both Rajiv and Sanjiv remain on the board of the other's company. Yet, they maintain a healthy

respect for the operational lines carved out and remain focused on their respective businesses.

"I never felt even for a minute that the demerger should have been done differently or that it

should not have been done at all," says Rahul. "Such a thought never crossed my mind."

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