Dear Shareholder,
 
 Over two years have passed since I handed over the management of your
 Company to Rajiv Bajaj as the Managing Director, Sanjiv Bajaj as the
 Executive Director, and their team. I am happy to say that the team has
 continued to perform well - as I expected they would. The management
 has unveiled a challenge - that of being `Distinctly Ahead', and their
 philosophy has been outlined in this year's Management Discussion and
 Analysis.
 
 As always, I shall begin by highlighting the key elements of your
 Company's performance.
 
 * Bajaj Auto sold over 2.72 million vehicles in 2006-07 - a record in
 itself, and 19 per cent higher than the previous year.
 
 * Your Company sold 2.38 million motorcycles in 2006-07 - an increase
 of over 24 per cent compared to the previous year, versus an overall
 market growth of 14.5 per cent.
 
 * Consequently, for the seventh successive year, Bajaj Auto raised its
 market share in motorcycles: this time from under 31 per cent in
 2005-06 to over 33 per cent in 2006-07.
 
 * Gross sales increased by 24 per cent to an all time high in excess of
 Rs.106 billion.
 
 * Operating EBITDA (earnings before interest, taxes, depreciation and
 amortisation) increased from Rs.13.7 billion in 2005-06 to Rs.14.3
 billion in 2006-07. Your Company's operating EBITDA margin of 15 per
 cent of operating income continues to be the highest in the industry.
 
 * Profit after tax (PAT) increased by over 12 per cent to Rs.12.38
 billion in 2006-07; and earnings per share (EPS) grew from Rs.111 in
 2005-06 to Rs.122 in 2006-07.
 
 These are good results - especially so in a market that was beset by
 high input costs in the first half and then slowed down considerably in
 the last quarter of the year. The first three quarters of 2006-07
 showed buoyant growth, much in line with what the industry experienced
 over the last four years. Thereafter, because of the sharp tightening
 of non-food credit by the Reserve Bank of India and all commercial
 banks and non-banking finance companies, demand growth slackened.
 
 I think of this slow down as a temporary aberration. India has grown in
 excess of 9 per cent over the last two years; the compound annual GDP
 growth over the last four is well over 8 per cent; and I expect the
 country to continue growing equally rapidly over the foreseeable
 future. Thus, as inflation eases off, non-food credit growth will per
 force bounce back to its 30 per cent annual growth rates. And your
 Company with its brand new 1 million motorcycles per annum capacity at
 Pantnagar (Uttarakhand) will be ideally placed to ride this growth.
 
 In my letter to you last year, I had outlined my vision for Bajaj Auto
 by 2010. It involved:
 
 * Mobilising India - by supplying 4 million motorcycles out of a
 projected market of 10 million.
 
 * Globalising India - by rapidly enhancing exports and international
 facilities to become among the three largest global players in two
 wheelers.
 
 * Financing India - by ramping up Bajaj Auto Finance's operations.
 
 * De-Risking India - by expanding the group's insurance business across
 the land.
 
 Let me share with you how far we have progressed on each of these.
 
 In 2006-07, your Company sold over 2.38 million motorcycles. We have
 to, therefore, significantly ramp up sales to achieve the 4 million
 target in the next few years. I believe that it can be done.  Bajaj
 Auto has an excellent portfolio of products from the 100 cc Platina, to
 the 125 cc and 135 cc Discover, to the 1 50 cc, 180 cc, 200 cc and 220
 cc Pulsar - to name some. A new bike will be launched shortly which the
 management believes could well be a block-buster. My kudos to the R&D
 team for having created a portfolio of well accepted products that
 allows your Company to occupy key positions at all price points. And,
 with the Pantnagar plant, it now has the capacity to substantially
 increase production.
 
 I need to share with you my admiration for the management team in the
 way in which it has set up your Company's Pantnagar plant.  With an
 investment of only Rs.1.5 billion (Rs.150 crore), Bajaj Auto set up a
 state-of-the-art 1 million motorcycle per year unit in just eleven
 months' time. Moreover, in a pioneering manufacturer vendor
 relationship, the Pantnagar plant is being supported by a cluster of 16
 key vendors who are wholly integrated with the manufacturing process.
 Consequently, Pantnagar will operate as a zero-inventory plant. I
 compliment your Company's process engineering team to have conceived
 such an excellently integrated project, and to have implemented it in
 record time.
 
 Regarding `Globalising India', I am truly proud of your Company's
 international achievements.  Exports, which formed a mere 4 per cent of
 sales in 1999-2000 have now grown to 18 per cent, or Rs.1 6.9 billion.
 Your Company continues to be India's largest exporter of two- and
 three-wheelers.  In volume terms, Bajaj Auto's motorcycle exports grew
 by 82 per cent to 300,656 in 2006-07; and three-wheelers increased by
 87 per cent to 140,645 vehicles. There have been many firsts: sales of
 over 150,000 two - and three-wheelers in Sri Lanka; and of over 100,000
 vehicles within a single financial year in Latin America. Moreover, in
 addition to an assembly plant in Nigeria, Bajaj Auto has established a
 95 per cent owned joint venture in Indonesia which, in the coming
 years, will play a key role in expanding the Company's footprint in
 South-East Asia. Exports will continue to grow, and I am confident of
 the management achieving the target for 2010 that I had set out last
 year.
 
 As far as `Financing India' is concerned, I believe that the group is
 yet to adequately leverage the enormous business opportunities in the
 retail and consumer lending space. Towards the end of this letter, I
 will share with you how this value can be unlocked in the years ahead,
 and what is needed to enable Bajaj Auto Finance to substantially widen
 its operations in the country.
 
 Insofar as `De-Risking India' goes, I am very happy with the
 performance of the group insurance companies. Both Bajaj Allianz Life
 and Bajaj Allianz General have grown rapidly, and occupy the number two
 position in the industry within the private sector. Bajaj Allianz
 General has been earning profits. My compliments to the two CEOs for
 their excellent performance, along with my exhortation that they must
 do even better in the years to come.
 
 That brings me to something that I have been occasionally thinking
 aloud over the last few years - separation of your Company's financial
 assets from its auto business. The case for doing so rests on three
 linked propositions:
 
 * First, that there is substantial additional value to be unlocked in
 having a lean and purely focused auto business.
 
 * Second, in today's economic environment, that there are significant
 upsides in having a pure-play consumer finance business which, in
 addition to the traditional auto loans, also operates in other parts of
 the growing retail financing space.
 
 * Third, that the sum of the values of de-merged entities will be
 greater than that of the whole.
 
 On 17 May 2007, your Board of Directors concurred with all the three
 propositions and recommended a de-merger subject to the approval of
 shareholders and the Bombay High Court.
 
 The gist of the de-merger is as follows:
 
 1. The auto business with all its assets will be hived off as a
 separate listed entity. This pure play auto company will retain the
 name Bajaj Auto Limited.
 
 2. There will be a new financing business, which will have in its
 portfolio Bajaj Auto's holdings of the two insurance companies as well
 as Bajaj Auto Finance and few other assets like the wind power project.
 This company is going to be called Bajaj Finserv Limited.
 
 3. The existing company - minus its de-merged auto and finance assets -
 will coexist and retain most of your Company's surplus cash and
 investments to either financially support the auto and/or finance
 businesses, or explore newer business opportunities. The company will
 be named Bajaj Holdings and Investment Limited.
 
 Full details of the proposed de-merger and scheme of arrangement will
 be made available to you shortly, for you to express your opinions at
 the appropriate shareholders' meeting.
 
 On your behalf, allow me to once again congratulate your Company's
 management team and all its employees for achieving good results.  But,
 as I always do, let me also remind them that their self-stated task of
 being `Distinctly Ahead' has just begun.
 
 Rahul Bajaj
 Chairman