Does the Rs. 2,500 crore buyback plan announced by Bajaj Auto benefit investors?

Bajaj Auto Buyback: The proposal for a buyback of the company's shares for Rs. 4600 per share has been authorized by the board of directors of Bajaj Auto Limited. The stock exchange's mechanism will be used to purchase back shares on the open market.

The proposal for the buyback of fully paid-up equity shares with a face value of Rs. 10 from existing shareholders was authorized by the firm at its meeting on Monday (except promoters, promoter group, and persons in control of the company). A price of no more than Rs 4,600 per equity share would be obtained from the open market using the stock exchange mechanism, according to a statement from the company.

What Does The Bajaj Buyback Mean?

"Bajaj Auto Ltd.'s buyback is anticipated to have little impact on the share price. Due to the open offer mode's six-month duration and tiny size (just 1.9% of paid-up share capital), it has been unsuccessful in attracting investors. The management plans to distribute 90% of its profits back to shareholders, and this repurchase is merely a mechanism for doing so. Therefore, we do not anticipate any arbitrage profits from the aforementioned repurchase scheme, according to Santosh Meena of Swastika Investment Ltd.

Since the share buyback is being conducted on the open market rather than through a tender offer, the investors appear to be disappointed. In an open market buyback, the business buys back shares from the market immediately at the going rate. In contrast, in a tender offer, shareholders have a limited amount of time to tender their shares at a predetermined price.

What Do Analysts Say?

After the business announced the buyback of shares at a 20% premium to current prices, the majority of analysts kept their neutral outlook on Bajaj Auto. The stock's valuation at the current prices, which some say does not allow much potential for an upside, is causing the analyst's concern. A decline in exports could also result from other factors, such as rising inflation and recession fears.

Morgan Stanley kept its equal weight (EW) rating on the shares, citing the firm's comparable valuations and the possibility of a downturn in high-margin exports. The company reported an 8% decline in export volume from January to March at the end of the March quarter.

According to the corporation, in FY22, sales of over 2.5 million automobiles were the greatest ever for the company's overseas division. Exports currently account for more than 52% of its net revenues, with over $2 billion in sales. So, the corporation will suffer from any delay on this front.

Bajaj Auto has announced a buyback of up to 2,500 crore rupees at a price of up to 4,600 rupees a share from the open market, according to Nishit Master, Portfolio Manager at Axis Securities. Although the buyback amount is a little less than the market anticipated, given it is being done on the open market rather than through a tender process, we anticipate strengthening the stock price shortly. Also, The stock should continue to rise shortly due to the recently declared dividend of Rs 140 per share (ex-date 30th June 2022). One must monitor exports to important markets where there may be a slowdown and the availability of semiconductors to increase production and sales in the medium run.

One consolation is that even after the buyback, the corporation will still have a substantial cash balance. After paying out a dividend of Rs 4,051 crore, Bajaj Auto's surplus cash and cash equivalents as of March 2022 totaled Rs 19,090 crore.

Keeping its target price at Rs 3,800, which is close to the current values, UBS also maintained its neutral attitude. According to the broker, assuming maximum repurchase, the paid-up share ceiling will be reduced by 2.2%. For two-wheelers, it favors TVS Motor and Eicher Motors.

Given the available funds, several analysts and market participants consider a Rs 2,500 crore buyback to be "underwhelming."

Stock Performance

In contrast to the S&P BSE Sensex's 0.5% fall as of 11:47 AM, the stock was trading 0.36 percent higher at Rs 3,875. From the high of Rs 3,790 reached in transactions on Monday before the share buyback announcement, the stock was down 4.2%.

In terms of performance thus far this year, Bajaj Auto has excelled. The stock has increased by around 17% while the benchmark Sensex has dropped by more than 9% over the same period.

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