Bajaj Auto buyback, falls short of expectations, largely non-event!!

What's Buzzing

Bajaj Auto's board of directors have approved share buyback amounting to Rs 2,500 crore (~9-10% of its FY22 net-worth) at a maximum buy-back price of Rs 4,600/share through open market route. The company intends to acquire a minimum of ~2% of its existing outstanding shares.

Context

In a regulatory filing to stock exchanges, the company on June 9, 2022 informed about the scheduled meeting of its board of directors on June 14, 2022 to consider a proposal for buyback of equity shares. However, the decision on the same could not be reached in the said meeting and the decision on buyback was deferred to a later date. It was later notified that the meeting for the same will be held on June 27, 2022.

Our Perspective

Although buyback is an investor friendly initiative wherein surplus cash on the company's books is returned back to the shareholders in the absence of its optimum use, the buyback announced by Bajaj Auto falls short of our expectations both on the absolute quantum front as well the open market route of executing the same with current market price acting a floor for the stock price. The maximum permissible limit for buy-back is up to 25% of declared networth, which in the case of Bajaj Auto comes to around >=Rs 6,500 crore against which the company has announced a buyback of Rs 2,500 crore amid >Rs 20,000 cash surplus on books (FY22) and minimal capex spend outlay. Moreover, open market route does not result in best buyback price discovery for investors as in an open market route of executing buy-back, investor shares are acquired at the prevailing market price and not the maximum buy-back price whereas in the tender route the shares are acquired at the maximum buy-back price. However, leaving aside the buy-back news, which is now a non-event, Bajaj Auto is still one of the most capital efficient companies with RoCE at ~20% and RoIC >100% and also has one of the highest dividend yields (~4%) among Nifty stocks with dividend pay-out in excess of 75%. Since the given buy-back is expected to be executed near our target price i.e. Rs 3950, it has minimal implications for us in terms of financial modelling. We await more affirmative steps by the company on the electrification front, before turning decisively positive with key near term monitorable being its electric 3-W launch.