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BAL plans buyback once again ?

Mar 23, 2000

In its forthcoming board meeting on the 28th March'2000 Bajaj Auto Ltd (BAL) plans to consider a buyback of its shares. Companies generating surplus cash and not being able to put this to use in projects where they would earn a return higher than their cost of capital, should consider buyback of shares. Also those companies which do not feel the need of increasing their debt component in future could do so.Bajaj Auto is the world's third and India's largest two wheeler manufacturer. The company commands a 57% market share in scooters, 7% in mopeds and 22% in motorcycles. BAL reported a turnover of Rs 35.3 bn for FY99.

As per the FY99 balance sheet of BAL, the total of investments, cash and loans and advances is 70% of its total balance sheet size. The different ways by which BAL can use these surpluses are:

  • Increase dividend payout
  • Buy back of its shares
  • Invest or acquire companies where the returns would be higher than its cost of capital
  • Also increase its investments in its own R&D.

While in the case of dividend payout it is not clear what BAL's future policy on this would be, though recently the company announce an attractive interim dividend of 100%. As BAL is not considering investing in projects where it would earn a return higher than its cost of capital, the options available to it are buyback of shares and increased investments in research and development.

By the buyback move Bajaj Auto will be able to increase its earning per share as its equity share capital would be reduced and also increase its return on equity. This is good news for shareholders if this goes through as it would result in better quality earnings. Shareholders and analysts have not viewed BAL favourably mainly because of its large cash, investments and loans and advances components.

The company can well deploy its funds increasing its spends on research and development to try and improve on its scooter models. With foreign competition in the two wheeler segment to be a threat in future, BAL need to get its act together to keep up its market share in the falling scooter market.

However an issue with buyback of shares in India currently that is a negative for investors, is that there is no clear cut way of deciding the price at which the company should do this. The company has to take a view on its share price, this could lead unscrupulous management's to use the buyback of shares to prop up their share prices.

Market View:
BAL has been rated a "BUY" by many analysts due to the pick up in two wheeler demand. However some analysts and fund managers have not been very positive on the company as it is sitting on a huge pile of cash and investments without any clear plans about its usage.

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