Bajaj Auto bows to shareholders demand - Views on News from Equitymaster

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Bajaj Auto bows to shareholders demand

Mar 29, 2000

Bajaj Auto (BAL) has taken a decision to buy back its shares. In a press release the company has stated that it plans to buy back 15% of its share capital, representing around 18 m shares of the company and would be done at a maximum price of Rs 450 per share.BAL 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 net profit of Rs 3.98 bn for the first nine months of FY2000.

As per SEBI guidelines, the company can utilise 25% of its share capital and free reserves for the buy back of shares. As of March'99 the paid up capital and free reserves stand at Rs 27 bn.

The buy back will be financed through surplus funds of BAL. As per the FY99 balance sheet of BAL, the total of investments, cash and loans and advances is Rs 31.8 bn and this is 70% of its total balance sheet size. Even if the company does the buy back at Rs 450 per share they would require only Rs 8.1 bn. However 25% of the share capital and free reserves amounts to Rs 6.75 bn, so the maximum amount to be spent by BAL will be Rs 6.75 bn. Hence the average price of the buyback works out to Rs 375 per share.

In order to tackle its surplus funds BAL had four options:

  • increase dividend payouts,
  • buy back of shares,
  • invest or acquire companies where the returns would be higher than its cost of capital,
  • increase its investments in its own R&D.

Having seen an erosion its market capitalisation both due to loss of market share in the scooter business and also due to lower returns earned from its surplus funds the company has now taken steps to change this and improve its shareholder value. It has increased its spending in research and development, design and come out with new vehicles, it has declared a higher interim dividend this year and has now opted for the buy back route.

The advantage of buyback is that BAL will be able to increase its earning per share as its equity share capital would stand 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 as its other income component would be reduced. For instance even if BAL maintains the same net profit for FY99, its earning per share due to reduction in capital will go up by 18% for FY99 to Rs 53.7 per share.

In the past shareholders and analysts have not viewed BAL favourably mainly because of its large cash, investments and loans and advances components.

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 has been sitting on a huge pile of cash and investments without any clear plans about its usage.


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