Bajaj Auto shares buyback: Who stands to benefit the most?

The share buyback at Rs10,000 apiece is at a whopping 43 percent premium. But not all will benefit from it as acceptance ratio is likely to be lower. With the promoter group holding 54.94 percent as of December 2023, they will potentially get a bulk of the money

By Nasrin Sultana

Published: Jan 11, 2024 03:42:00 PM IST

Updated: Jan 17, 2024 12:32:22 PM IST

File Photo: A worker cleans a Bajaj motorcycle at a Bajaj Auto showroom in Kolkata, India. Image: REUTERS/Rupak De Chowdhuri /File Photo

It’s not surprising that the shares of a company which declared a buyback have seen bountiful gains on the stock exchanges, as a consequence. Shares of Bajaj Auto hit record highs of Rs7,420 apiece, a day after the company announced its buyback or share repurchase plans on late Monday evening.

However, all that exuberance and joy for those queuing up to buy shares of Bajaj Auto in pursuit of availing the buyback may be a bit misplaced. No doubt, the share buyback at Rs10,000 apiece is at a premium of a whopping 43 percent from the closing price of Rs6,985.7 on Monday. But not all will benefit from the buyback as the acceptance ratio is likely to be on the lower side.

Considering the small buyback, most retail investors will not be able to receive any considerable benefit from the same as the acceptance ratio is expected to be 4 to 13 percent, says Aditya Welekar, senior research analyst-auto and metals, Axis Securities. He expects a return of 2 to 4 percent in the stock in the next three to four months. Acceptance ratio in a share buyback by a company is the proportion of shares tendered by shareholders that the company intends to accept for share repurchase. For instance, if a company repurchases 25 percent stake from the buyback and the total percentage stake held by external shareholders is 50 percent, the buyback acceptance ratio will be 0.5 or 50 percent, indicating the company will accept one share for every two shares held by shareholders.

The board of Bajaj Auto approved the buyback of 40 lakh shares at a price of Rs10,000 per share for an aggregate amount not exceeding Rs4,000 crore. The buyback offer amounts to 1.41 percent of the total number of equity shares of the company which will be executed through a tender route.

The share repurchase represents 16.33 percent of the total paid-up equity share capital and 14.49 percent of free reserves (including securities premium account), the company said in a statement to the exchanges. The total buyback amount of Rs4,000 crore excludes transaction costs such as brokerage, filing fees, advisors/legal fees, public announcement publication expenses, printing and dispatch expenses, applicable taxes such as buyback tax, securities transaction tax, goods and service tax, stamp duty.

However, the record date of the buyback isn’t declared yet. Till one working day prior to the record date, the board/buyback committee may increase the buyback price and decrease the number of equity shares proposed to be bought back, such that there is no change in the buyback size.

Bajaj Auto has declined to comment on any further details of the buyback plans.

Advantage Promoters

It’s the promoters who stand to gain the most in a proposed buyback plan. Exchange data shows the promoter group holds 54.94 percent as of December 2023. Out of the promoter group, Bajaj Holdings and Investment holds a significant 34.16 percent in Bajaj Auto. “Considering their participation, the promoter group will potentially receive Rs2,200 crore of the Rs4,000 crore offer," says Welekar.

According to estimates by Abhilash Pagaria, head, Nuvama Alternative & Quantitative Research, general acceptance ratio is likely to be approximately at 1.3 percent, with a best-case scenario reaching up to 1.5 percent. “For retail shareholders, as per initial calculations, the anticipated acceptance ranges between 4 percent and 10 percent,” Pagaria explains.

Retail shareholders or individuals holding nominal share capital up to Rs2 lakh form a cumulative 5.44 percent of the shareholding in Bajaj Auto, as of December 2023. As per guidelines, 15 percent of the total buyback is reserved for the small shareholders category. Based on this, Axis Securities’ calculation shows a minimum acceptance ratio of 4 percent for the small shareholder category.

However, in a scenario assuming only 30 percent of the investors tender for the buyback offer, further lowering public holding to 46 lakh shares, would result in an acceptance ratio of 13 percent, according to Axis Securities.

Individuals holding nominal share capital in excess of Rs2 lakh form 4.23 percent of the total shareholding in the company.

Mutual funds such as SBI Large & Midcap Fund hold 1.34 percent, LIC of India holds 1.13 percent while foreign portfolio investors (FPI) hold 14.65 percent in Bajaj Auto.

In a scenario assuming only 50 percent participation is by mutual funds, FPI and general category shareholders, and 50 percent participation by promoters, the acceptance ratio will be higher at 7 percent, according to Axis Securities.

Also read: India M&A deal activity slides but 2024 outlook better: Experts

Is buyback at the cost of capex?

Not really. Bajaj Auto has cash and investment of Rs17,326 crore in the first six months of the current financial year and guided for a cash surplus of Rs20,000 crore, hence a buyback of Rs4,000 crore is just a tax effective way to reward its shareholders, says Abhishek Gaoshinde, deputy vice president (research), Sharekhan by BNP Paribas.

“Given its business model is focussed on high margin premiumisation theme, Bajaj Auto remain a cash rich company and has strong visibility cash flow for the near future. In light of this, we don't see that a buyback would have any negative impact on its investment plans,” Gaoshinde elaborates.

Just over a year ago, Bajaj Auto had made a repurchase of shares worth Rs2,500 crore. From July to October 2022, Bajaj Auto had offered a buyback at Rs4,600 apiece.

Gaoshinde explains that the current buyback differs with the earlier one in two positive ways—the earlier buyback offer was open market purchase offer and the current buyback offer with tender route with an attractive price point at Rs10,000. Second, the earlier buyback came during the downcycle, while the current buyback is announced at a premium price during the upcycle of the business, which determines the promoters’ confidence over the growth prospects of the company.

Others concur. Welekar believes that the announcement is in line with the company's dividend policy as the company would have estimated over Rs15,000 crore of surplus funds by the end of fiscal 2024.

Recently, the company has amended its dividend distribution policy (including buyback) to the shareholders, wherein the amount of surplus funds will guide the overall payout at the end of a fiscal. “In the case of surplus funds at the end of the fiscal year over Rs15,000 crore, the overall payout for shareholders will be over 70 percent of the percentage of standalone profit, whereas in case of surplus funds at Rs7,500 crore to Rs15,000 crore, the overall payout will be up to 70 percent. The overall payout for surplus funds less than Rs7,500 crore will be up to 50 percent,” Welekar adds.

The company has an annual capex plan of Rs1,000 crore (including the capex for its electric vehicle segment).

Welekar expects Bajaj Auto's revenue growth in FY26 to be supported by solid volume performance and better realisations while Ebitda margins are likely to expand slightly on a better scale. In FY25, Welekar expects the two-wheeler industry volumes to grow in high single digits, led by better rural demand, turnaround in the economy segment, and continuing growth in executive/premium segments.

Gaoshinde considers it a good proxy to high margin mass market premium motorcycle segment. "Along with that, its entry into the premium motorcycle market on the launch of Triumph 400, healthy market share gain in electric vehicles and bottoming of monthly export volumes augur well for the company," he says.