Bajaj Auto Share BuyBack: All you need to know before investing

Leading auto giant, Bajaj Auto, has approved a share buyback scheme worth Rs 2500 crore. As per the buyback scheme, the company will buy the shares from existing shareholders in the open market at a maximum of Rs. 4,600 per share.

Let us understand the share buyback and what it could mean for you to participate in it.

Bajaj Auto Buyback

The Bajaj Auto buyback scheme will be implemented as an open market buyback where the shares will be bought by the company at the latest prevailing price. Generally, buybacks happen via a tender offer process where the price per share is fixed. The open market buyback route means that the company will continue to buy back its shares from the investors as the price remains volatile throughout the trading session. This means investors can sell their shares to the company at the market price. A sharp buying pattern can push the price of the stock up, and the company will continue to buy shares at the market price (which must not be more than Rs 4,600 per share) until it reaches its buying threshold of Rs 2,500 crore.

However, investors seem unenthused by this buyback offer from Bajaj Auto. Within 24 hours of the buyback announcement, Bajaj Auto’s share surged a meagre 0.57% and within the range, it has been trading at over the past few sessions.

However, there are advantages and disadvantages to participating in the buyback. Here’s what you need to know about the pros and cons of participating in the Bajaj Auto share buyback scheme:

Advantages of the Bajaj Auto buyback

• For investors, the main advantage of participating in the buyback scheme is that they get an opportunity to exit at a higher price with the buy-demand, hopefully, pulling the prices of the stock up. Higher demand can lead to Bajaj Auto's stock prices rallying, giving some investors the opportunity to sell the stocks they hold at a higher price.
• The buyback will also provide a good opportunity for long-term shareholders who are looking to book profits.
• This can also be a great opportunity for investors looking to make quick profits by selling the stock if they bought it at a price lower than the current market price.
• The buyback creates a positive sentiment about the stock in the market. Bajaj Auto's stock is currently trading close to Rs 3,900 per share and the company has marked the upper threshold for the buyback in the open market at Rs 4,600 per share. This means that the company feels that its stock is undervalued, and is worth up to Rs 4,600 per share. Hence, it improves the market perception of the stock, promoting its growth further.

Also, Check - Upcoming Buyback of Shares in 2022

The downside of participating in the Bajaj Auto buyback

• One of the main disadvantages of participating in the Bajaj Auto share buyback scheme is that the shares will be bought in the open market by the company instead of a tender offer. This means, that there is no guarantee that the stock price would reach the Rs 4,600 per share mark. Moreover, there is no certainty about the stock climbing up from its current market rate. The company has reported a significant slowdown in its export volume and dismal stock performance in the recent past, which may not leave a lot of room for the stock price to shoot up sharply.
• The buyback may also be seen as a way to artificially push the stock prices up by driving demand.
• Traditionally considered a fundamentally strong stock by many analysts, you may lose out on probable future profits if you sell out during the buyback.
• Your long-term investment strategy may need a shake-down to factor in the shares being sold and a rebalancing if they decide to move ahead and participate in this buyback. 

Should you sell your Bajaj Auto shares in the buyback?

If you are a small shareholder who is looking to exit at a price higher than the current market price, then you could consider selling your shares through this buyback scheme.

However, if you are a long-term investor or believe the stock holds potential in the future, this share buyback from Bajaj Auto may not be your calling. In that case, you may want to give it a pass.

Note that, over the past 5 years, the stock has given a return of 39.08% CAGR and shows the potential of outperforming its peers. The company is the largest two-wheeler manufacturer in the country and has the highest dividend yield, ROE, and ROA among its peers. Analysts, as per media reports, too remain bullish on the stock.

The takeaway

The Bajaj Auto share buyback scheme may be a good opportunity for investors to exit at a higher price only if you were looking to sell the stock. 

But keep in mind that there is an upper cap to the buyback price. And that the stock may have better prospects ahead. Alternatively, the stock may not see enough demand to push it to the Rs 4,600 per share threshold. 

That said, each investor might face distinct advantages and disadvantages of the buyback. 

Before deciding whether or not to sell your Bajaj Auto shares in the buyback scheme, you should consider your investment objectives and time horizon.