With Bajaj making its intentions clear about buying back its equity, it would mark the first case of a major Indian company buying back its shares. With a market share of 57 percent in the scooters segment, 7 percent in mopeds, 22 percent in motorcycle segment and a whopping 86 percent in the 3-wheeler segment, BAL is the leader in Two-Wheeler and Three-Wheeler segment. Between FY95 to FY99 its sales grow by an average of 22 percent and Bajaj continues to reward its shareholders with generous dividends.

The question is why do companies go in for buyback of equities. During the seventies and eighties cash surplus would mean a logical diversification into unrelated areas. Not surprising then that the previous era saw the rise of conglomerates with interests in diverse areas. With companies increasingly focusing on their core competencies equity buybacks makes a lot more sense for companies who are in matured industries and the scope for expansion is constrained by demand factors.

Between FY 96 and FY 99 the Reserves of Bajaj Auto grew at a compounded average rate (CAGR) of 24%. With shareholders already being richly rewarded through dividends, buyback of equities offers a better way to boost the EPS and consequently the valuation of Bajaj in the market.

As the situation exists Bajaj Auto has four options to choose from viz., (1) To increase the dividend rate (2) To acquire/start a new venture where the return on capital would be more than the cost (3) To invests in R&D or (4) To buy back the shares.

As far as dividend payments are concerned, Bajaj has been richly rewarding its shareholders, and any higher dividends may be seen as monopoly rents to shareholders. Continuing to channelize these funds into investments would lead to a negative view on the sustainability of operating profits. And in a technologically saturated market, the scope for any major research and development is limited.

The question then is whether buyback is the right option in the current scenario. BAL strengthened its R&D with the collaboration of Kawasaki and Kubota of Japan and Cagiva of Italy to introduce new models and to upgrade its existing models. It released more than 5 models in FY99. But stringent emission norms and necessity to use alternate sources of energy like CNG/LPG could call for increased investment in R&D. Global majors like Honda are already planning to enter the scooter market and hence the need to give a boost to R&D cannot be underestimated. On the contrary, the company has resorted to the more myopic measure of buying back its equity so as to artificially boost its EPS and consequently its valuation in the market. Also with lax insider trading laws the question is whether the promoters are in a position to capitalize on this opportunity and exit from their position. One only hopes that Bajaj continues to remain Hamara Bajaj.

C Sekhar