Good Morning Toasters!

Hiii friends!! That was torture. The markets cracked and how!! Taking a cue from Dow Jones performance that reacted very negatively to CPI numbers (US print is highest in >4 decades), Indian markets left no stone unturned in their pursuit to fall 😞

A silver lining perhaps within all this was Bajaj Auto, that stayed resilient, even advancing by ~2% during trading. The company announced a Buyback, with details to be finalised in the Board meeting scheduled for June 14. The company last executed a buyback in 2000, and has consistently released a dividend since 2008.

In another Technical + Financial combination, we cover JK Paper that’s on the verge of breaking its prime resistance. 3Y / 5Y returns for the stock are stellar, and Paper companies have been a darling for the markets in the recent past. Does the rally continue?

And finally, we’ve started a rollout of our newest product, Trade:able, that aims to democratise trading, via a unique and fun learning experience. There are a bunch of amazing rewards and prizes to win. Click here to know more.

Market Watch

Nifty 50: 16,201.80 | -276.30 (-1.68%)
FII Net Sold: INR 3,973.95 crore

Sensex: 54,303.44 | -1,016.84 (-1.84%)
DII Net Bought: INR 2,831.07 crore

Technical Setup

JK Paper on the verge of breaking its prime resistance? 🔺

• JK Paper is the leading player in Office papers, Coated papers, Packaging boards and much more
• Analyzing JK Paper on a daily time frame indicates that the stock has been trading in an uptrend taking constant support along the 50-day SMA
• Prices have been consolidating in a tight range making a symmetrical triangle pattern. These 2 components give a clear indication of a possible breakout in the nearer future

Short and convincing! But is there any other bullish indication on the daily chart?

• Yes, let’s check it out. Prices have made higher lows as they take support at crucial levels
• Prices have experienced a multi-week resistance around 374, this weak resistance (due to multiple tests) might not sustain

Financial and Company Profile?

• JK Paper is a small to mid-cap company with a market capitalization of ~INR 5700 crores, and runner-up in the paper industry after Century Textiles; Competitors include West Coast Paper and Andhra Paper, amongst other players
• The stock is currently trading at a P/E of 10.6, while the industry P/E is at 13.30; DII holding has more than tripled from 1.0% to 3.5% since September 2019
• The company has delivered profit growth of 39% CAGR over the last 3 years, while also maintaining a healthy dividend payout of 20.1%
• Sales for the quarter stood at Rs 1,340 crore (49.2% growth YoY), with a 5 Yr compounded sales growth of 12%
• 3Y / 5Y returns for the stock are over 165% and 223%, with average daily traded volumes of over 400,000

Interesting! Final thoughts?

• On a daily time frame, prices have been taking support along a 50-day SMA and making and consolidating in a symmetrical triangle increases the chances of a breakout
• Furthermore, prices making higher lows and breaking interim resistance levels the adds strength
• The stock has had a turnaround post covid, will this rally continue?

Keep a track?

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Around the World 🌎

• Russia is destroying the world – Companies across the globe have racked up $59 billion in losses from their Russian operations. Things don’t seem to be improving as sales and shutdown continue due to imposed sanctions. Almost 1,000 Western businesses have pledged to exit/cut back operations in Russia as a weakening local economy and a lack of willing buyers render once-valuable assets worthless
• Crypto slump hurting new joiners – The spending spree at crypto firms seems to have come to an end with hiring being hit the hardest. Coinbase Global Inc. has rescinded offers made to new employees while Gemini Trust Co., cut 10% of its staff, citing the effects of the continuing crypto price slump. Since November, bitcoin has fallen 55% and the entire crypto market has dropped 59% with a major drop in volume as well
• Disney remove their main man – Months after his contract was renewed, Peter Rice, a top television executive, was fired in a surprise shake-up and was replaced by chairman of general entertainment content Dana Walden – his longtime deputy.  The erstwhile CEO had been under pressure due to its tumbling share price, and multiple political controversies, with Mr. Rice, poised to replace him; in a move reminiscent of the TV show Succession, the CEO has consolidated power leaving the minimal chance of a coup

Company News

Bajaj Auto to consider share buyback; what’s up and what do you need to know?

Disclaimer: this piece, unlike our other pieces, involves multiple assumptions about the buyback, given action (entering the stock) prior to details being announced is key in the successful execution

• In the first buyback since 2000, Bajaj Auto has announced plans to consider a share buyback at its board meeting scheduled for June 14, finalising details including intended size and buyback price
• Normally taking the dividend route, Bajaj Auto has been consistently increasing its dividend payout since it began its development in FY08, going from INR 20 per share to INR 140 per share at the end of FY22, with the aggregate amount during the same period increasing from INR 289 Crore to INR 4,051 Crores
• While buybacks are common in the IT sector, such manoeuvres are rare in the Auto & Auto Components space, with Eicher Motors the last company executing one in 2009 (INR 98 Crore in size)
• The stocks reacted the positive, advancing 2% during trading on Friday, in what was an especially weak market (you don’t say!!); with this, the stocks rallied 5% in two trading days (since the announcement)

Interesting! Can I get some details? Also, give a lowdown on buybacks? (Yess my man)

• Bajaj Auto has ~INR 16,500 Crores as Cash & Cash Equivalents (post FY22 dividend payout) on its Balance Sheet, INR 4,000 crore as buyback size is a fair assumption, roughly translating to ~25% of cash on books OR ~3.4% of paid-up shares
• Assuming a ~6.2% premium (offered to increase the acceptance ratio amongst shareholders, thereby providing returns) on the Current Market Price of INR 3,860, a buyback price of INR 4,100 would be a fair estimate
• Assuming an acceptance ratio of ~14%, and an exit price of INR 3900, a shareholder of Bajaj Auto can make a return of ~1.8% from the buyback (see the educational concept for the understanding of the acceptance ratio)
• There are plenty of reasons to execute a buyback, with some companies choosing this route to avoid paying Dividend Distribution Tax, while others executing this manoeuvre from a stock price perspective
• Purchase of shares invariably can reduce the overall supply within the market, while also arresting a slide in case the counter has shown any weakness;

Interesting! Final thoughts?

• While Bajaj Auto has outperformed the market in the run-up to this announcement, advancing 11% in the last 1M vs 0.53% rise in BSE Sensex, a longer time period analysis shows weakness in the counter
• Bajaj Auto is down ~6% in the last year vs a 5% rise in Sensex during the same period; in addition, the larger Auto & Auto Components space has been besieged with semi-conductor and supply chain challenges, resulting in relatively poor monthly volume numbers
• A buyback in addition to an annual dividend seems to have been designed to reward shareholders in the absence of consistent stock performance (we believe)

What else caught our eye? 👀

AMZN leaves the race

• AMZN is withdrawing from the race of rights to stream Indian Premier League cricket matches which would have fetched an estimated $7.7 billion
• The remaining competitors include Disney Hotstar, Jio+, Sony Group etc. who are hell-bent on using this chance to dominate the Indian consumer market by increasingly going online
• IPL was valued at about $5.9 billion in 2020 by Duff & Phelps 2020 and is now expected to be around $7 billion

Reliance needs to calm down

• A consortium of Reliance Industries Ltd (RIL) and buyout firm Apollo Global Management Inc. are all set to acquire Walgreens Boots Alliance Inc.’s Boots pharmacies unit in the UK
• The assets have been valued at $7-8 billion and will substantially expand their presence in the health care sector
• RIL has been making multiple acquisitions in the healthcare and pharma space like Karexpert and C-Square

Educational Topic of the day

Buyback + Acceptance Ratio

A buyback is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than the market price.

The acceptance ratio depends upon the buyback size and the quantity tendered in the buyback.

If in a category, the total buyback tendered quantity exceeds the buyback size, the acceptance ratio will be lesser and if the buyback tendered quantity is less than the buyback size then the acceptance ratio will be 100%.

Edited by Raunak Karwa

Let’s connect, I always love hearing from you. Hit me up at Raunak_Karwa on Twitter or Raunak.karwa@finlearnacademy.com