Are stocks value neutral, maybe not for Bajaj Finserv

It is said that stock splits are normally value neutral. It does not make a difference whether you hold 5 shares of par value 10 or 50 shares of par value 1. The net impact on value is still zero. However, the value of the company does get influenced if it is a high priced stock like Bajaj Finserv, which is trading at over Rs14,800, after touching a high of Rs19,000. The high price normally dissuades retail investors from participating in these stocks and so a stock split would bring the stock into a more acceptable range and improve liquidity in trading.

On Thursday, the Shares of Bajaj Finserv surged 10% to Rs 14,580 and continued to remain robust through the day on the exchanges. This was after the company’s board approved 1:1 bonus issue and 1:5 stock split. Effectively, it means that the existing equity share of face value of Rs 5 will be sub-divided into five equity shares of face value Rs 1 each. In addition, the board has also approved a 1:1 bonus by capitalization of free reserves and this 1:1 bonus will further double the equity size. Effectively, shares will go up 10 times.

Ironically, the stock of Bajaj Finserv has been an underperformer in the June quarter during which period, the stock fell by 3% against a 1% fall in the benchmark indices. However, if you look at the month of July alone, the stock of Bajaj Finserv is up nearly 33% as compared to just a 7% hike in the benchmark indices. This surge in price in July has been largely driven by the expectations of a stock split and bonus, although it must be same that the eventual stock split and bonus announced by Bajaj Finserv is more elaborate and generous.

Bajaj Finserv board was quite forthright in that the combination of the stock split and issue of bonus shares would be significant in the light of the sharp growth in the business of the company in the last few quarters post the pandemic. In October 2021, the stock of Bajaj Finserv had touched a high of Rs19,325, but has since corrected sharply to the current levels but has surely jumped from a yearly low of Rs12,200 levels. The corporate action also becomes significant since retail or individual shareholders comprise 98% of total numbers.

In a stock split the par value is reduced while in a bonus the free reserves like the general reserves or the share premium account is capitalized. Both are value neutral on paper since the wealth impact is hardly affected in both the cases. However, one of the main benefits of a stock split is that it brings the stock into a more popular trading range. More retail investors would venture to buy Bajaj Finserv at Rs1,450 that at a steep price of Rs14,500. It increases liquidity in the stock by making it more accessible to retail investors.

Bajaj Finserv is the holding company of Bajaj Finance and also has a strong insurance franchise and has been one of the biggest value creators in the Bajaj group. Today, both Bajaj Finance and Bajaj Finserv are valued at more than Bajaj Auto and the company has managed to capture the gist of retail finance market better than anybody else. Bajaj Finserv is into finance, insurance, broking and also into investments. It also has a strong digital franchise, which it uses to extensively distribute its own and third party products.