InvestorQ : Since stock splits don’t add value to shareholders, why did the stock of Bajaj Finserv rally so sharply ahead of the stock split?
Anamika Sodhani made post

Since stock splits don’t add value to shareholders, why did the stock of Bajaj Finserv rally so sharply ahead of the stock split?

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Angel dcosta answered.
2 weeks ago
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You are right in the sense that the stock splits and stock divdiends normally tend to be value neutral. After all, what is the difference whether you hold 5 shares of par value 10 or 50 shares of par value 1? However, let me twist this argument and turn it around a bit. It does influence the value of the stock if it is a very high priced stock and Bajaj Finserv falls in that particular category. The stock had recently touched a high of Rs19,000 and is curently quoting at around Rs14,800. The stock split brings it in a more acceptable range.

It is not just about retail interest but also about liquidty and that is what adds real value to the investors. Last week, the Bajaj Finserv Board approved 1:1 bonus issue and 1:5 stock split. Effectively, the existing equity share of face value of Rs 5 will be sub-divided into five equity shares of face value Rs 1 each. The 1:1 bonus will be given by capitalization of free reserves. The combined effect of the bonus and the split will be that the total shareholdings will go up by 10 times and theprice will get fixed at nearly one-tenth of the current price.

Just look at the recent price history. Bajaj Finserv was an underperformer in the June quarter, falling by 3% against a 1% fall in the benchmark indices. However, in the month of July 2022, the stock of Bajaj Finserv rallied by a whopping 33% compared to a 7% hike in the Nifty and the Sensex. This was largely driven by expectations of a stock split and bonus, which were doing the rounds for some time now. The stock touched a high of Rs19,325, but corrected sharply to the current levels, although it has jumped from a low of Rs12,200.

One of the main benefits of a stock split, and especially in this particular case of Bajaj Finserv, is that it brings the stock into a popular trading range. Let megive you an example, Retail investors would be more comfortable buying Bajaj Finserv at Rs1,450 that at a steep price of Rs14,500. It does not make a difference but it is about affordability. The stock split and bons issue here increases liquidity in the stock by making it more accessible to retail investors. That is what has spurred the sharp rally in the stock.

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