RBL Bank IPO – A Grand Revival

  • Date: 18th August 2016
  • IPO price range Rs 224 – 225, Apply from 19-23rd Aug 2016
  • Advice: BUY with a 2 year holding perspective
  • Mid Cap: Rs 7,700 crore Market Capitalization
  • Industry: Bank – Private Sector
  • PE 25.9 times and PB 2.45 times

JainMatrix Investments, RBL Bank IPO

Summary

  • Overview: RBL is a Kolhapur (Mah.) based private sector, universal, full service bank.
  • Total Income in FY16 was Rs 3,235 cr. Topline and PAT grew 57% and 45.6% CAGR over 5 years.
  • RBL occupies several valuable niches such as (50%) Maharashtra operations; agriculture, rural and microfinance focus; a startup focus in Bangalore.
  • The strategy of high growth, aggressive deposit & loan rates, and low margins is sustainable.
  • With new management since 2010, RBL is in a Grand Revival and a good business trajectory.
  • Why BUY: 1) RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. 2) In terms of valuations, RBL has priced the shares moderately.      3) High quality institutional & PE investors and good management.
  • Key risks: Rural slowdown in Maharashtra and intense competition in BFSI sector.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

Here is a note on RBL Bank Limited (RBL).

IPO highlights

  • The IPO is open from 19-23rd Aug 2016 with Issue Price band: Rs. 224-225 per share
  • The IPO will raise Rs 1,213 crore totally, as Offer for Sale (Rs. 380 cr.) and fresh issue (Rs 833 cr.)
  • Shares offered to public are 5.39 cr. of Face Value: Rs.10. The IPO offers 14.58% of the post IPO equity base, including OFS from shareholders (1.69 cr. shares) and fresh issue (3.7 cr.). Fig 4.
  • Market Lot: 65 shares and in multiples of 65 shares thereof
  • Objects of the issue are – 1) Two existing PE funds and several smaller investors exit with Rs 380 crores 2) Rs 833 cr. will augment RBL’s Tier-I capital base to meet future capital requirements, loans/advances & investment portfolio, and compliance with Basel III norms and RBI guidelines.
  • Valuations are P/E 25.9 times and P/B 2.45 times at the upper end of price band.
  • The Grey Market Premium for this IPO is Rs 40-50 (on 17th Aug).

Introduction to RBL Bank

  • RBL is a Kolhapur (Mah.) based private sector bank with operations in 16 states and UTs.
  • Total Income in FY16 was Rs 3,235 cr. and Profits were Rs 292 cr. RBL topline and PAT has grown CAGR 57% and 45.6% respectively over the last 5 years.
  • It offers banking to companies, SMEs, agricultural, retail and low-income customers, Fig 1.
RBL Bank IPO, JainMatrix Investments

Fig 1 – Business Segments (FY16) and Fig 2 – Segments Growth (click to view)

RBL Bank IPO, JainMatrix Investments

Fig 3 – RBL Branch Network  and Fig 4 – RBL post IPO shareholding (click image to view)

  • It has 3,871 employees, 201 bank branches & 365 ATMs. See Fig 3.
  • Leaders are N. Ramachandran (Ch’man), Vishwavir Ahuja (MD-CEO) & Naresh Karia CFO
  • RBL has a 73-year operating history. They have transformed in the past 6 years with a new management, from a traditional to a ‘new age’ bank. RBL has expanded presence across India through a new network of branches and ATMs, and upgraded the delivery channels with modern tech-enabled channels like phone banking, internet banking and mobile banking.
  • RBL’s business segments consist of corporate and institutional banking (C&IB), commercial banking (CB), branch and business banking (BBB), agribusiness banking (AB), development banking and financial inclusion (DB&FI) and treasury and financial markets operations.
  • RBL’s capital adequacy ratio (CAR) was 12.94% compared to the RBI mandated CAR of 9.625%. The minimum CAR will increase from 9.625% (FY16) to 11.5% (FY19); an increase of 0.625% every fiscal.
  • In addition RBI requires banks to have an additional capital buffer for absorbing risks so the capital requirement for FY17 would be around 12-12.5%.

Business News and Updates

  • SEBI had provided a conditional go-ahead for the IPO of RBL. It had violated the Companies Act when it made 2 rights issues, allotting shares to 2,591 investors (Feb 2003), and 1,969 (Mar 2006). As per the earlier Companies Act of 1956, an unlisted company is not allowed to allot securities to more than 49 investors in a financial year. In order to fast track the IPO process, RBL has given the exit option to its existing shareholders via buyback offer.
  • RBL is looking to grow 10% above the industry average. Under the new leadership during the last 5 years, deposits and loan book rose 20 and 8 times to Rs 17,099 cr. and Rs 14,450 cr. resp. The operating profit rose 19 times from Rs 19 cr. to Rs 360 cr., and the customer base jumped from 1.5 lakhs to 17+ lakh currently. RBL Bank is aiming for a 1 crore customer base by 2020.
  • RBL launched an exclusive branch for start-ups in Bangalore. It was launched to assist entrepreneurs in setting up new companies/enterprises and offer banking services like FOREX, remittances, cash management and other value-added services with affiliates and partners.
  • Beacon and GPE are the only category 2 (PE) selling shareholders in the proposed IPO.
  • In FY14, RBL bought the credit card & home loan groups of RBS India, with 1.2 lakh customers.
  • The loan portfolio is Rs 21,229 crores. We can see that RBL has a diversified loan book. Fig 5.
JainMatrix Investments, RBL Bank IPO

Fig 5 – Loan Book Industry wise

  • RBL had signed up with IBM for their MobileFirst Platform to build, deploy and manage applications to improve the customer experience & stickiness, and employee engagement.
  • Strategy: RBL, with 60% branches in rural and semi-urban areas, is well-suited to serve the bottom of the pyramid where a slew of new payments banks and small finance banks are also expected to operate. In the past, RBL hired talent from microfinance companies for self-help group, joint liability lending and micro-lending businesses. It also has an expert team for rural agriculture, which involves lending for drip irrigation, cultivation, warehousing and transportation.
  • Personal Visit: A visit to RBL Bank branch was useful. The bank was on a main road, and visibility & location were excellent. The branch layout was good. The sales rep. was polite and helpful. All queries were addressed and there was an effort to cross sell other related products. The bank FD rates were attractive, and overall the urban bank branch had a high-end appeal. Perhaps in future we may become customers …..

Industry Outlook

  • The Indian banking sector remains under-penetrated in comparison to other countries. Even though banking industry has increased reach and scope, there is unmet demand for services.
  • Only 40% of the adult population (45% urban and 32% rural) had bank accounts in 2014.
  • Indian banking grew at a healthy pace, as deposits with banks grew at 16.6% CAGR during FY 07-15 to reach Rs 89 lakh cr. But growth slowed to 10.9% (Mar’15) from 14.6% in Mar’14.
  • Deposit accounts with banks per 1,000 adults increased from 734 in 2012 to 1,358 in 2014. Banking assets increased 14% CAGR from Rs 40.7 lakh cr. (Mar’11) to Rs 68.7 lakh cr. (Mar’15).
  • There was a slow growth in the balance sheets of banks witnessed over FY11-15, mainly due to tepid growth in loans and advances at below 10%. Investments also slowed. The decline in credit growth reflected a slowdown in industrial growth, poor corporates earnings growth, risk aversion from banks due to rising bad loans and governance related issues.
  • RBI & GoI are setting up new policies to expand and strengthen banking infra. Banks in India need to capitalize on these to support economic activity and meet financial needs of all sections of society.
  • PSB’s NPA problem: The PSB loans write-offs jumped sharply in recent years, with the state-owned banks writing off the highest-ever amount of Rs 59,547 cr. in FY16. State-owned banks’ gross NPAs by end FY16 were Rs 4.77 lakh cr. or 9.32% of the total advances. RBI has estimated that this ratio may rise to 10.1% by Mar 2017. PSB’s have recorded NPAs across the board, with corporate loans having for NPA of 11.95%, MSE had 11.13% and agriculture and allied were 6.39% of advances.
  • Recapitalisation of PSBs: The govt. proposed a recapitalization plan for the PSB’s to infuse Rs 25,000 cr. in FY16-17, followed by Rs 10,000 cr. each in FY18-19. This is aimed at shoring up the PSBs lending capacities, currently restricted by poor asset quality and weak capitalization. Moody’s has said that the 11 PSBs would need capital of about Rs 1.2 lakh cr. until 2020.
  • Market share: PSBs account for about 70% of the total banking system assets, down from 75% a few years ago. Robust growth for aggressive private banks happened in parallel to weakening of PSBs.
  • Payment Banks: The RBI in Aug 2015 granted approval to 11 entities to open PBs. PBs are tech enabled new stripped-down banks that will reach customers mainly through mobile phones rather than bank branches. PBs will provide basic savings, deposit, payment and remittance banking services, and will target like migrant workers, low-income households and tiny businesses.
  • SFBs: In Sep 2015, the RBI granted approval to 10 entities to convert to small finance banks.  The aim was to upgrade microfinance firms. SFBs would be similar to the existing commercial lenders and can undertake basic banking activities of accepting deposits and lending. The GoI and RBI have created a policy and regulatory framework for MFI to operate in the country, by setting up MUDRA for refinancing and regulating the MFI sector.
  • All universal banks (including RBL) are of course free to offer similar services as PBs and SFBs.
  • Given the large market share of PSBs, their structural issues, capitalization challenges and high NPAs we feel there is a permanent market share shift taking place to private sector banks & NBFCs. Dynamic banks & NBFCs are seeing ample scope to grow business and provide banking services.
  • The banking industry is a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian GDP is growing at 7% and  this should improve over the next few years. Basis this, the sector should grow at 14-16% p.a.

Financials of RBL

JainMatrix Investments, RBL Bank Financials

Fig 6 – RBL Financials

  • RBL Total Income, Net Interest Income (NII) and PAT/EPS have grown 57.0%, 56.1% and 45.6% CAGR over the last 5 years. These are very high growth rates. See Fig 6.
  • Profit margins have not suffered during this growth, and have recovered to 9%.
  • RBL has been paying dividend and also increasing this every year, a good sign. The dividend rate has improved over the years from 3% to 15% on FV Rs 10. The dividend yield is still low at 0.07%.
JainMatrix Investments, RBL Bank IPO

Fig 7 – Key Financial Metrics

  • In Fig 7 we map financial metrics of RBL over 3 years. NIM’s have improved marginally and the CAR has fallen marginally. The IPO proceeds should arrest the fall in CAR ratio.
  • ROA and RoNW is low. However RoNW has improved sharply in the last few years. The Gross NPAs to advances were 0.98% and Net NPAs were 0.59% for FY16, these look OK. CASA is low.

Benchmarking

We compare RBL with peers in the banking space (See exhibit 8).

JainMatrix Investments, RBL Bank IPO

Exhibit 8 – Benchmarking

  • RBL leads on 3 year sales growth and 3 year PAT growth.
  • The P/E, P/B and net NPA’s are in the mid-range amongst its peers.
  • RBL has the lowest margins among peers. It also has the lowest RoE in the industry. But this has risen sharply in 2 years. Dividend yield is low, but growth in dividend rate is also good.
  • PAT margin at 9.04% is the lowest among its comparable peers.

Our conclusion is that RBL is combining high growth and low margins. This is in sync with reports that RBL is addressing the semi urban and rural markets. It can prosper as a low-cost leader.

Positives for RBL Bank and the IPO offering

  • RBL is focusing on niche high growth areas. In the semi-urban and rural areas it has a MFI, agro and small business approach. In Bangalore, it has a start-up focused branch for new entrepreneurs.
  • The greatest potential sector within Indian BFSI is microfinance. RBL has focused sharply on the rural sector to combine high growth and low cost leadership. This is a sustainable success strategy.
  • The financials growth rates have been good over the last 5 years. Given this growth rate, the valuations of the IPO of a P/E of 25.9 and P/B of 2.45 do not look excessive.
  • With almost 50% of its 202 branches in Maharashtra, it has a high regional focus and visibility. Mah. is one of the fast progressing, high potential states and RBL is well placed in this region.
  • RBL has a good management team of experienced banking executives built since its 2010 revival. Mr. Vishwavir Ahuja is a post-graduate diploma from IIM-A and has about 35 years of experience in BFSI. The second rung of management too is impressive.
  • RBL uses M&A to grow rapidly. This can be a good means as long as they do not overpay for assets. Successful acquisitions lead to faster growth and improvement in bottom-line.

Internal Risks

  • Banking sector is competitive, with 120+ banks – PSBs, MNC & private Banks, SFBs, PBs, etc.
  • RBL has a concentration risk with exposure to certain industries, and if such sectors experience any sustained difficulties then RBL business would suffer. There are 3 sectors with >5% exposure, see Fig 5.
  • RBL has a concentration risk in loans to customers. Loans advanced to 20 largest borrowers were Rs 4,635 cr., representing 14% of advances. However this to be expected in a small bank.
  • Inorganic growth involves a number of risks. Additionally many M&A opportunities may be overpriced or of over-hyped assets, something RBL has to be careful about.
  • The 45-57% CAGR growth in financials over last 5 years may be unsustainable over the next 3 years as RBL has transitioned from small to midcap. Post IPO we expect a 28-40% growth.

External Risks

  • Our economic outlook is that India is recovering from a 2013 bottom in terms of GDP growth, with lower inflation, lower CAD & fiscal deficit and stable rupee against foreign currencies. However a continued recovery depends on the government policies, good execution and governance by RBI.
  • RBL is an aggressive player that has entered several new potential sectors and can make mistakes that can affect the growth trajectory and brand.
  • RBL is quite rural focused. India is recovering from 2 consecutive drought years that slowed rural demand. This year so far the rains have looked good. However good rains for the rest of this season remains an uncertainty that can affect rural farming output and demand.
  • RBL operates in a highly regulated banking industry and any changes in the regulations or enforcement initiatives may adversely affect their business.
  • RBL is operating in a good environment of falling interest rates. However recently CPI and WPI index rose to outside the comfort zone of RBI, which may trigger a reversal of this environment.
  • RBI has performed well over 3 years under the leadership of Raghuram Rajan. With his term at an end, we worry that in future RBI may not continue successfully on the reform & improvements, rupee defending and inflation control path seen so far.

Overall Opinion

  • India remains underbanked and in fact a number of NBFCs, MFIs and dynamic private banks are seeing an amazing growth in recent years, trying to fill these spaces. Private banks will grow fast and gain market share over PSB’s in a growing economy.
  • RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. The strategy of high growth, aggressive rates and lowest margins is sustainable.
  • Given the high growth, in terms of valuations, RBL is not expensive. However there is not much on the table for immediate gains.
  • Since the new management took over in 2010, RBL has seen A Grand Revival and entered a good business trajectory.
  • The key risks are rural slowdown in Maharashtra and high competition in the BFSI industry.
  • The IPO is rated a medium risk, medium return offering.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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  2. Yes Bank – A Rediscovery – April 2014 report
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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in RBL Bank or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Source for Data – RBL Bank Ltd – RED HERRING PROSPECTUS dated August 4th, 2016, company website, news reports, etc.

Yes Bank – A Rediscovery

  • 02 Apr 2014
  • CMP: Rs 415
  • Large Cap – Mkt Cap 14,900 crores.
  • Advice:  Buy

JainMatrix Investments has published a report on Yes Bank for its Subscribers. A partial report is available below. Edited from it are Financial metrics, Risk factors, Bench-marking, Financial Projections and 2 year target prices for YB stock. The JainMatrix Investment service is available for a subscription fee.

SUBSCRIBE NOW. Click on See Offering

Key Reasons to Invest:

  • The 24% fall since May ’13 is temporary in nature and gives an opportunity to invest at lower levels
  • Aggressive growth will continue in 20-35% range, with stable NIMs and profitability
  • Investments in Retail and SME will provide next phase of expansion
  • Resurgent share price indicates a recovery has started

Description and Profile

  • Yes Bank (YB) started in 2003, received the only greenfield bank license by RBI in last 15 years.
  • Based in Mumbai, Yes Bank’s FY13 revenue was Rs 9551 crore and net profit of 1300 cr.
  • Its market cap is 14,929 cr and it is among the top 6 private banks in India.
  • The leaders are Rana Kapoor (Founder, MD, CEO), Alok Gupta, Aditya Sanghi and Ajay Desai.
  • Share pattern %: Promoter 25.6, FIIs 39.6, MFs/DII 19.3, Retail/HNI 11.9, Corporate 2.5& Others 1.1.
  • YB has employee strength of over 9000, the bank branches are 550 and about 1,150 ATMs in India.
  • YB is focused on its Retail and MSME Loan portfolio, which has grown sharply, see Fig 1.
Business Segments, JainMatrix Investments

Fig 1 – Business Segments, JainMatrix Investments, click image to enlarge

Recent News and Updates

  • The recent Q3FY14 results were good. Net profit at 415.6 cr grew 21.4% YoY. NIM at 665 cr grew 13.9% YoY. NIM is at 2.9%. However results were not as good as Q2FY14.
  • RBI has permitted YB along with 5 other banks and 3 financial institutions to import gold under the 80:20 scheme. This is expected to lower gold cost and help the country’s external balances.
  • YB has raised USD 500 m in foreign currency loans and deposits in FY14 after regulatory relaxations introduced in the fiscal. RBI relaxed regulations by raising the borrowings limit from 50% to 100% of Tier I capital and concessional FCNR (B) deposit swap window. The loan facilities will be used to scale up general corporate lending and small and medium enterprise loan portfolios.
  • Ongoing Promoter legal tussle: Madhu Kapur, widow of Yes Bank co-founder Ashok Kapur, opposed in court the nomination of three directors to the lender’s board, an initiative led by her brother-in-law Rana Kapur. And, the Bombay HC admitted the plea.
  • Revised monetary policies favor YB. The RBI’s move to boost liquidity has brought down the Marginal Standing Facility rate from 10.25% (in July’13) to 9.0% (in Jan’14). This is positive for YB due to significant wholesale funding.
  • Savings rates deregulation in Oct’11 has aided retail customer acquisition, as YB aggressively hiked savings interest rates and shifted focus to growing the retail business.

Unique Strengths and Superior Strategies

  • YB has a vision to become “A global bank” and “India’s #4 private sector bank by 2015”. They have invested 60-75 cr. to expand branch network, and plan to open 100 new branches.
  • Their Vision-2015 was to create human capital of 12,750 employees, have 900 branch strength and a balance sheet of 150,000 cr. The bank is stretching to meet these objectives.
  • YB is focused on research and knowledge lead banking services. It pioneers lending to new sectors that have high potential growth prospects.
  • YB has a diversified and De-risked Credit Book.
Diversified Credit Book, JainMatrix Investments

Fig 2 – Diversified Credit Book, JainMatrix Investments

  • YB practices a strong employee value proposition of “Creating and Sharing value” with a vision to build their organization driven by professional entrepreneurship.
  • YB is focusing on the SME sector with access to finance and to help them excel in future.
  • YB has aggressively grown the CASA deposits to 20.9% from 18.3% last year. YB offers the savings bank interest rate of 7%, which is highest in the industry.
  • In an economy that used to be denied good banking, Yes Bank is building its brand around positivity, good services and fast approvals.

Stock Evaluation, Performance and Returns

  • YB had its IPO in July’05 priced at Rs 45. It was 31 times oversubscribed. At CMP of Rs 414 today, the stock has given a 28% CAGR return since IPO.
  • The share has risen well, but is volatile. After IPO, price rose to 277 in early 2008, fell to 41 in Mar ’09 and peaked at 547 in May ’13. Today, it is 24% below this peak price.
  • The Price fall around July-Aug’13 was much sharper for YB (56%) than the CNX Bank (33%).
  • This fall is linked to the events of 1) Taper of the monetary easing by Fed Bank in USA 2) A sharp fall in INR/USD value. 3) A case against YB by Promoter/owner Madhu Kapur.
  • Also YB which was an investment & trading favorite and had touched its all-time high of 547 in May’13, may have fallen more sharply due to exits by the trading community.
  • Total Income, NII & Other income and Profits have grown at 38%, 36% and 41% CAGR over 6 years.
Yes Bank Financials, JainMatrix Investments

Fig 3 – Yes Bank Financials, JainMatrix Investments

  • While total income has grown rapidly, margins have fallen a little in the last 3 years. This is natural as Yes Bank is growing into a Large Cap from a Mid Cap size. See Fig 3.
Yes Bank, Book Value, dividends, JainMatrix Investments

Fig 4 – Yes Bank, Book Value, dividends, JainMatrix Investments

  • The first dividend of Rs 1.5 was paid in ‘10, and since dividend has shown a steady increase, Fig 4.
  • The P/B ratio has fallen over 6 years, in spite of price rise, due to rapid growth in Book Value.
  • While NIM% has been flat for 5 years, other financial metrics like RoNW, RoE, CAR and CASA are showing YoY improvements. NIM has been between 2.7-3.2% over the past 5 years. This is low by industry standards as CASA is low. Capital Adequacy is at 18.3%, which is good. The ranges of ROE (20-25%) and RONW (15-23%) for last 5 years are high and growing.
  • The PE chart 5 shows that average PE over the last 6 years has been 15, with a range 5-25.
Yes Bank PE and EPS charts, JainMatrix Investments

Fig 5-6 – Yes Bank PE and EPS charts, JainMatrix Investments

  • PE has fallen today to 9.55 and is in the lowest quartile. This fall was in spite of EPS growth, Fig 6.
  • Price and EPS quarterly graph, shows that EPS has been rising very steadily. The Share Price has been roughly following EPS, except for the last one year.
  •  We expect the EPS of YB to stay within the channel in Fig 6.
  • It appears from Fig 6 that the price fall is not based on financials/ EPS but due to other reasons.
  • Gross & Net NPA rose by Q3FY14 to 0.39% & 0.08%, but are still at lowlevels for the industry.
  • Beta of the stock is 1.98 (Reuters) indicating high volatility.
  • Dividend yield is 1.46%, which is good for the banking sector.
  • PEG is at 0.36 – indicates safety and an undervalued stock.

Opinion, Outlook and Recommendation

  • India is under-banked. There is potential for Banks to invest in new sectors and stimulate growth.
  • The banking industry is a proxy to the overall economy, and should grow at 12-17% p.a.
  • YB as a new private bank is well placed to exploit the trend of Private sector growing faster than PSBs, will continue to be in the 20-35% range for the next 3 years.
  • The recent price fall of 24% since the peak in May ’13 provides an opportunity to invest in YB.
  • In Mar’14 YB crossed its 200DMA and has stayed above it for 2 weeks already. It is a bullish sign and may signal a long positive period for the stock.
  • YB will continue on the path of solid stock performance and dividends over the next decade. Invest now and systematically to gain for the long-term.
  • Our Call is a BUY.

JainMatrix Knowledge Base:

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Disclaimer:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Yes Bank: The Brave Warrior of Indian Banks

_____________________________________________________________

This report has been refreshed, read the latest April 2014 report Yes Bank – A Rediscovery

  • Date: September 12, 2012                               
  • CMP: Rs 333  Its a Large Cap with Mkt Cap Rs 11,833 cr               
  • Valuation: Today’s is Rs 414, available at 24% discount
  • Mar’14 target is 790 
  • Advice:  Buy now and systematically. 

Summary:

Key Reasons to Invest:

  • Aggressive growth (will continue in 35-45%), stable NIMs and profitablility
  • Investments in Retail and SME will provide next phase of expansion
  • Vision for 2015 is achievable and inspiring
  • The 14% fall since Mar ’12 gives an opportunity to invest at lower levels

Risks:

  • Global and India slowdown continues
  • Exposure to troubled sectors – Airlines, Power

This is an update of the Mar’12 Report by JainMatrix Investments – LINK

Yes Bank – Description and Profile

  • Yes Bank (YB) started in 2003, received the only New Bank license issued by RBI in 15 years.
  • Leaders are Rana Kapoor, Founder, MD & CEO and Aalok Gupta, EVP & Country Head- Retail
  • Promoter stake is 26%; other shareholders are FIIs 43%, MFs/ DII 14%, Individual – Retail /HNI 9.5%, Bodies Corporate/etc. 7.5%.
  • The firm has 4,875 employees; branches doubled in 1.5 years to 380 in 275 cities, with 650 ATMs.
  • Market cap is at 9,300 crores, putting it at #12 among Indian banks, and #7 in private sector.
Yes Bank - Growth Parameters, JainMatrix Investments

Fig 1 – Yes Bank – Growth Parameters, JainMatrix Investments (click any graphic to enlarge)

Superior Strategies and Execution

  • YB has a Vision 2015 (Version 2.0) which is an inspiring combination of soft and hard targets – “The Best Quality Bank of the World in India”; and 900 Branches, 12,750 employees, 2000 ATMs, Advances –`100,000 cr., Deposit base –`125,000 cr. and Balance Sheet –`150,000 cr. (as of now).
  • Seasoned, capable bankers in the Management team provide stability.
  • The focus is on Retail and SME banking involves growth in branches and investments in Sales and retail products. Recent deregulation of Savings Account interest rates allowed YB to introduce highest rates of 7%. The CASA is up from 10% in March ‘10 to15% by March ’12. Fig 1,
  • The firm rapidly enters high potential sectors for advisory, loan and banking services, with a Knowledge based approach to lending. Advances grew 45% CAGR in 4 years (industry growth 22%). With this approach, YB is pretty much The Brave Warrior of Indian Banks.
  • The Loan Book is well diversified, and the banks credit exposure to sensitive sector (due to asset price fluctuation) like capital markets, real estate, power, iron & steel and textiles are below the industry average. Here is a view of the top ten sectors as part of the Loan Book Distribution, Fig 2.
Yes Bank, Loan Book Distribution, JainMatrix Investments

Fig 2 – Yes Bank, Loan Book Distribution, JainMatrix Investments, (click any graphic to enlarge)

 

  •  In business development, mistakes are made, but YB learns from these, and exits fast (example – in 2007, the category of foreign exchange derivative products sold to SMEs turned loss making. There were litigations against YB (and several other banks too). These are now resolved.
  • Growth will be organic as executives feel that organic growth costs less compared to available assets

 

Industry Note

  • Scheduled Banks in India are Public Sector (27), Private Old (22), Private New (8) and Foreign (38).
  • Total number of (scheduled bank) savings accounts was 12.1 crore in 2011. But 80% are inactive, giving 2.4 cr. active accounts. The gross penetration is 10%, and active accounts penetration is 2%. Thus India is underbanked. (RBI data).
  • The FY12 credit growth of Indian banks was in line with the RBI projection of 16%.
  • Market share in savings accounts of banks dropped – SBI/associates (30.3 to 29.2%), other nation-alized banks (49 to 47.8%), foreign (5.8 to 5.2%), but Private banks grew (14.9 to 17.8%) by FY12.
  • The global Basel III requirements require banks to hold top quality capital equal to 7% of their assets adjusted for risk, will be phased in between 2013 and 2019. Aimed at improving financial stability and avoiding a repeat of the crisis of 2008, they will increase the cost of capital for banks.
  • Channels: By 2011, there were 93,800 ATMs in India, about 70% of them in Metro/ urban locations. Mobile banking is also an important banking channel, due to penetration of smartphones and 3G.

Stock Evaluation, Performance and Returns

  • YB had its IPO in July’05 priced at Rs 45. It was 31 times oversubscribed. At CMP of Rs 333 today, the stock has given a 28.5% CAGR return since IPO.
Yes Bank, Price Trend, JainMatrix Investments

Fig 3 – Yes Bank, Price Trend, JainMatrix Investments

  • The share has risen well, but is volatile. After IPO, price rose to 277 in early 2008, fell to 41 in Mar ’09 and peaked at 389 in Mar ’12. Today, it is 14% below this peak price. See Fig 3.
  • EPS has grown at 59.5% CAGR over 5 years, Fig 4.
Yes Bank - Quarterly Income and EPS, JainMatrix Investments

Fig 4 – Yes Bank – Quarterly Income and EPS, JainMatrix Investments

  • Quarterly Income and Profit too have grown rapidly (Fig 5), with NII + Other Income, NII and Net Profit growing at 46.5%, 57.4% and 59.6% CAGR over the last 5 years.
Yes Bank, Quarterly Income Profit, JainMatrix Investments

Fig 5 – Yes Bank, Quarterly Income Profit, JainMatrix Investments

  • The maiden dividend of Rs 1.5 was paid in 2010. Thereafter dividend has shown a steady increase.
  • The P/B ratio has fallen over 6 years, in spite of price rise, due to rapid growth in Book Value, Fig 6.
Yes Bank - Price, Dividends, BookValue, JainMatrix Investments

Fig 6 – Yes Bank – Price, Dividends, BookValue, JainMatrix Investments

  • Price and PE chart Fig 7, shows that average PE has been 15, while the PE range has been between 5 and 25. PE today is 11.2 and clearly in the ‘below average’ quartile. This PE fall has happened in spite of earnings growth, Fig 8.
Yes Bank, Price and PE Chart, JainMatrix Investments

Fig 7 – Yes Bank, Price and PE Chart, JainMatrix Investments

  • Price and EPS quarterly graph, Fig 8, shows that EPS growth has been improving. The Share Price has been roughly following EPS. We expect the EPS of YB to stay within the channel in Fig 8.
Yes Bank, Price and EPS Chart, JainMatrix Investments

Fig 8 – Yes Bank, Price and EPS Chart, JainMatrix Investments

  • NIM has been between 2.7-3.2% over the past 5 years. This is low by industry standards as CASA is low. Capital Adequacy is at 16.5%, which is good.
  • Gross & Net NPA are at 0.28% & 0.06%, among the lowest NPA levels in the industry.
  • ROE and RONW are between 20-24% in FY12, which is excellent.
  • Beta of the stock is 1.61 (Reuters) indicating high volatility.
  • PEG is at 0.33 – indicates safety and great value.

Benchmarking and Financial Projections

In a benchmarking exercise, we compare YB with 3 firms in the same or related industry, Table 9.

Yes Bank, Benchmarking Aanalysis, JainMatrix Investments

Table 9 – Yes Bank, Benchmarking Analysis, JainMatrix Investments

  • Conclusions: Compared to peer Banks, YB holds its own on most parameters. YB looks particularly strong on EBITDA and Profit per employee ratios indicating high productivity.
  • Bajaj Finance has the flexibility of an NBFC, and has performed better on many parameters. See Research Report on Bajaj Finance.

In a Financial projections exercise, we project YB financials till FY 2014, See table 10.

Yes Bank - Financial Projections, JainMatrix Investments

Table 10 – Yes Bank – Financial Projections, JainMatrix Investments

Risks:

  • Current Economic and Government data indicate a slowdown across industry, a rising govt fiscal deficit, current account deficit, and weak rupee. Further, oil prices are high and other commodity prices are falling. Decision-making is slowing in the government, as past decisions are being revisited in Telecom and Coal. These point to a slowdown that can affect YB.
    • YB will continue to lead on performance parameters. But if there is a sector slowdown, the performance will be affected. The poor Indian economic data if seen in the context of an international slowdown, suddenly looks better than many other countries. Currently the Indian market indices are holding up well due to FII confidence and fund inflows. So there may be a cushion to the fall in Indian Indices.
  • YB is an aggressive player that enters new potential sectors and can make mistakes that can affect the overall brand. These can impact sentiment and valuations.
  • Infrastructure woes: Ratio of Non-fund based exposure to Power Sector to net worth is high at 49% (Macquarie Research). This sector while critical for the India growth, is in a stressed condition, and awaiting government driven systemic improvements. Also exposure to troubled Airline sector. Airline companies owe RS 770 Cr to YB.
    • The Loan Book details in Fig 2 and the calibrated approach to loans exposure build confidence that YB has a safer approach than industry.

Opinion, Outlook and Recommendation

  • India is underbanked. There is potential for Banks to invest in new sectors and stimulate industry growth. In Retail, the consumption play is bank accounts, personal/housing loans, credit cards, etc.
  • The banking industry is also a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian economy is well placed to grow at 6-9% per annum over the next decade. Basis this, the Banking sector will grow at 15-24% p.a.
  • YB is well placed to exploit the trend of Private sector growing faster than PSBs, and its own growth rate will be superior to the peers. The strategies followed and good execution means that the growth will continue to be in the 35-45% range for the next 3 years.
  • The recent price fall of 14% since the peak in Mar ’12 provides an opportunity to invest in YB.
  • The share price is currently poised at its 200 DMA of 333. The expectation is that it will take support at these levels before rising higher.
  • The valuation and projection/ targets for YB are:
    • Current valuation is of 414, indicating it is available at a 24% discount at CMP
    • The target for March ‘14 is 790 (a 137% appreciation)
  • YB will continue on the path of solid stock performance and dividends over the next decade. Invest now and systematically to gain for the long-term.

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Consult your financial planner for deciding about your investment funds.

State Bank of India – FY12 results

Date: May 21, 2012                                                    SBI Market Price: 2020

This Indian Banking heavyweight declared outstanding results on May 18th for FY12.

SBI chairman Pratip Chaudhuri reported improvements: PAT has shot up 43% over that of FY11. Dividend has been increased from 300% to 350% of Face Value of Rs 10.

SBI has also successfully managed a significant improvement in asset quality. Its gross NPAs fell to 4.44% from last quarter’s 4.61%. Significant restructuring has helped recognize and recover NPA.

Lets do a quick Analysis of this stock to see where its heading.

Pricing Snapshot

A 5-year view of the share price of SBI shows us:

SBI - Price Chart, JainMatrix Investments

SBI – Price Chart – Click graph to enlarge

  • Share price has risen 17% per annum over the last 5 years.
  • The all time high was 3515 in Nov 2010. Today it is 43% below this peak.
  • The current market cap is 1,35,000 cr. ranking it #6 among Indian firms.

Financial Snapshot

  • EPS, Income and PAT have appreciated by 19%, 21%and 19% CAGR over this 5-year period.
SBI Consolidated Financials - JainMatrix Investments - Click Graph to enlarge

SBI Consolidated Financials – JainMatrix Investments – Click Graph to enlarge

  • P/E has moved in a range of 6 – 21 times. Current P/E of 8.5 indicates Underpriced status.
  • PEG is at 0.44 – indicates undervalued status

Conclusion

  • SBI is today an under priced stock. Investors can buy at these lower levels.

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Also see: https://jainmatrix.wordpress.com/disclaimer/