Yes Bank announced its board approval to raise $2 billion from a clutch of global and domestic Investors through preferential allotment route on 29th November 2019. The announcement was much awaited by the investors in-order to get clarity on road ahead for the company after a turbulent 2019
List of bidders for Investment through preferential route
Source: Company Filings
As per Yes Bank CEO – Mr Ravneet Gill’s interview to CNBC TV-18 on 30th November 2019, the issue will be at INR 78 per share as per the past 6 months average price. Basis the details shared in interview today and press release yesterday, the equity issuance will be as detailed below:
The equity dilution for the existing shareholders therefore is substantial and will require re-calibration of P/E multiple calculation.
Also, the CEO mentioned the following in his interview to CNBC TV-18:
Given the fact that this is a preferential allotment, in many ways, it constrain the kind of investor that we could bring on board and when I say constrained, let me just give you a little sense on that. First and foremost, if you look at the mutual funds (MFs), they will struggle with the one year lock-in so there is a constraint over them.
There were lots of funds which came and made very strong expressions of interest (EoI) and then what really became a constraining factor there was a regulation that if you have sold the stock in the last six months then you cannot qualify for a preferential allotment. So many of these funds who wanted to participate in this equity raise, got ruled out simply because they had sold the Yes Bank stock in the last six months.Source: Interview to CNBC TV-18
However, the specifics of the equity raise are still not completely clear. For example, we still do not know whether the preferential allotment will be through Optional Convertible Preference Shares (OCPS) or Compulsory Convertible Preference Shares (CCPS). Also, what are the options on these equity shares?
We believe the picture will be more clear post the Board Meeting on 10th December 2019.
Stock Price may continue to remain under stress after initial Euphoria
The funding of INR 14,000 Crore only allays fears about the ability of the company to be a ‘going concern’. However, the markets will still be wary of the provisioning for bad loans in H2 fiscal 2020. Higher provisions may lead to company again tapping the markets for raising one more round of capital thereby leading to equity dilution. Further, the higher provisioning will also mean the current round of funding (INR 14,000 Crore) will not be able to generate any growth for the company and will only act as a enabler to meet the RBI guidelines pertaining to capital adequacy.
As of Q2 fiscal 2020, the company had INR 31,000 (or 10.1%) of its overall corporate book belonging to BB and below category. Further, the management expects possibility of slippages in 25% of this book, which is around INR 7,000-8,000 Crore. Therefore, a major part of the company’s preferential allotment (around 60%) may only act as cushion against bad loans and in-order to adhere to regulatory requirements on capital adequacy.
Furthermore, even if the company is able to get back to its growth path in fiscal 2021, there may not be significant upside available for the company over the short-term due to equity dilution. Assuming 100% of the preference shares will be CCPS, we have worked out on following scenarios
Please note the PAT numbers are not based on detailed projections, as it would be difficult to forecast provisioning numbers (as explained above) basis publicly available data. We only intend to provide EPS and IRR details basis different scenarios to give sense on dilution.
Different Scenarios for Fiscal 2021
In fiscal 2019, the company reported PAT of INR 1,720 Crore. However, during H1 fiscal 2020, the company reported profit of merely INR 200 Crore (without considering Deferred Tax Adjustment) . The provision during the period was INR 3,120 Crore.
The PAT for the company in fiscal 2021 will depend on the slippages in BB and below book. If the slippages increases and are to the tune of 30-35%, (against management expectation of 25%), then profitability for the company will be under sever pressure even during the next fiscal
Different Scenarios for Fiscal 2022
The company may enter growth path in fiscal 2022 after a period of consolidation in fiscal 2019 and fiscal 2020. However, this will also depend on company’s ability to raise capital through debt.
Why would an Investor look to take long-term position in the stock?
The investors would no longer be worried about the ability of the bank to be a going concern with fund raise of $2 billion
Fundamentally, the increase in retailization of portfolio might give comfort to many investors
No influence of previous promoters in the bank which will ring-fence the bank against regulatory and legal issues
Opportunity to invest in one of the leading Private Banks at a “cheap” price (not valuations)
Why would an Investor avoid the stock despite the fund-raise?
The two major investors on board –SPGP Holdings and Citax Holdings – are very little known to Indian Inc; for SPGP holdings, this is the first investment in the country as per its interview to CNBC TV-18
Therefore, many investors would be sceptical about the inability of the bank to attract marquee Private Equity (though CEO shed light on the issue, the interpretation of the same is open for debate)
Higher Provision in H2 Fiscal 2020 in BB and below book might hamper the ability of the bank to deploy incremental funds for growth
Investors might be wary of pending regulatory approvals from RBI for preferential allotment
To conclude, investment opportunity in Yes Bank is only for long-term investors with minimum horizon of 18 months. Retail Investors will be best served to avoid taking short-term bets on this counter. The stock price may be “cheap” but even at INR 64 (INR 16,300 Crore Market Cap), the valuation justifies the current fundamentals. The company still has to navigate itself through the difficult phase and fund raising of $2 billion is merely the beginning. However, whether the patience will pay over the long-run is a million dollar question!
Disclaimer: The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and for academic purpose and is not intended to be and must not alone be taken as the basis for an investment decision.