Yes Bank : This Bank says Yes to growth and recovery

Company Profile
Yes Bank, a private bank incorporated in 2003, is promoted and led by Mr. Rana Kapoor, who is currently the MD & CEO of the bank. Yes Bank has
steadily built a full-service commercial bank with Corporate, Retail and SME Banking platforms, with a comprehensive product suite. It was the first bank to offer differentiated rates on savings account following RBI's deregulation of savings account rates in October 2011. The number of branches and ATMs stood at 964 and 1,757 respectively.

Latest Results
Yes Bank's strong operational performance for the December quarter should for now allay concerns over asset quality divergence flagged by the RBI audit. Well-capitalised after the latest round of fund raising, Yes Bank is gaining market share, building a strong deposit franchise, and increasing exposure to better quality corporate and retail assets.

Valued at 2.9X FY19 book, Yes Bank has a strong earnings growth trajectory ahead. But for the stock to get re-rated, Yes Bank would require a more balanced asset mix (in favour of retail) and a clean chit from RBI in the next audit.

Strong performance

Profit-after-tax grew 22 percent and pre-provision profit, 38 percent. Growth in net interest income (difference between interest income and interest expenses) at 26.8 percent was helped by a stable net interest margin at 3.5 percent and robust 46.5 percent growth in advances.

The non-interest income growth too was a healthy 40 percent driven by a big increase in core fees. Provisions jumped sharply as the bank may have created additional buffer against SR (security receipts against assets sold to Asset Reconstruction Companies) and taken steps towards having a provision cover of 60 percent in the next couple of years. While cost was well-contained, the bank targets to achieve a much better cost to income ratio in the future.


The 20 basis points sequential reduction in interest margin was attributed to the bank raising Rs 9,415 crore quasi capital (including Tier II bonds) that are much costlier than the bank’s overall cost of funds (nevertheless improved its capital adequacy). Part of the decline was also attributed to Security Receipts. Net Security Receipts (SRs) for Yes stood at 1.06 percent of gross advances with a net increase in the quarter of Rs 421.9 Crores.

Business showing traction

The bank has been aggressive in capturing market share. Advances rose 46.5 percent and Yes Bank now has close to 7 percent share in incremental advances. Going forward, the focus would be on improving the share of non-corporate, especially retail.


The bank has been able to compete in the market, thanks to the low-cost liability profile it is building up steadily. While overall deposits grew by 29.7 percent, the low-cost CASA (Current & Savings account) deposits grew by 48 percent and constitute 38 percent of total deposits. The bank has close to 9.5 percent share in the incremental deposits of the system. The bank is eyeing CASA ratio of 40 percent before September 2018.

Confident of achieving 4 percent interest margin

Thanks to the strength of the low-cost liability, Yes Bank has been able to maintain stable margins even as stiff competition has been eroding yield on advances.


The bank is eyeing 4 percent net interest margin as it takes the low-cost deposits share to a formidable level of 40 percent. This is all the more helpful, especially in a rising rate environment. Since the bank offers close to 6 percent on its savings account (compared to 3.5 percent of most banks) there is headroom to reduce costs there. Finally, Yes Bank expects to earn better as it originates more of its own priority sector lending (PSL) loans than the predominant buyout that it had done in the past.

Asset quality “ awaiting the clean chit?

The bank has embarked on a journey to incrementally de-risk its book which is also reflected in the falling lending yield. Over 75 percent of the corporate portfolio is now rated “A” or above with a well-diversified sectoral composition.

While the reported NPL (non-performing loan) picture looks better in the quarter, we would like to monitor the slippage closely as that number has not fallen significantly.


In the quarter, out of the total slippage of Rs 495 crore - Rs 245.4 crores was from accounts previously classified under SDR and  NCLT categories.


A recap on divergence

Riding on the strength of its superior loan structuring skills, the bank had only taken a small quantum (Rs 1219 crore) of the latest round of divergence of Rs 6355 crore into gross NPA in the last quarter.

Close to 47 percent (Rs 2977 crore) of the divergence had been classified as standard assets by the bank. In this quarter, Yes Bank reported nil slippage into NPA for accounts classified as Standard with significant principal loan repayments and with no interest overdue.

If we were to monitor all known troubled exposure (under various dispensation like restructured, SDR etc., outstanding SR and RBI divergence classified as standard assets) the quantum is close to Rs 5500 crore “ 3.2 percent of advances. With the incremental better quality of growth, the problem, therefore isn't going to impact financial performance meaningfully. However, to establish credibility of its numbers, the clean chit from RBI is important.

While we do see provision remaining elevated especially as the bank has set a target to achieve 60 percent cover within the next few quarters, the earnings momentum should enable the same.

The next round of inspection is for FY18 (which is at least a good 9 months from now). We do not see any imminent near term uncertainty. The bank is well-capitalised (Capital adequacy of 19.5 percent), steadily capturing market share in advances and building a solid low-cost liability franchise.

With the systemic NPL resolution moving into high gear, we are staring at an end of the bad asset cycle. The recapitalisation of PSU banks and resolution of bad assets should pave the way for recovery of the capex cycle that stands to benefit most corporate lenders including Yes Bank. The bank has already guided to a strong momentum. Hence at 2.9X FY19 book Yes Bank will remain a candidate to look at for its long road to profitable growth ahead.

3QFY18 conference call highlights
Asset quality
Overall sensitive sector exposure has come down to 7.1% (iron and steel is 2%;Telecom is 2.3% v/s 3.9% a quarter ago).
 The bank guided that ~30-40% of SRs will be recovered in next 15 months.
 One standard account of INR4.21b was sold to an ARC.
 Repayment on RBI divergence account has been due to change in management.
In other cases, repayment has been due to improvement in operational cash
flows.

P/L related
 Corporate fees in terms of IFRS: 40-50% of the fees will be subject to amortization, but also last year’s amortized fees will recognized. Net impact will thus be lower.
 Loan yields have fallen as new loans are showing lower risks, and thus, lending rates are also lower.

Balance-sheet related
 Impact on margins due to two reasons: a) About 10bp reduction in NIM due to perpetual bonds (which will be part of capital under IFRS) amounting to INR54.5b at 9%; and AT1 bonds also raised INR40b of tier 2 capital at 7.8% (market rate ~8.4%). b) ~10bp impact on NIM from SR/NPA portfolio.

 Going forward, biggest contributor to improvement in NIM will be CASA.

 The bank is working on making PSLC book self-sufficient and focusing on organic growth.

 The bank targets taking retail banking to 40% of total book by FY20. For retail growth, the focus is not just on PSLC lending, but also on organic growth. PSLC would accrete as a byproduct to normal retail lending.

 Up to 20% of growth is self- funded. The bank hinted to a discussion in April 2018 about raising capital.
 CD ratio has gone up due to high borrowings (capital planning) and that has hurt margins due to higher cost.

Business updates
 The bank is adding ~10m SA customers every month, which is helping with cross-sell of other products. YES Securities is also helping them cross-sell.

Valuation and view
As per Motilal Oswal Securities Report on Yes Bank:

 With the continued investment in franchise, people and processes, YES is well positioned to leverage on to the opportunity that Indian economy presents.

Bank has strong capitalization (CET1 of ~10.7%), branch network has increased to 1,050 v/s 430 in FY13.

 Comfortable liquidity, low inflation and bulk deposit rate is a significant positive for YES from NIMs (higher short term liabilities) and bond gains perspective (~9% share of corporate bonds in customer assets). Further bank has room to reduce savings deposits rate leading to stability over margins.
Stable/improving NIM and traction in fees will keep core PPP/ earnings CAGR strong at ~33%/28%
over FY17/20E despite strong investments in building liability franchise.

 With an incremental market share of 3.5%+, aggressive roll-out of retail/SME products and strong corporate relationships, YES is expected to register loan CAGR (FY17-20) of 32% – at least 2x of system loan growth.

 YES has a well-laid strategy for growing small business loans (most of which qualify as priority sector loans) and cross-selling to acquired customers which would help granular retail fees growth. On balance-sheet front, initial focus of the bank will be on growing the liability side first and as customer relationships age, focus would be on cross-selling its retail assets. The bank has been
expanding its branch network at an increasing pace.

 The stock trades at 2.6x FY19 BV and 14.2x FY19 EPS.
Reiterate Buy with a target price of INR410 (2.7x Mar 2020 ABV) – based on residual income model
(Average growth of ~17% over FY17-37E, Terminal growth of 5%, 13.7% cost of
equity – risk free rate of 7%, beta of 1.34, and 5% market risk premium.

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Q3FY18-Sector Review:
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2QFY18 Result Updates - ITC, Yes Bank, CG Consumer Electricals, Jubilant Foodworks and ABB India

ITC - 2QFY18 Result Update - Modest Quarter; Valuations in Favour

ITC has reported muted set of numbers in 2QFY18 with its net sales and net profit growing by 7.2% YoY and 5.6% YoY to Rs102.3bn and Rs26.4bn, respectively. Gross revenues before GST grew by 3.9% YoY to Rs163.9bn. EBITDA margins declined by 80bps YoY to 35.9%.

We estimate ITC to post revenue and earnings CAGR of 9.9% and 12.4%, respectively through FY17-19E. Based on expected EPS of Rs10.6, the stock currently trades at an attractive PE multiple of 25.4x FY19E earnings, which is at a 35% to the consumer sector multiples (ex-ITC). The stock has corrected by >20% post revision in GST rates, thereby providing some margin of safety, in our view. Notwithstanding the near-term concerns, we maintain our BUY recommendation on the stock with a revised Target Price of Rs323 (from Rs336 earlier).

Muted Quarter for Cigarette Biz

We estimate the cigarette volumes to have fallen by ~6-7% YoY during the quarter. Post the revised GST rates and compensation cess, ITC effected a 14% price increase across the portfolio, which led to volume de-growth. We expect the situation to normalise in 2HFY18 with gradual acceptance of the price increase by the consumers. Although the reported cigarette sales are not comparable due to re-classification of line items post GST, segmental EBIT grew by 2.3% YoY to Rs32.9bn. Segmental EBIT was also impacted due to higher costs associated with transition to GST due to non availability of additional duty surcharge credit on transition stocks.

Decent Growth in FMCG Biz despite GST Transition

Reported revenue from the non-cigarette FMCG business rose by 5% YoY to Rs28bn (comparable sales growth of 10%), while it registered an EBIT of Rs205mn vs. loss of Rs33mn in the base quarter. Revenue growth was led by branded foods and personal care segments, but was adversely impacted due to on-going restructuring in lifestyle retailing business.

Mixed Performance in Other Segments

Revenue from Hotels remained largely flat at Rs3bn, although EBIT improved from Rs7mn to Rs42mn. While room revenues increased at a healthy pace due to higher ARRs, F&B revenues were adversely impacted due to ban on liquor near highways. Paperboard revenues fell by 1.7% YoY to Rs13.1bn due to subdued demand in FMCG and cigarette business, but segmental EBIT grew by 18.2% YoY to Rs2.7bn on the back of improved product-mix and cost saving initiatives. Agri-business revenues rose by 4.7% YoY to Rs19.7bn, but EBIT fell by 13.7% YoY to Rs2.6bn due to shortage of leaf tobacco and stronger INR, which impacted exports.

Outlook & Valuation

With this modest quarterly performance, we believe that the worst is behind for ITC. The current stock price is 20% lower from the date on which revised GST rates on cigarettes were announced, thereby providing some margin of safety. We continue to remain positive on the stock considering ITC’s dominant market leadership, pricing power, strong cash flow generation and attractive multiples. We maintain our BUY recommendation on the stock with a revised SOTP-based Target Price of Rs323 (from Rs336 earlier).

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Yes Bank - 2QFY18 Result Update - Operating Performance Improves, but Asset Quality Surprises Negatively

Yes Bank continued to deliver higher-than-estimated operating performance in 2QFY18 driven by sharp sequential growth in NII and other income along with stellar business growth led by consumer loans and business banking portfolio. However, the Bank reported the highest ever fresh slippages to the tune of Rs19.9bn led by substantially higher divergence, as suggested by the RBI in Annual Risk Based Supervision Audit and elevated slippages (Rs7.7bn) from other stressed sectors. The Bank has reported a divergence of Rs63.5bn on gross NPA front in RBI Annual Supervision Audit for FY17, out of which only 19% (Rs12.2bn) slipped into NPA, while the remaining got either resolved or sold.

Management Commentary & Guidance

• Out of total divergence of Rs63.6bn; 47% got upgraded on satisfactory conduct, 27% got repaid and 7.3% got sold to the ARC. The rest 19% reported as fresh slippages in 2QFY18.
• The Management has shared last 3 Risk Based Supervision Audit for FY15, FY16 and FY17, which reveals the Bank on an average has witnessed ~16% net slippages to NPA.
• Further, the Bank has exposure to 9 corporate accounts out of total 40-45 accounts referred to Insolvency & Bankruptcy Code (IBC) by the RBI. It has total exposure of Rs14.3bn towards these accounts. Out of which only Rs1.7bn are currently classified as standard asset.
• The Management ruled out any overlap among any divergence reported in the RBI Annual Supervision Audit for FY15, FY16 and FY17. Further, maximum divergences are from Infra & Infra related accounts.
• The Bank continues to maintain credit cost guidance of 70bps for FY18, compared to actual credit cost of 48bps in 1HFY18.
• The Management looks forward to 25-30% growth in loan book in FY18, compared to 12.4% YTD. Further, it expects 3.7- 3.8% growth in NIMs in current fiscal.
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Outlook & Valuation

YES Bank is making sustained progress towards building a strong retail franchise, which in our view would add depth to its balance sheet and boost earnings. Further, recent developments indicate that the Bank has been able to manage the issues of asset quality effectively. Further, the Bank also raised capital to support its aggressive growth plan over next 2-3 years. Looking ahead, we expect the Bank to sustain continued improvement in operating metrics led by dwindling headwinds on asset quality front and improving balance sheet growth especially from retail segment. Hence, we maintain our BUY on recommendation the stock with a revised Target Price of Rs350 based on 2.7x FY19E Adjusted Book Value.

Other Post on YES Bank : Future of yes bank after stock split

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CG Consumer Electricals - 2QFY18 Result Update - A Strong Show; Fundamentals Remain Intact

Led by volume growth, Crompton Greaves Consumer Electricals (CGCEL) has reported a strong performance in 2QFY18. Its reported revenue grew by 6.6% YoY to Rs9.6bn, while adjusted revenue – considering the impact of Excise Duty – grew by 15.9% YoY. CGCEL’s reported PAT grew by 23.3% YoY to Rs0.7bn, while adjusted for non-cash ESOP charge of Rs141mn, its PAT surged by 39.8% YoY. We believe that the expected strong double-digit growth in light electrical industry augurs well for CGCEL. Thus, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs246.

Strong Growth in Lighting Biz Boosts Adjusted Revenue

Revenue from lighting business – which contributes 35% to CGEL’s total sales – grew by 15.5% YoY. Within the lighting business, LED segment grew by 25% YoY to account for ~70% of its total CGCEL’s lighting sales. Consumer Electrical segment, which contributes ~64% to CGCEL’s total revenue, grew by 2.4% YoY. Sales volume of premium fans also remained strong. The markets witnessed some normalcy following disruption in run-up to and following GST roll-out, which led to notable improvement in two biggest businesses i.e. Fans & Lighting. While leveraging innovation in Anti Dust Fans led to gain in consumption market share in Fans segment, cost optimisation led to healthy growth in B2C lighting growth. The Company expects the business to back to normal by 3QFY18-end.

Higher Margin Aids Bottom-line Growth

CGCEL’s EBITDA margin grew by 133bps YoY to 12.6% in 2QFY18 led by improved margin in electrical consumer durable and lighting products business. While the margin from electrical consumer durable segment improved by 347bps YoY to 17.8% in 2QFY18 (vs. 14.4% in 2QFY17), the lighting products business segment witnessed 90bps YoY improvement in margin to 12.6% in 2QFY18. Stable cost structure owing to continued efforts on operational efficiencies and improved margins led to 23.3% YoY growth in reported net profit to Rs0.70bn.

Outlook & Valuation

We expect CGCEL’s business to recover in next 1-2 quarters, as normalcy is steadily getting restored post GST roll-out. We expect CGCEL’s revenue and earnings to witness 16.4% and 23.5% CAGR, respectively over FY17-19E driven by strong product portfolio of established brands, market leadership and strong distribution network. The Company is expected to deliver RoCE in the range of 30-40% during the same period. We maintain our BUY recommendation on the stock with an unrevised Target Price of Rs246 (Valuing at 35x P/E to its FY19E EPS).

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Jubilant Foodworks - 2QFY18 Result Update - Revenues in line but strong EBITDA beat; Upgrade to HOLD

Surpassing our estimates, Jubilant FoodWorks (JFL) has posted a strong performance in 2QFY18. While net revenues grew by 9.2% YoY to Rs7.3bn in line with our estimates, EBITDA surged by 59% YoY to Rs1bn vs. our estimate of Rs796mn. Led by sharp fall in operating costs, JFL’s net profit surged by 125% YoY to Rs485mn vs. our estimate of Rs239mn. Same Store Sales (SSS) growth came in at 5.5% YoY. Depreciation charge declined by 11% YoY to Rs326mn due to reversal of accelerated depreciation from 1QFY18, thereby aiding earnings growth.

Considering sharp improvement in margin profile due to low store addition, aggressive cost reduction and lower base effect coupled with stable SSS growth, we are revising our revenue/EBITDA/PAT estimates upwards by 4.8%/17%/35%, respectively for FY19E. On account of high operating leverage, we expect recovery in SSS would lead to sharp improvement in margins. Hence, we upgrade our recommendation on the stock to HOLD from REDUCE with an upwardly revised Target Price of Rs1,586 (from Rs922 earlier).

Stable SSS Growth with No Store Addition

SSS grew by 5.5% YoY compared to 7% YoY in 1QFY18. Looking ahead, we expect lower base effect to result in higher SSS growth in coming couple of quarters. While the Company added one new store, it also closed one existing store keeping the Dominos store count intact at 1,125. JFL has reduced the store opening target from 40-50 to 30-40 stores in FY18. Store count for Dunkin Donuts has come down to 52 from 55 in the same period. The Management stated that the consumer response to the recent product changes has been encouraging. The Company has also passed on the benefit of lower GST rates to the consumers.

High Operating Leverage in Play

JFL’s gross margins declined 70bps YoY to 74.1%. Despite rise in the prices of key inputs and higher cheese content in Pizzas, JFL was able to restrict the fall in margins owing to lower discounting and availing of input tax credits. Sharp focus on cost containment coupled with no major store addition resulted in fall in other cost heads i.e. rent (-90bps YoY), employee (-100bps YoY) and other expenses (-310bps YoY). Thus, the resultant EBITDA margins rose by 440bps YoY to 14.1%. 

Outlook & Valuation

Considering the sharp earnings beat coupled with increased focus on cost rationalisation and improved consumer sentiment, we have increased our earnings estimates for JFL. Going forward, while SSS growth would be a key monitorable factor, store expansion, cost rationalisation and reduction in Dunkin losses will also be important factors to watch out for, in our view. Based on expected EPS of Rs28.6, the stock currently trades at 57.6x FY19E earnings. We upgrade our recommendation on the stock to HOLD from REDUCE with an upwardly revised Target Price of Rs1,586 (from Rs922 earlier).

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ABB India - 3QCY17 Result Update - Improving Fundamentals; Robust Order Book

Led by better operating margins, ABB India’s PAT grew by 18.2% YoY to Rs0.83bn in 3QCY17. However, its top-line declined by 13.1% YoY to Rs18.8bn, as all its businesses reported lower revenues following GST roll-out. Though the stock has gained ~25% since our initiation report in Jan’17, we continue to remain positive on the stock owing to improving fundamentals. We maintain our BUY recommendation on the stock with an unrevised Target Price of Rs1,607.

All Business Verticals Reeled Under GST Impact

Though the new GST structure caused an impasse for several SMEs leading to deferrals and delays in the absence of clarity, innovative product-mix and enhanced manufacturing base yielded results in the form of export orders (15% of total revenue) during the quarter. Revenue declined by 13.1% YoY to Rs18.8bn with the decline in revenues in all business verticals i.e. Electrification Products (-2.8% YoY), Industrial Automation (-29.2% YoY), Robotics & Motion (-7.1% YoY) and Power Grids (-14.3% YoY). Looking ahead, the Management expects revenue to come back to normal level as GST clarity issue among the suppliers and vendors is over.

Operating Margin Continues to Improve

ABB continued to report steady improvement in margins led by operational efficiencies and focus on products. Initiatives undertaken in past 3-4 years i.e. increased localisation, rationalisation of supply chain, improving efficiency, better project management and lower input cost aided ABB to report steady improvement in margins. Further, customised offerings, continued focus on cost and differentiated portfolio supported YoY improvement in ABB’s net working capital position. PBIT margins for Robotics & Motion, Industrial Automation and Power Grid expanded by 481bps YoY, 227bps YoY and 482bps YoY, respectively. However, PBIT margins for Electrification products decreased by 11bps YoY.

Order Backlog Offers Strong Revenue Visibility

Though ABB secured orders worth Rs19.3bn in 3QCY17 (vs. Rs29.7bn in 3QCY16), adjusting for one-time large rail order in 3QCY16, fresh orders remained largely flat. Base orders were the key contributor with industry turning to improving operational efficiencies through technology and digital upgrades including robotics automation. Notably, continued uptrend in overseas business and order backlog of Rs121.3bn augur well for ABB.

Outlook & Valuation

Looking ahead, we expect ABB’s earnings to witness 34.5% CAGR through CY16-18E, while RoE is expected to improve to 15.4% in CY18E from 11.5% in CY16. On the back of strong presence in power T&D space, we believe ABB would continue to command higher multiple, going forward. Valuing at 50x CY18E (15% discount to its mean multiple of 60x over 2005-15) earnings of Rs32.1/share, we maintain our BUY recommendation with an unrevised Target Price of Rs1,607.

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