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Saturday, June 18, 2005
YES Bank - Capital Markets
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4YES Bank : Issue Highlights
YES Bank (YB) is tapping the primary market to increase its paid-up capital base, meet its long-term capital requirement for growth and diversify the equity-holding structure. Knowledge banking is the bank's USP. The bank will focus on, develop and leverage knowledge in specific, high-growth sectors to win and expand client relationships in them.
The bank has already commenced knowledge banking with respect to food and agri-business, life sciences, TMT, and infrastructure. It is also in the process of instituting the knowledge banking in sectors like textiles, select engineering and retailing. It intends to be a significant player in agri-business sector. Already this sector accounts for 18.1% of its advance portfolio.
YB has two operational branches in Mumbai and Delhi, the financial hubs of the country. It plans to open another 30 branches by the end of FY 2006 in major cities, which would lay the foundation for business expansion and brand building.
Strengths
Experienced promoters are the YB's main strength. Its two promoters, Rana Kapoor (MD and CEO) and Ashok Kapur (non-executive chairman) are two highly experienced bankers who have held leadership positions in some of the world's prominent banks in India. In addition, the two promoters have a proven track record as professional entrepreneurs in establishing and managing Rabo India Finance Private Limited (RIFL), a joint venture with Rabobank, Moreover, the three private equity investors (CVC of Citigroup, Chrys Capital and AIF Capital) have prior successful ventures in India.
YB enjoys potential cost and time advantages due to its technology outsourcing arrangement with Wipro, which allows it to arrange just-in-time hardware facilities and human resource for starting branch operations.
Weaknesses
YB will initially focus on corporate and institutional business, which yields lower margin.
Almost 100% of the deposit portfolio consist of term deposits, which raises the cost of deposits and lowers the spread. It will take some time for the bank to significantly lower its cost of deposit.
The focus on emerging sectors can increase its risk profile as failure rates and scope for shakeouts are high in these sectors.
The Indian banking industry is very competitive and established foreign and private banks with equally efficient business plans are bound to give YB a good run for its money.
Valuation
YB has a limited operational history with two fully completed operational quarters and only two branches. For the FY 2005, it has reported an operating loss of Rs 3.64 crore and a net loss of Rs 3.76 crore. Pre-issue book value is Rs 10.6. However, the bank is offering its shares in the price band of Rs 38 to Rs 45. The logic given is that the post-issue book value will be around Rs 20, based on the upper limit of the price band, giving a price-to-book-value ratio of 2.25, which is considered to be in line with the industry standards keeping in mind the growth prospects of the bank. Some smart begging the question, indeed. Price the shares even higher and the post-issue book value will look even more attractive!
Holdings of promoters and certain foreign investors are above the prescribed limit for ownership in private banks specified by the Reserve Bank of India. However, 49% of the shareholding, held by the promoter group and Rabo International Holding (RIH), has a five-year lock-in (of which four years still remain) and the three private equity investors have a three-year lock-in period (of which two years are still to go). During the lock-in period, there will not be any impact of these guidelines. Hence, no offloading of shares by these groups in this period is expected
RIH has shown considerable intent in maintaining its holding in YB at 20%, which will come down to 14.81% on post-issue equity based on current RIH holding of 4 crore equity shares. RBI has given RIH the required approval to maintain 20% post-issue holding. YB has allocated 3.5 crore, equity shares (50% of current IPO) to qualified institutional buyers (QIB) segment and RIH needs to buy further 1.4 crore shares by subscribing to the issue and subsequently through open- market purchases to maintain its post-issue stake at 20%. This could provide post-issue support to the scrip, provided RIH does not get hefty allotment in IPO.
YB offers a good business plan and financial strength of some major global investors to back it up. But that's the only thing it can offer at this point of time. When dealing with a bank for any purpose, track record is one of the very important criteria, which YB cannot offer.
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