India’s so called Warrem Buffet and Indian Stock market Ace investor Rakesh Jhunjhunwala is always remembered for surprising analysis and invest by placing huge bets on badly hammered quality stocks and booking profits with them in the long term. He is always praised big time for exceptional bets such as Titan Company, SpiceJet, Lupin, Crisil and Escorts have reaped handsome gains, returns from JP Associates and Dewan Housing have not been encouraging of late. On November 4, Jhunjhunwala, often referred as Big Bull of India, bought nearly 1.3 crore shares of YES Bank for around Rs 87 crore through open market transactions.
The purchase by Rakesh Jhunjhunwala comes at a time when YES Bank finds itself in a worst financial crisis in terms of its financial position. Even as couple of mutual fund houses and other renowned investors do not always reveal the reasons behind their big bets on a particular beaten down stock so we try to decode what’s got the Mr Jhunjhunwala interested in YES Bank stock.
One of the primary reasons that we identified is Jhunjhunwala has been closely watching the performance of the private lender and is convinced about the bank’s improving financial position. And one of the other reasons Jhunjhunwala bought YES Bank share to offset his position in the Futures and Options market. However, this could not be verified.
Yes bank has been in the news recently for all the wrong reasons. That turned its stock price volatile, rising 129% from its 52-week low and also down 77% from its 52-week high. While myriad concerns still loom, some light is becoming visible at the end of the tunnel. But the many concerns about the bank are unlikely to go away in a hurry.
Yes Bank’s asset quality picture has worsened, with slippage remaining elevated and a substantial portion coming from outside the sub-investment grade book. The size of the sub-investment grade book itself has swelled to 10.1% of total corporate exposure. Reflecting the worsening macro environment, the overall rating profile of the bank’s corporate exposure has deteriorated, and it has revised up its credit cost guidance for FY20.
The baggage of toxic assets and the need to conserve capital is affecting business parameters as well. There is a sequential decline in the total balance sheet, driven both by reduction in advances and deposits. Non-interest income remains tardy and interest reversal due to NPA is affecting its interest margin. Its low cost CASA at a little over 30% and retail book at 20% is no match against its peer group.
However, amid all this gloom, the bank has successfully raised $273 million by way of a Qualified Institutional Placement and is aiming for a massive dose of capital infusion that would not only aid in absorbing the asset quality shock but also provide capital to kick start growth.
The bank’s management has highlighted that it has received a binding offer of $1.2 billion from global investor and has also received eight bids from global investors’ worth close to $1.5 billion. The bank is also in discussion with few family offices and strategic counter parties and expects the capital infusion to conclude before the end of the calendar year.
While a large haircut on its corporate book is a given and might wipe out a large part of existing net worth, the new capital should aid growth after its balance sheet repair is completed. Yes Bank has a sizeable real estate exposure that could benefit marginally from recent government’s effort to unclog the sector. Finally with the founder and promoter Rana Kapoor out of the picture, and RBI keen to ensure the long-term survival of this entity, governance and disclosure standards should get better.
Investors willing to stomach volatility for a decent upside could find Yes Bank a worthy bet at the current level.