Verdict: No, not at all!

FPO Snapshot:

Yes Bank is entering the primary market with a further public offer (FPO) on Wednesday 15^th July 2020, to raise Rs. 15,000 crore via fresh issue of equity shares of Rs. 2 each in the price band of Rs. 12-13 per share, with employee discount of Re. 1 per share. The issue represents a huge 48% dilution and will close on Friday 17^th July, with listing likely on 27^th July.

Why is the FPO being undertake?

As of 31-3-20, bank’s CET I ratio was 6.3% against RBI’s prescribed minimum of 7.375% (31-3-20) while the minimum threshold will increase to 8% by 30-9-20. To comply with these requirements and to provide for possible buffer towards bad loans going forward, capital is being beefed up.

Poor State of Financials:

For FY20, on total income of Rs. 38,000 crore, bank reported loss of Rs. 16,430 crore, EPS of negative Rs. 56. As of 31-3-20, equity stood at Rs. 2,510 crore, comprising 1,255 crore shares of Rs. 2 each and net worth stood at Rs. 21,695 crore, translating into BVPS of Rs. 17.3. Post FPO, Yes Bank’s equity will expand to Rs. 4,818 crore, comprising 2,409 crore equity shares of Rs. 2 each, and net worth will rise to Rs. 36,695 crore, leading to BVPS of Rs. 15.2. This discounts the current share price by a PBV multiple of 1.4x (based on expanded equity), which is quite stretched, as the bank is not yet out of the woods in the post-covid world. On deposits of Rs. 1.05 lakh crore and advances of Rs. 1.71 lakh crore (31-3-20), asset quality is still poor, with gross NPAs of Rs. 32,878 crore (16.80%) and net NPAs of Rs. 8,624 crore or 5.03% of total net advances.  

Shareholding: Low float due to locked-in shares

Pursuant to its restructuring scheme, on 14^th March 2020, Yes Bank raised Rs. 10,000 crore via issue of 1,000 equity shares of face value Rs. 2 each at Rs. 10 per share, to 8 domestic financial institutions - SBI, HDFC, ICICI Bank, Axis, Kotak, Bandhan, Federal and IDFC Bank. This lead to SBI holding 48.2% stake in the bank, and is required to hold a minimum of 26% and maximum of 49% stake till 13^th March 2023. Since equity is expanding via FPO, all of SBI’s current holding is locked-in for 3 years.

Other 7 banks/investors, holding 30% stake as of 31-3-20, have 75% of their respective stakes locked in for 3 years till 13^th March 2023 and balance 25% is available for sale. In April 2020, 3 banks - Kotak, Federal and IDFC have already encashed part of their not locked-in shares, just a month after investing. Nothing prevents them from exiting from the non-locked in shares, now or in the future.

Moreover, pursuant to the scheme, all shareholders (excluding those with up to 100 shares) also have 75% of their holding locked-in for 3 years. This implied that 87% of current equity of Rs. 2,510 crore is locked-in till 13^th March 2023. 

Weak Outlook:

Post FPO, Yes Bank’s equity will expand to Rs. 4,818 crore, comprising 2,409 crore equity shares of Rs. 2 each. Of this, 55% equity will not be locked-in, in turn increasing free float on the counter by 6.8x to 1,320 crore shares from 170 crore shares currently. This may lead to better price discovery and may create downward pressure on prices as the 7 banks/investors can come ahead to sell their non-locked-in shares acquired at Rs. 10 per share in March 2020, besides the new FPO investors. Share price has already fallen 13% on Monday and 6% today. We believe share price can fall to Rs. 15 over the medium term, despite FPO priced at a steep discount.

Conclusion:

FPO is being undertaken to provide the bank some capital. However, fundamentals are still weak and Rs. 15,000 crore fund infusion will not improve that anytime soon. We advise an ‘avoid’.

Do not get lured by the FPO price being a 38% discount to the current market price.

Disclosure: No Interest.