Yes Bank - 10 Reasons to buy at current valuations

Reason 1: Capital adequacy is not an issue:

• Over the last 25 quarters - Company had a higher than 9.5% Tier I only 30 percent of the time
• Whether it is riskier to run the book with this kind of leverage is a different question and is separate topic of discussion
• It has raised capital in 3 occasions previously:
• INR 120 crores in Dec 06 at a price of INR 120 and pre-money P/B of 4.3 x and post of 4.1 x
• INR 330 crores in Dec 07 at a price of INR 225 and pre-money P/B of 5.0 x and post of 4.8 x
• INR 1034 crores in Jan 10 at a price of INR 270 and pre-money P/B of 4.1 x and post of 2.6 x

• What's interesting from the above data is buy and hold DOESNOT work!

1. stock doubled between Dec 06 to Dec 07; if you bought and held it till today (CMP of INR 300) - it is about 16 percent IRR;  if we bought in Dec 07, return comes to 6.3 % (< than fixed income returns)
2. Now consider that stock ranged between 44 to 270 post December i.e. one should have averaged out without hesitation; same should be the case now if it corrects further - effectively keep increasing the stake until it finds its natural bottom:)

• Likely pre-money P/B would be 3.5 x (assuming mgmt. would consider growth sacrifice)

1. reverse computing - the mgmt. will manage the show until price moves up to INR 560+; Assuming they raise $ 300 M post-money P/B comes to around 2.6 x; which is broadly in-line with the last fund raise

• They can aaram se manage growth without rushing to raise capital
• Key inherent assumption is it is a strong bank and can find investors to fund (a fact that has been validated more than 3 times before)
• Also, after the recent Basel III classification of capital - There is 3% more room in Tier II => they can grow at 25% without raising capital for a period of time (RoE is 25%)

Next Reason: Asset Quality in next post!