Yes Bank - Future HDFC Bank available at PSU Bank valuations!!!

Yes Bank has been following perfectly on HDFC Bank's foot-steps. The only major difference between the two modern Private Sectors Banks being the gap in the time of inception. Because of that gap, HDFC Bank is nearly four times the size of Yes Bank in almost all aspects. But there are many similarities between Yes Bank & HDFC Bank, like: High quality experienced management, focus on corporate business, quality of loan book is not compromised to gain volume market-share. This strategy of focusing on high-quality assets has helped HDFC Bank gain tremendous respect from global investors over the last decade & more. That is the reason why HDFC Bank's stock trades at premium valuations compared to all other public as well as private sectors banks. Since Yes Bank too is walking on the same lines, it's valuations too will rise above the rest in the coming years.

About two years ago, Yes Bank's stock was commanding P/E ratio of around 17 to 18, while the bank was consistantly posting a growth rate of over 50% Y-o-Y. Over the last two years, Yes Bank's growth has moderated to between 30 to 35% range, mainly because of the high-base effect. The market has responded by lowering Yes Bank stocks' P/E ratio to between 11 to 14 range. Yes Bank has now crossed the Rs.10,000 crores Total Income mark on a T-T-M basis, while it's Net Profit is over Rs.1400 crores, translating into an T-T-M EPS of Rs.39/-. If the current momentum continues, Yes Bank could be reporting an EPS of around Rs.46/- for FY'14. But RBI's recent moves to control money-market liquidity is expected to impact Cost of Funds for all those banks more who don't have a very good CASA (Current Account Savings Account) ratio. Since Yes Bank falls in that category, the market is expecting Yes Bank's growth & profitability to suffer more than most other banks.

But I think the market is ignoring two important aspects: (1) RBI's moves to control liquidity are temporary & may not last for more than a month or two; (2) Yes Bank management's ability to cope with this situation. I think Yes Bank's management has all the experience required to adjust to tight-liquidity situations. They will push for higher growth in their CASA deposits in the coming months. During Q1 of FY'14, Yes Bank has reported a growth of about 86% in their CASA deposits. This growth momentum could continue in the coming months & quarters as well. It will partially fulfill the bank's hunger for capital needed to expand it's loan book. And if it feels necessary, Yes Bank could raise fresh capital via preferential issue of shares as well.

Overall, I think the market has over-reacted to RBI's steps by thrashing Yes Bank's stock to under Rs.400 levels. At the current price of about Rs.375/-, it is trading at less than 10 times it's T-T-M EPS. I think, even if the Bank's profit growth slows down for a few months, it will get back to the 30% mark later. Hence this is an opportunity to invest in the growth of a high-quality Private Sector Bank at valuations of a common Public Sector Bank. Invest with a medium to long term view of 1 year to 5 years duration. This stock will definitely deliver handsome double-digit returns to it's investors from the current levels.

Suzlon Energy - Positive Winds set to Blow soon!!!

Suzlon Energy Ltd has had a terrible FY'13, but at the same time a crucial one too. It was the year when the company's India operations suffered the maximum liquidity problems with huge Interest payouts & Debt maturity repayments both coinciding at the same time. The Q3 & Q4 virtually went without any production as well as execution from the company's India division. Hence the revenue number suffered badly & the fixed costs meant that the company had to report huge operational losses for the 2nd half of FY'13.

But at the same time there have been some very positive developments for the company during H2 of FY'13. Suzlon's CDR package was approved & implemented by the company's Indian lenders. Under this CDR, the company's Debt repayment & Interest repayment has been rescheduled and there will be nil or very minimum payments to be made for an initial period of 18 months. Plus, the lenders have made a working capital of Rs.1500 crores available to the company, which will certainly help Suzlon in re-starting it's India operations & focus on execution of orders. The impact of these will be partially felt in Q1 of FY'14, but mainly boost the Q2 performance. Because of the CDR package, Suzlon's Equity Capital will increase about 65% from 177 crore shares currently to about 291 crore shares by the end of FY'14. This is mainly because the Interest due on loans taken from Indian Banks will be converted into Equity Shares of the company. In a way, the Banks are Investing their capital in Suzlon's business. This is a vote-of-confidence from the banks that the company can turnaround it's operations & be profitable again over the next 12-18 months.

Now coming to Suzlon's operations: It is mainly comprised of two units - Suzlon Wind, which is the company's India operations, and REpower Systems, which is Suzlon's wholly-owned German subsidiary acquired in late 2011. Suzlon Wind has almost all it's manufacturing operations in India, but does execution of Wind-farm contracts in many other countries as well, other than India. Suzlon Wind has gone through troubles times over the last few years. First it was the US economic/liquidity crisis in late 2008, which affected order flow, then there were reports of Quality issues in some of Suzlon's installations abroad, and finally the company's own liquidity problems over the last 12-18 months because of rising Interest burden & maturing Debt obligations. The recently implemented CDR package will allow Suzlon Wind to restart it's manufacturing operations & hence it's execution of pending orders.

On the other hand, REpower Systems is going from strength to strength. Over the last 2 years, REpower Systems has reportedly grown at a CAGR of 35%. It's revenues were reported to be 2.22 billion Euros in FY'13, which must be around Rs.14,000 to 15,000 crores. That also means that REpower Systems contributed around 75% of Suzlon's consolidated Total Income for FY'13, up from a little under 50% contributed in FY'12. Suzlon Wind had done revenues of about Rs.11,000 crores in FY'12, but it dropped sharply to just about Rs.4,000 crores in FY'13, mainly because of it's operations remaining shut for more than half of the fiscal due to liquidity problems. Despite Suzlon's huge losses during FY'13, the company paid a Tax of about Rs.350 crores, which must be almost entirely by REpower Systems. That means the German subsidiary is making decent amounts of Net Profit. Unfortunately the company has not been able to use REpower's Cash to repay some of it's Indian Debt. There is some kind of a lock-in period under the purchase agreement because of which Suzlon cannot access REPower's Cash balance.

Suzlon Energy Ltd is reportedly sitting on a consolidated Order Book worth over Rs.40,000 crores and 70% of that must be for REpower Systems. Thanks to the strength of the Order flows, we can expect REPower to easily post a 20% growth in it's revenues during FY'14. That means it should be somewhere close to Rs.18,000 crores. Suzlon Wind too is expected to do substantially more revenue this fiscal compared to last fiscal. I am expecting Suzlon Wind to do atleast Rs.7,000 to 9,000 crores in revenues this fiscal. That means Suzlon Energy's consolidated revenues should be in excess of Rs.25,000 crores this fiscal. With an expected EBITDA margin of about 10% during FY'14, the EBITDA figure too should be in excess of Rs.2500 crores. Since Suzlon has been given an Interest holiday for an 18-month period, the total Interest outgo this fiscal will be substantially lower at around Rs.500 crores compared to over Rs.1850 crores paid last fiscal.

This should help Suzlon Energy Ltd to post a healthy Net Profit for FY'14 at around Rs.1000 crores, translating into an EPS of about Rs.3/- even on the expanded Equity Capital of 291 crore shares. At the current share price of just about Rs.8/-, the company is commanding a measly Market Cap of less than Rs.2400 crores (on the expanded Equity Base), which is peanuts for a company which fully owns REpower Systems. At some point of time in the next few years, the lock-in period will be over or REpower will start generating Free Cash Flow and the company will atleast start declaring dividends, which will flow straight into Suzlon Energy's accounts since it owns 100% of the company.

This is the time for long term investors to tank up on shares of Suzlon Energy to the tune of atleast 4 to 5% of one's portfolio and sit on it for a period of atleast 2 to 3 years. As per my calculations, it should deliver stellar returns from current levels.

Bharti Airtel Ltd - Stock price chart is bullish.

Bharti Airtel's stock price movement over the last few months has clearly shown signs of the end of a downtrend and a start of a gradual uptrend. From a low of under Rs.240 in August'12, the company's stock price moved up to a high of about Rs.370 in January'13. But after that it dropped again to about Rs.275 levels. But the stock has taken good support at Rs.275 to 280 levels more than twice in the last 3-4 months. The overall newsflow for the telecom sector as a whole has been turning over the last 2 quarters. Bharti Airtel too has seen some positive developments happen.

First and foremost the reduction in overall competition in the Indian Telecom market. Then the Q-o-Q drop in the company's Net Profits has stopped. Business volumes & revenues have seen a smart Q-o-Q increase in March'13 quarter. Bharti Airtel received one of the biggest PE investments from Qatar for 5% stake in the company. The Rs.6700 odd crores raised from that deal were used to bring down the Debt. This will certainly help in reducing the quarterly interest outgo in the coming quarters & boost Net Profits & Free Cash Flow generation.

Bharti Airtel's promoters too have purchased lakhs of shares of the company from the open market at close to Rs.280-285 levels. All these are positive signs for the company & it's investors. The stock price too should react to all these developments in the coming days, weeks or months. From the stock price chart below, it can be seen that there is some bit of resistance at about Rs.325 to 328 levels. The stock price needs to cross this level convincingly & stay above that for a few days to confirm the uptrend. Until that happens, it could continue to hover between Rs.280 to Rs.325 levels. My personal opinion is that it should be breaking that resistance soon. Once it does that, the upmove could take it to Rs.370 or even Rs.400 levels, before it corrects again. Overall I think the medium to long term trend is very positive for Bharti Airtel. The stock prices of other telecom companies like Idea Cellular & Reliance COmmunications have already seen huge run-ups in the recent couple of months. Bharti Airtel has lagged both of them. But Airtel's big upmove shouldn't be far.

Tata Teleservices - Rumours about Merger are floating again.

Over the last couple of weeks, there has been lots of news-flow about Tata Teleservices. First it was the news that NTT DoCoMo would be exiting the company in 2014 & the Tata Group will have to either buyout the former's stake or look for another partner, who can bring the capital. Tata Teleservices is the only loss-making telecom company despite being in operations for over a decade now. The company would have been profitable if the 2008 licensing fiasco had not taken place.

But thankfully things are changing for the positive for the telecom sector. The cancellation of several licences early this year has lead to reduced competition in several circles of India. This has lead to increase in revenues for all the remaining operators. But it is not all positive for all the remaining operators. The Top-3 operators: Bharti Airtel, Vodafone & Idea Cellular are all doing well on the financial front & generating reasonable amount of Cash Profits to keep their overall Debt well under control. Reliance Communications too looks to be doing fine now after a few deals being signed with Reliance Jio. RCom too is suffering from huge Debt burden, but most probably it will survive with little help from Reliance Jio.

But the remaining two large operators, Tata Teleservices & Aircel are both struggling with huge Debt & very low Cash Profits. Hence their Net Debt level is continuing to climb. In such a scenario, they both are potential candidates for merger or acquisition by another player who is wanting to have a national presence & willing to Invest more Capital. Telenor & Sistema are two such potential candidates. Earlier there were rumours that Sistema is in talks to acquire Aircel instead of bidding for spectrum in the recent auctions. At the same time, there were reports that Telenor could be looking to merge with TTSL. But both the rumours died down and now fresh rumours have surfaced that Sistema is looking to merge it's Indian operations with TTSL & Buyout NTT DoCoMo's 26% stake to take majority stake in the merged entity.

Whatever transpires, I am pretty sure that there is going to be lots of M&A activity after the Govt. announces fresh rules for Telecom M&A. Under the current rules for M&A, there is not going to be any deal. Hopefully, the new rules are in place within the next couple of quarters. By participating in the recent spectrum auctions, both Telenor & Sistema have made their intentions clear that they want to be in the Indian telecom sector for a long time. They are both currently having a much smaller licence footprint, but they certainly have the intentions to cover a much larger part of India in the coming years. The unrealistic spectrum prices forced them to curtail their Coverage, but they are both looking to pounce on a Merger &/or Acquisition opportunity as soon as the rules are relaxed.

Between TTSL & Aircel, I think TTSL has marginally stronger case for being the first target for M&A. TTSL has a stronger brand in Tata DoCoMo. It has a larger subscriber base despite having substantially cleaned up it's dud subscribers from it's CDMA network. It's Licence still has between 8 to 10 years before they come up for renewal. The recent Quarterly results of TTML, which is a listed subsidiary of TTSL and operates in the two crucial circles of Mumbai & Rest of Maharashtra, are clearly indicating a decent growth in the company's Revenues & Cash Profits. Over the last 12-18 months, TTSL & TTML are clearly focusing on retaining & growing Revenues-Earning-Customer base. ? From a Total subscriber base of nearly 90 million, TTSL & TTML's combined subscriber base is now down to about 67 million. And they still have nearly 30% dud subscribers. The simultaneous growth in revenues clearly indicates that their Revenue-Earning-Subscriber base is growing. This focus on quality of subscriber base will serve them well in the longer term. Their Operating profit margins should improve in the coming quarters.

Aircel on the other hand is struggling with a not-so-popular brand in most of the states other than the South & North-Eastern ones. Aircel too has a huge debt, which was enhanced further by the company's ambitious bidding during 3G & BWA spectrum auctions. It's exact financial condition is not exactly known, but it is estimated that the company's Interest burden is piling up & the company is under pressure to bring in fresh capital or raise capital via asset sales. In a way Aircel could be a more vulnerable target, but may not be the first choice for the suitors.

Lets just wait for the new M&A rules for the Telecom Sector to be announced. Lots of action is going to take place after that.