I had posted my views about Yes Bank about 3 months back. At that time too Yes Bank's stock price was trading at about Rs.375/- levels. During these 3 months, the stock was hammered all the way down to around Rs.225/- levels, but has pulled back upto Rs.375-380 levels now. There has been no change in my views about the potential returns from Yes Bank's stock in the coming 1 to 5 years duration. During this period, I received some requests to post comparison between Yes Bank & HDFC Bank, so that investors will get a better idea of the attractiveness of the former's Value.
In terms of Business size, HDFC Bank is little over 4 times bigger than Yes Bank, mainly because of it's age. Yes Bank is much much younger, but growing with the same measured technology-led, low-risk strategy that HDFC Bank has done over the many years. HDFC Bank continues to be the best performer in terms of consistency of growth & quality of assets, despite it's substantial size now. And that is precisely the reason why HDFC Bank commands a huge premium in valuations over all other Banks as well as Financial Institutions. Yes Bank is travelling on the same path that HDFC Bank has done. Only thing being, Yes Bank is much smaller in terms of size & much cheaper in terms of valuations, than HDFC Bank. So, I think there is an obvious opportunity to all those investors, who did not benefit from HDFC Bank's growth over the last decade & more. Invest in Yes Bank now & you could be riding a similar wave over the next 10 years. Oh yes, but don't forget to monitor it's performance periodically.
In the following table I have calculated per-share data for the Trailing-Twelve-Months period ending Sept.'2013 for both the banks for easy comparison. Why 'per-share'? The answer is: We look at share prices moving up & down. It is better to understand what that one share of the company represents in terms of business & profits. That is how we can judge it's valuation perfectly.
For this comparison, Results for the period October'12 to September'13 have been considered. The Equity Capital number is at the end of Sept'13. As we can see, Yes Bank's Total Income per share is nearly Rs.110 per share more than HDFC Bank's number. But Yes Bank's Interest cost is nearly Rs.101 per share more than HDFC Bank. In the end, what remains is the Net Profit per share (also known as EPS). Here too Yes Bank's figure is higher at almost Rs.41/- compared to HDFC Bank's less than Rs.32/- per share. Despite having a higher EPS number, Yes Bank's share price (@Rs. 378/-) is way lower than HDFC Bank's (@Rs.683/-). Hence, Yes Bank's current valuation is much much lower at just over 9 times it's EPS, compared to HDFC Bank's at 21.5 times it's EPS. Apart from way cheaper valuations, what is even more important to note is Yes Bank's growth track record. Yes Bank's Total Income has grown at 30% Y-o-Y, faster than HDFC Bank's growth of 21%. Interest Cost, which is any Bank's biggest Expense, has shown improvement. Yes Bank's Interest Cost has grown at less than 24%, which is more than 6% lower than it's Total Income growth. This is a clear reflection of Yes Bank's increasing CASA deposits, which are generally also seen as low-cost deposits compared to Fixed Deposits from Retail as well as Corporate clients. On the other hand, HDFC Bank's Interest Cost has grown by 19.5%, which is just 1.5% lower than the Bank's Total Income growth. However, CASA deposits forms just about one-third of Yes Bank's total deposits, while it is about two-third for HDFC Bank. Yes Bank's Retail Branch expansion (has 500 operational branches now & growing) is helping it increase the contribution of CASA deposits. I am expecting CASA deposits to form nearly half of Yes Bank's total deposits in the next 4 to 6 quarters. This will further help bring down the overall cost of funds for Yes Bank & boost it's margins & EPS.
In terms of Business size, HDFC Bank is little over 4 times bigger than Yes Bank, mainly because of it's age. Yes Bank is much much younger, but growing with the same measured technology-led, low-risk strategy that HDFC Bank has done over the many years. HDFC Bank continues to be the best performer in terms of consistency of growth & quality of assets, despite it's substantial size now. And that is precisely the reason why HDFC Bank commands a huge premium in valuations over all other Banks as well as Financial Institutions. Yes Bank is travelling on the same path that HDFC Bank has done. Only thing being, Yes Bank is much smaller in terms of size & much cheaper in terms of valuations, than HDFC Bank. So, I think there is an obvious opportunity to all those investors, who did not benefit from HDFC Bank's growth over the last decade & more. Invest in Yes Bank now & you could be riding a similar wave over the next 10 years. Oh yes, but don't forget to monitor it's performance periodically.
In the following table I have calculated per-share data for the Trailing-Twelve-Months period ending Sept.'2013 for both the banks for easy comparison. Why 'per-share'? The answer is: We look at share prices moving up & down. It is better to understand what that one share of the company represents in terms of business & profits. That is how we can judge it's valuation perfectly.
For this comparison, Results for the period October'12 to September'13 have been considered. The Equity Capital number is at the end of Sept'13. As we can see, Yes Bank's Total Income per share is nearly Rs.110 per share more than HDFC Bank's number. But Yes Bank's Interest cost is nearly Rs.101 per share more than HDFC Bank. In the end, what remains is the Net Profit per share (also known as EPS). Here too Yes Bank's figure is higher at almost Rs.41/- compared to HDFC Bank's less than Rs.32/- per share. Despite having a higher EPS number, Yes Bank's share price (@Rs. 378/-) is way lower than HDFC Bank's (@Rs.683/-). Hence, Yes Bank's current valuation is much much lower at just over 9 times it's EPS, compared to HDFC Bank's at 21.5 times it's EPS. Apart from way cheaper valuations, what is even more important to note is Yes Bank's growth track record. Yes Bank's Total Income has grown at 30% Y-o-Y, faster than HDFC Bank's growth of 21%. Interest Cost, which is any Bank's biggest Expense, has shown improvement. Yes Bank's Interest Cost has grown at less than 24%, which is more than 6% lower than it's Total Income growth. This is a clear reflection of Yes Bank's increasing CASA deposits, which are generally also seen as low-cost deposits compared to Fixed Deposits from Retail as well as Corporate clients. On the other hand, HDFC Bank's Interest Cost has grown by 19.5%, which is just 1.5% lower than the Bank's Total Income growth. However, CASA deposits forms just about one-third of Yes Bank's total deposits, while it is about two-third for HDFC Bank. Yes Bank's Retail Branch expansion (has 500 operational branches now & growing) is helping it increase the contribution of CASA deposits. I am expecting CASA deposits to form nearly half of Yes Bank's total deposits in the next 4 to 6 quarters. This will further help bring down the overall cost of funds for Yes Bank & boost it's margins & EPS.
All this should lead to narrowing the valuation gap between Yes Bank & HDFC Bank over the long term. A growth of >25% over the next two years can take Yes Bank's EPS to Rs.62 to 65 region. I think a P/E ratio of atleast 13 to 15 will be reasonable for Yes Bank by then, which will translate into a fair value of around Rs.850/- in the next 2 years time. This could very well be a reality as 2 years a substantial amount of time for the markets to re-rate a stock.
Happy Investing!!!
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