Yes Bank's Performance Update after Q2-FY'17.

Over the last three & half years, I have posted a handful of reports on Yes Bank, which included a couple of comparison reports too. The first report was written in July'2013: Yes Bank - Future HDFC Bank available at PSU Bank valuations!!! I am happy to say that Yes Bank's performance over the last over three years has not failed my expectations & estimations. The most recent report was written about 18 months ago (Yes Bank - Good Growth, Attractive Valuations). Hence I thought it fit to post a Performance Update on Yes Bank's Financials & Valuation.

The Quarterly as well as Trailing-Twelve-Months Profit & Loss Numbers are already available on my blog at this link: http://www.stockslogic.in/2016/02/yes-bank-ltd-results.html

Hence I would focus on other details in this report. Any bank operates under 3 primary business heads: 1) Treasury Operations - Here it's in-house team trades in different kind of bonds, depending on liquidity situation at the bank & bond prices. 2) Wholesale or Corporate Banking - This division focuses on providing Banking/Lending services to SMEs & Corporates. 3) Retail Banking - This division is for providing services to individual consumers.
Older Banks with large Branch Networks since many years generally have a substantial contribution from Retail Banking operations, going upto about 35 to 45% of it's Total Income. Large Retail presence with wide network of branches is also important for any bank in terms of access to low-cost deposits. Current Account deposits form the lowest cost deposit base for Banks, followed by Savings Account deposits. Any bank with high proportion of Current Account & Savings Account (CASA) Deposits is able to offer more competitive Interest Rates on Loan products and also enjoy higher Net Interest Margins. This is one area where Yes Bank still has a lot of ground to cover, not just with older peers like HDFC Bank or Axis Bank, but even with contemporary peers like Kotak Bank or IndusInd Bank.

Have a look at the chart alongside, which shows the Trailing-Twelve-Months progress of Yes Bank's Segment-wise Income figures over the last 3 years. Yes Bank's Corporate Banking services have been it's pillar of strength right from the time of it's inception. And it continues to provide robust growth for the Bank even now with over 65% of Yes Bank's Total Income still coming from this division. Treasury Operations contributed nearly a third of Yes Bank Total Income in September'13, but has seen it's contribution coming down to a quarter of the Bank's Total Income in September'16, mainly because it did not grow at the same pace as that of the other divisions. Yes Bank's Retail Banking division has shown some urgency for growth only in the last 4 quarters. After posting a steady Y-o-Y growth of about 35% for periods ending Sept'14 and Sept'15, the Retail Division posted a handsome growth of nearly 70% for 12-months ending Sept'16. Yes Bank will need to maintain over 50% growth in Retail Banking business for another 2 or 3 years to see it's contribution improve from existing low levels of under 9% of Total Income to something like 15 to 20%. Even a relatively not-so-old Kotak Bank gets nearly 45 to 50% contribution from it's Retail Banking division. Hence I think Yes Bank should certainly be targeting to expand it's Retail Banking business' contribution to something like 25 to 30% of Total Income in the next 5 years. Growth in Retail Banking business will only help the Bank's other divisions by giving it access to increased CASA Deposits.

Another big aspect of any Bank's business is how well it manages to keep it's Cost of Funds low and also not let it's Bad Loans number go high. The Chart alongside shows the Interest & Provisioning figures as a Percentage of Yes Bank's Total Income. Interest Cost is consumes the biggest portion of any Bank or Finance Company's Total Income. In September'13, Interest Cost formed just over 62% of Yes Bank's Total Income, which the Bank has managed to bring substantially lower to about 53.3% of Total Income in September'16. This is an excellent progress, especially considering the fact that the last Equity-based Fund raising done by Yes Bank was sometime in June'14 quarter, i.e. over 27 months ago. This excellent control over Cost of Funds has helped Yes Bank expand it's Net Profit margin from 13.54% in Sept'13 to 16% in Sept'16, i.e. about 250 bps improvement in 3 years time.

Over the last couple of years we have seen the Banking sector being in the NPA storm with almost every PSU Bank and many Private Banks too having to make large Provisioning towards NPAs. In such a scenario, Yes Bank has managed to keep it's Provisioning figure to under 4% of Total Income throughout the last 4 years, despite having almost it's entire Loan Book exposed towards Corporates. This clearly talks about the quality of assets that Yes Bank has managed to identify & Finance.

Valuations & Stock performance: First have a look at Yes Bank's Stock Price chart for the last 2 years:

After spending over year within a range Rs.650 to Rs.900, Yes Bank's stock price finally a breakout in February'16, which lead to a sharp rally from Rs.675 levels to about Rs.1400 levels, that means doubling in a matter of just about 6 to 7 months. Since then the stock price has seen some bit of correction & consolidation in the Rs.1100 to 1300 range. At the current price of about Rs.1130, Yes Bank is trading at just over 16 times it's T-T-M EPS of Rs.69/-. In the current market scenario, when almost the entire market has undergone some decent correction over the last couple of months, Yes Bank's valuation cannot be called 'Very Cheap' anymore. But a P/E Ratio of 16 certainly cannot be called expensive for a quality stock like Yes Bank. As and when the market stabilises & starts progressing upwards again, I am expecting Yes Bank's stock to move towards a 20+ P/E Ratio. The quality of Yes Bank's business performance certainly deserves higher valuations in stable & progressive market conditions. Long Term investors should continue to remain invested & somebody who wishes to book atleast some portion of profits, may do so when the stock hits a P/E Ratio of something closer to 20 to 22 levels. A P/E Ratio of 15 or lower will make it a very attractive Buy option of other investors.

Performance of Top-5 Telecom Operators in their Top-5 Circles

The Indian Telecom sector was finally hit with Reliance Jio Tsunami in the last week of August'16, when the company started offering Preview Offer Sim cards to almost all 4G handsets available in the market. It was soon followed with launch of Jio Welcome Offer, which was advertised widely by the company through various mediums. Millions of people with 4G smartphones started queuing up for getting a Reliance Jio Sim card, primarily because of the offer for Free usage till 31st December'16. An additional few million people preponed their handset upgrade plan just to be able to enjoy the Jio Welcome Offer for a few months. All this lead to Reliance Jio registering a user base of close to 16 million by the end of September'16, probably the highest single-month subscriber addition by a single operator in the history of Indian Telecom sector. Ofcourse the attraction of Freebies pulled in so many users. But this sudden shift in usage of nearly 2% of India's mobile populace was bound to start reflecting on the numbers of all existing operators. The impact during September'16 quarter was expected to be small, but still noticeable. The impact will be much bigger during the December'16 quarter as Reliance Jio's userbase had swelled to over 50 million by end of November'16 and expected to hit about 60 million by end of December'16.

In my analysis for this report, I have focused on a few limited parameters. Firstly I have considered the AGR & VLR-subscriber numbers for only the Top-5 operators (excluding Jio). They are:
1) Bharti Airtel
2) Vodafone India
3) Idea Cellular
4) BSNL/MTNL
5) Tata Teleservices ....... (even though Tata Tele is smaller than RCom & Aircel in terms of subscriber numbers, it leads the other two in Adjusted Gross Revenue (AGR) terms by a considerable margin.)

Secondly, I have selected the Top-5 AGR contributing Circles for each respective operator and then studied the VLR-subscribers addition pattern for those Circles. [ The VLR subscribers number announced by each operator every month represents the Highest number of users active on it's network for that Circle in that month. It need not be true for every day of that month. Hence a change in VLR base will only give us a slight hint of things to expect in the following months. ]

Numbers in '000s

1) Bharti Airtel: India's No.1 Telecom operator has over 251 million VLR subscribers and quarterly AGR of around Rs.12,500 crores. Bharti Airtel commands about 32% AGR market share as of September'16 and about 26% subscribers market share. The Top-5 AGR contributing Circles for Bharti Airtel are: (not in any order) Andhra Pradesh, Bihar, Delhi, Karnataka and Tamil Nadu. These 5 Circles together contribute 49.8 % of the company's Nationwide AGR and hence their performance becomes even more important for the company. The combined AGR for these circles reported a 1.9% Q-o-Q drop during September'16 quarter, with Bihar being the main culprit reporting a near 9% drop in AGR. The VLR base of these Top-5 Circles form just over 40% of the company's All-India VLR base. Now have a look at the chart alongside which shows the company's monthly VLR subscribers addition since June'16. After adding 4.3 lakh & 17.5 lakh VLR subscribers during June'16 & July'16, Bharti Airtel has seen an erosion of 2 lakh & 3.2 lakh VLR subscribers during the following 2 months. The two main competitors that Airtel needs to be wary about in it's Top-5 Circles are Idea Cellular & BSNL with each of them gaining some ground in atleast 3 of them. Amongst Airtel's Top-5 circles, Idea Cellular was super-aggressive with 4G expansion in Andhra Pradesh, Karnataka & Tamil Nadu.

Numbers in '000s

2) Vodafone India: India's No.2 Telecom operator has little over 190 million VLR subscribers and little under Rs.8800 crores in quarterly AGR, making it nearly 30% smaller than the No.1 operator. The Top-5 AGR contributing Circles for Vodafone India are: (not in any order) Delhi, Gujarat, Maharashtra, Mumbai & Tamil Nadu. These 5 Circles together contribute close to 48% of Vodafone India's Nationwide AGR. The combined AGR of these Circles reported a 2.5% Q-o-Q drop during September'16 quarter, with Gujarat & Maharashtra circles being the lead losers reporting nearly 6% drop in AGRs.. The VLR base for these 5 Circles constitutes little over 37% of Vodafone's All-India VLR base. In these 5 Circles, Vodafone had seen it's VLR base increase by 6 lakhs in June'16, 4 lakhs in July'16 and over 10 lakhs in August'16, but the net addition in September'16 was barely 35,000 subscribers. The primary reason for dismal VLR addition in September'16 for Vodafone was a VLR loss of nearly 5 lakh subscribers in Delhi Circle alone. Healthy additions in Maharashtra and Tamil Nadu Circles helped avoid the Net Addition number from dipping into the red. Vodafone has fortified it's 4G-capable spectrum holdings in many of it's crucial circles in the recent auctions. It certainly needs to act fast though. Over the recent couple of months, it has been seen that Vodafone India is the slowest amongst the Top-3 operators in introducing changes to it's tariff plans, both on prepaid as well as postpaid. I think it needs to be more agile on this front too. 

Numbers in '000s

3) Idea Cellular: India's No.3 Telecom operator has little over 186 million VLR subscribers and about Rs.7300 crores in quarterly AGR. Compared to Vodafone India, Idea Cellular's VLR base is less by only about 2%, but it's AGR is less by about 15%. This clearly suggests that rural subscribers comprise a higher proportion of Idea Cellular's VLR base, compared to Vodafone India. The Top-5 AGR contributing Circles for Idea Cellular are: Andhra Pradesh, Kerala, Madhya Pradesh, Maharashtra and UP (West). These 5 Circles together contribute nearly 59% of Idea Cellular's All-India AGR, making the company even more sensitive to performance of these circles. The combined AGR of these 5 circles reported a 5.7% Q-o-Q drop in the latest quarter, with Madhya Pradesh reporting nearly 10% drop & Maharashtra reporting nearly 8% drop in AGRs. One look at the chart alongside & it is obvious that Idea Cellular is the only one amongst the leading trio to have maintained a healthy VLR addition rate every month over the recent 4 months. Idea Cellular has added about 4.8 lakh VLR subscribers every month on an average, with the lowest monthly number being 1.7 lakhs in August'16. Idea Cellular has clearly done better on VLR additions front in the month of September'16, when compared to both Bharti Airtel & Vodafone India. If this trend continues in following months, it should help Idea Cellular regain the ground it lost to it's larger peers on the AGR front. The VLR numbers for the Top-5 Circles constitute a little over 49% of Idea Cellular's All-India VLR base.

Numbers in '000s

4) BSNL / MTNL: The once-upon-a-time PSU behemoth is now a distant No.4 in the Indian Telecom space with barely 10% AGR market share, which is less than a third of the No.1 player and just about half of the No.3 player. It is only in the last couple of years that BSNL/MTNL combine has shown a few signs of making an attempt to arrest it's continuous decline. The companies are finally trying to upgrade their network infrastructure in several cities to be able to offer better coverage & services. The Top-5 AGR contributing Circles for BSNL/MTNL combine are: Karnataka, Kerala, Maharashtra, Mumbai & Tamil Nadu. These 5 Circles together contribute about 44.5% of the combine's Nationwide AGR. BSNL/MTNL has seen it's AGR for these 5 circles jump by over 8% Q-o-Q, making it the only operator to have reported a Q-o-Q growth during September'16 quarter. BSNL/MTNL have been reporting wild Q-o-Q fluctuations sometimes in previous quarters. Hence it will be worthwhile to wait & see it the combine manages to build upon this growth in the following quarter. The VLR additions chart for BSNL/MTNL combine too is very strange. The combine saw a huge surge in VLR numbers during August'16 with an increase of over 24 lakhs in just the Top-5 circles and around 83 lakhs Nationwide. It seemed as if millions of dormant BSNL sim cards suddenly were put into use by their holders. And the combine added another 2.9 lakh VLR users in September'16. If the VLR additions number for BSNL does not turn negative in the following 1 or 2 months, then the combine should be able to post another healthy growth in it's AGR during December'16 quarter.

5) Tata Teleservices: The performance of Tata Teleservices has been rather surprising over the recent quarters. From the media reports we gather that the Tata Group is not too serious about continuing with it's Telecom venture for long & is looking to find a buyer or partner since the last couple of years. It's Japanese partner too is looking to exit. In such a scenario one would have expected the company's performance to gradually dwindle. But surprisingly it has been quite steady, especially in a few important circles. The company even went ahead and purchased Band-3 Spectrum for Mumbai, Maharashtra & Andhra Pradesh Circles in the recent auctions. It is still unknown on what it plans on doing with it: continue offering 2G service or use it for 4G-LTE service.

Numbers in '000s

Tata Tele currently offers it's 2G GSM & CDMA service in 19 circles. But it has very very limited presence in 7 of those 19 circles. The company also offers 3G service in 8 circles, but with only 5 of these circles doing reasonably well. On an All-India basis, Tata Tele commands just 6.5% AGR market share. It's Top-5 AGR contributing Circles are: Andhra Pradesh, Karnataka, Maharashtra, Mumbai and Tamil Nadu. These 5 circles now contribute about 55.5% of Tata Tele's Total AGR. The combined AGR of these 5 circles reported a drop of only 1.8% Q-o-Q during latest quarter, a drop which is smaller than that reported by Bharti Airtel, Vodafone as well as Idea Cellular. The combined VLR base for these 5 circles constitutes a little under 46% of Tata Tele's Total VLR base. After having added 4.3 lakh VLR subscribers in June & July'16, Tata Tele has lost 2.61 lakh VLR subscribers in the following 2 months. The drop in VLR base for Tata Tele could be due to 2 factors: Increased competition and possible winding down of CDMA operations in a few circles. The company's exact plans on discontinuing it's CDMA operations in few or all circles is yet unknown. Hopefully this increased competitive intensity & expected pressure on cash flows will push to company into taking concrete steps towards merger/sell out or curtailing operations to a few strong circles only.

Reliance Jio's Happy New Year Offer - Bad news for everyone!!

Reliance Industries' Chairman made another 'Big' announcement yesterday about Reliance Jio. And it turned out to be just another new offer 'Happy New Year Offer', where Jio customers will get access to Free services till 31st March'2017. The main reason for extending Free services for another 3 months was said to be that the company was not very happy with the Quality of Service some of it's customers were getting,

primarily due to 2 factors: 1) The Voice Calling experience still wasn't as smooth as expected due to lack of cooperation from incumbent operators; 2) The Data speeds for some customers was below acceptable levels as nearly 20% of the subscribers were exploiting the existing FUP limits to the maximum.

To counter these, on one hand Reliance Jio will continue to work with regulator & other operators to enhance the Interconnect Capacities to bring down Call Failure rate to under 0.5% level; and on the other hand Reliance Jio is lowering the FUP limit to 1 GB per day under the new Happy New Year Offer. This offer opens for new enrollments from 4th of December'16 as TRAI had asked the company to end it's Welcome Offer after 90 days of introduction, i.e. on 3rd December'16. Subscribers of Welcome Offer will continue to enjoy benefits of the same till 31st December'16 and then will be migrated to Happy New Year Offer on 1st January'17. Hence from 1st January'17, every subscriber on the Jio network will have a FUP limit of 1 GB per day, which is expected to improve the quality of Data service for most users.

Why am I disappointed? : As a user of Jio's service, I am happy to be able to enjoy the Free service for 3 more months and in turn save couple of thousands more. But I was actually eagerly looking forward to the day when Jio's Free service ends and how it performs once people are supposed to start recharging/paying to continue using Jio's Data & Voice service. In the current situation where over 50 million subscribers continue to use/abuse Jio's Free service, it is quite an unfair comparison between experience of Jio's network with that of others'. Average Daily Data usage of a Jio user is well above 500 MB, whereas the average Monthly Data usage of a 3G/4G user of other operators is about 1 GB. Jio's user base has already crossed the 3G/4G user base of Airtel, making Jio the top Wireless Broadband service provider. That means the Data Volume on Jio's network will be in the range of about 20 to 30 times the Volume on networks of the other incumbent operators. In such circumstance, the Quality of Data service is bound to drop especially in high density regions.

The other reason for feeling bad is that this extension of Free Service period will mean even more pain in an already troubled Telecom sector. Only the Top-3 operators (Airtel, Vodafone & Idea) were making some kind of decent Cash Profit before the Jio Tsunami hit the sector about 3 or 4 months ago. All the other smaller operators were already struggling to cover their Operating Costs with their Revenues, with that situation expected to worsen much much more during the 6 months period from October'16 to March'17. In fact we could see a couple of operators to just Shut shop (either partially or fully) due to Liquidity issues as Banks will also be reluctant to fund them more, without the promoters willing to infuse more money in the business. All these existing operators (including PSUs BSNL & MTNL) are struggling to retain a substantial portion of their customer usage, especially the ones with a 4G smartphones. With over 50 million users already having shifted their Data as well as Voice usage (either partially or fully) to Jio, all the existing operators are bound to feel substantial pain in revenue momentum. In my earlier posts, I had mentioned that I am expecting the Top-3 operators to post a drop of about 10-15% in their Revenues in December'16 quarter compared to June'16 quarter numbers. Now the March'17 quarter could prove to be even more painful with the drop extending to about 15 to 20% of Revenues quite easily. Such large drops in Revenues at a time when these operators are investing in CAPEX for expanding 3G/4G capacities could mean that even these Top-3 operators could post Cash Losses or very negligible Cash Profits in either December'16 or March'17 quarter. This is also not good news for shareholders of Reliance Industries as the company will need to Capitalise another quarter's Operating Costs for Jio, which could be around $ 1 Billion, leading to higher Interest burden and Depreciation Costs once Jio's revenues & costs start being consolidated with Reliance Industries' Quarterly numbers. Ofcourse this additional $ 1 Billion is quite small to the size of the total CAPEX undertaken by the company for Jio in total. But even shareholders of Reliance Industries must be very eager to see how Jio's financial performance progresses, and this extension will mean a further delay for the same.

I am expecting all these existing operators to approach TRAI / DoT to appeal that Reliance Jio cannot be allowed to offer Free Service for another 3 months. Even I am not sure if Reliance Jio's new offer will get permission from the regulator or not. We should know about it in the next couple of weeks for sure. Let's wait & watch.