Deepak Shenoy on YES Bank, Ujjivan, rate cuts & more
I really hope YES Bank fund raising plan goes through, and if it does, this is not a very low price to buy the bank.
The nearly $2-billion fund raising at YES Bank was much anticipated but the market remains curious about the gentleman who has put in the $1.2-billion bid. What is your view?
That is true. We would have thought that somebody in YES Bank would find more institutions that were recognisable but I do not want to cast aspersions because we do not know who this gentleman is. Perhaps he is known to have a lot of money. I feel there is not much point in speculating but I feel they may be diluting nearly 50% of the bank because $1.2 billion is Rs 8,000 crore plus and the bank valuation is about Rs 17,000 crore.
If you have to retain the same price, the valuation of the bank will become nearly Rs 27,000-28,000 crore just by infusion of so much capital. Some part of the funds raised will perhaps go into paying off some of the older loans and then a part of this capital will be wiped out. In that case, you are still valuing the bank at around 1X book without any adjustments at this point roughly.
It may not actually be very highly priced, considering there are so many uncertainties or a very low price rally. Considering so many uncertainties continue to exist in the book, this makes it more stable and if the money does come, it will be good.
This should not be a case of somebody putting a bid and then not paying up because that would be disastrous for the bank and for the reputation of the management. Nobody will believe the next time they say they are going to raise funds. that they are actually going to raise funds if this does not go through. I really hope it goes through, for their own sake and even if it does, I do not think this is a very low price to buy the bank.
Only if the bank can prove that the bad loans were behind it, we will say you can pay a 2X book or a 1.5X book for it.
How do you look at banks and NBFCs? Would you look at companies which are now trading at lower valuations or which have underperformed the market?
The finance space is divided a lot. There are housing loan NBFCs and we have seen HDFC outperform everything else there. But they are hardly that, They are a sum of all parts but their housing loan business is also likely to be impacted by the housing slowdown and commercial realty exposure.
But a company like CanFin is in much better shape and is probably likely to be sold as well, given all the ramifications. So there is a dichotomy over there. CanFin is priced at a much lower price compared to the likes of HDFC. Some of that valuation gap will get bridged because CanFin is actually much better shaped compared to an LIC Housing or perhaps a PNB Housing, where the ALM issues will continue to bog them down and Indiabulls as well.
Although they have gone up in the recent past. They have had some funding problems both in debt and equities. The winners will actually increase market share whereas the losers will lose market share across the financial space. There will be return to some kind of market share by the PSU Banks.
It will take three more years until they consolidate and SBI is the largest winner in that space. It will continue to make gains with Bajaj Finance or Bajaj Finserv and perhaps some of the other companies. Good companies, which are able to raise debt or even commercial paper at 5.5-5.6%, are the companies that will do really well because the spread between their lending rates and their borrowing rates has increased due to the fall in borrowing rates.
There are clear winners here and you should bet on the winners. There will be signs when the whole sector itself will start to do well but this is not the time for that. At this point the bet has to be that the winners will win over next year.
What do you make of the fund raising activity apart from that of YES Bank? Are markets slowly and steadily opening up?
There is an institutional demand for sure because Bajaj Finance also closed the Rs 8,000-crore issue. We had Manappuram talking of foreign issue of certain amount of money as well. RBL will raise some money and so would Ujjivan. They are raising about Rs 1200 crore, the market value at 2 times -- the book has got Rs 6,200 crore, which is fairly priced according to me. The issue will largely be about what do you do with the holdings like Ujjivan Holdings where the only thing that they do is own the bank?
There are clear winners in the financial space and you should bet on the winners. There will be signs when the whole sector will start to do well, but this is not the time for that.
Now people will actually shift their ownership to the bank itself, rather than keep it in Ujjivan Holdings. So, there is a bit of a grey area over there. I do not think this is so much capital raising per se than the fact that interest has been transferred from Ujjivan Holdings which will eventually be traded at about 40% to 50% discount from whatever they are holding, which is about 80%.
The fund raising activity in general is a good thing and money is cheap right now all over the globe, including in India, at least for institutional investors. There will be demand for good quality financials. But there are other companies which are supposedly not as good as those that have been able to raise capital. We have heard Piramal being able to raise debt funds, Edelweiss also was able to place a debt issue recently along with a bunch of others.
The market seems to be starting to ease up. Let us just hope that the DHFL resolution happens and it does not cause another crisis which will cause more capital raising issues. Right now, it looks quite positive.
Would you say it is a given that the central bank would have to reduce rates further in its policy this week?
The only thing that prevents them is perhaps onion prices because that shows inflation which may be a problem. But I do not think that is going to be a very deep problem because if you take out food and fuel, the rest is actually seeing a falling inflation. We do not have the November numbers as yet, but we have actually seen a drop in prices.
Vegetable prices typically tend to go up at this time. So, you will see some kind of a spike but overall it will come down in the next few months. Given that inflation is not a threat and growth has been a serious problem and also that we are having more issues in transmission, banks are continuing to deposit Rs 2 lakh crore plus with the RBI in reverse repo every day, mean they have the money but they are not actually effectively lending it out.
There is a fear in the market about the ability of some institutions and corporates to pay back. The corporate books have become much healthier now and so we really need better transmission of RBI rate cuts to happen. The only way the RBI can do something is to actually force banks to lend and that has not held out well in the past.
They will have to continue the passive effect of reducing rates on a regular basis and continuing to state that we will keep reducing until the economy recovers or the inflation reaches a crazy number. Both are far from here and if a rate cut come about, I have positions that will benefit. That is a note of disclosure.