YES Bank makes preferential allotment to Carlyle, Advent; stock dips 8%

Morgan Stanley has initiated the coverage on YES Bank with 'underweight' rating and a price target of Rs 20.50 per share

Shares of YES Bank dipped 8 per cent to Rs 22 on the BSE in Wednesday's intra-day trade, falling 11 per cent from the day's high of Rs 24.75, as investors booked profit booking after four days of relentless rally. They also took money off the table after private equity (PE) funds Carlyle Group and Advent picked 9.99 per cent stake in the bank.

These two PE funds together would pump in about Rs 8,900 crore in YES Bank with full conversion of warrants into equity, it said on Tuesday.

"The board has approved allotment of a total of 3,696 million shares of face value Rs 2 each at Rs 13.78 and 2,560 million share warrants convertible into equity shares of face value Rs 2 each at Rs 14.82 on a preferential basis to CA Basque Investments, a Carlyle Group entity, and Verventa Holdings Limited, an Advent group entity," YES Bank said in a regulatory filing.

Pursuant to the allotment of the equity shares, the total issued and paid-up share capital of YES Bank has increased from Rs 5,011.31 to Rs 5,750.54, it said.

CA Basque Investments and Verventa Holdings Limited were allotted 1,848 million shares and 1,280 million warrants carrying a right to exercise, get issued and allotted 1 equity share, each, it said.

Meanwhile, the stock of YES Bank hit a multi-year high of Rs 24.75 in the intra-day trade today. In the past four trading days, it has rallied 39 per cent from a level of Rs 17.75 on December 8, after the Reserve Bank of India's (RBI) gave nod to raise capital from funds affiliated to global private equity investors Carlyle and Advent International. The stock hit its highest level since July 2020.

Morgan Stanley has initiated coverage on YES Bank with 'underweight' rating and a price target of Rs 20.50 per share. "Our price target implies 1.3x Dec-24 P/BV, which we think is fair in the context of 10 per cent FY25 RoE. Current valuations at 1.6x FY24 book are already pricing in strong earnings over next few years. Much stronger execution on funding and/or high margin retail assets could lead us to revisit our thesis," the brokerage firm said in report dated December 13.

It expects strong RoA improvement to 1 per cent by FY25, helped by higher PPoP margins/lower credit costs as macro improves further. But at 1.6x F24 P/BV, the stock is pricing this in. Beyond 1 per cent RoA, improvement will be tough and gradual as we see much higher competitive intensity in this cycle, analysts said.

Justifyinh the underweight thesis, the brokerage firm said that since reconstruction, the new management has recognized and adequately provided for legacy stressed exposures, improved the granularity of the balance sheet and fixed governance issues. Post the ARC deal, the balance sheet will be clean and the bank will be well placed.

"We expect cyclical improvement in the next two years, mainly driven by strong loan growth and margin improvement, helped by macro tailwinds. We expect core PPoP CAGR of >50 per cent in F23-25 and benign credit costs (0.7 per cent avg. in F23-25) to drive RoE to 10 per cent by F25," it added. The brokerage firm expects competitive intensity in retail deposits as well as assets to cap further re-rating.