Yes Bank: Floating high

Yes Bank valuations look too demanding

Yes Bank is a late entrant into the banking sector and given the fierce competition, will not find it easy to grow a quality loan book be it in retail, where it currently has no presence, or corporate.

The management claims it will lend to sectors of which it has a deep understanding, but the current high exposures to individual sectors such as food and agri-business (18.1 per cent) and life sciences (17.5 per cent), as also a high concentration on a few borrowers, does not seem prudent.

Since the bank is yet to build a retail liabilities franchise, the weighted average cost of deposits is relatively high at 6.25 per cent compared with around 3 to 4 per cent for its peer group.

Besides, it would take a while to bring this down, especially in a rising interest rate scenario. It is currently highly dependent on inter-bank borrowings, making it vulnerable to rising interest rates. Its overall costs too would remain high in the near future since it plans to set up 100 branches.

With barely six months of operations behind it, Yes Bank has priced its IPO in the band of Rs 38-Rs 45 per share. For a bank whose business model appears no different from that of its peers', the valuation seems too expensive at 3.4-4.1 times price to book value (trailing).

HDFC Bank may have traded at 3 times book value at the time of its IPO but the comparison is simply not valid because the banking landscape ten years ago was far less competitive than it is today when global giants such as GE are talking of setting up shop.

Moreover, HDFC Bank enjoyed a strong brand equity which enabled it to build a deposit base whereas Yes Bank is a completely unknown brand. For perspective, ICICI Bank, today trades at 2.3 times price to book (trailing). Yes Bank needs to have a track record before it can ask for such high valuations.

Indian Hotels

Indian Hotels has reported strong growth in the fourth quarter ended March 2005, with net sales up at Rs 266.3 crore, an increase of 26 per cent y-o-y. The operating profit doubled to Rs 70.52 crore even though the company paid license fees of Rs 27 crore, as compared with Rs 21 crore in Q4FY04.

The licence fees are a function of the revenues earned from specific properties. In the last quarter of FY05, revenues from the Bangalore and Delhi properties have been particularly high and hence licence fees too went up.

Nonetheless, the operating profit margin at 26.4 per cent in the March quarter was up smartly compared with 16.6 per cent in Q4FY04.

With the company paying out lower interest, the profit before extraordinary items and tax at Rs 52.4 crore grew a stunning 123 per cent yoy.

For the full year too, net sales were up 27 per cent at Rs 847.6 crore. The operating profit soared to Rs 181.7 crore in FY05, a rise of 77 per cent while the operating profit margins stood at 21.4 per cent, a smart increase from 15.4 per cent in FY04.

At the current price of Rs 661, the stock trades at a trailing multiple of 31 times and a forward multiple of 24 times FY 06 estimated earnings.

Though India is set to receive a record number of tourists this year and average room rates (ARRs) in cities such as Bangalore are averaging Rs 9,000 per night, the Street appears to have factored in the growth.

Berger Paints

Berger Paints has reported a 26.2 per cent growth in its earnings before depreciation, interest, tax and exceptional items to Rs 25.48 crore in the March quarter of FY05.

However, a wholly owned subsidiary Berger Auto and Industrial Coatings Ltd was merged with Berger Paints with effect from March 2005, so the paint company's results are not comparable with those of the previous year. Nevertheless, operating profit margins for the combined entity grew 74 basis points to 11.3 per cent.

The stock has outperformed the Sensex over the past one month "" it has gained about 13.65 per cent as compared to a 7.5 per cent rise in the broader market. That's because the company had recently decided to buy back its shares at a price not exceeding Rs 60.

In Monday's trading, the stock was up one per cent to Rs 50.6. In the March quarter, Berger like other players in the industry has leveraged the current upturn in the construction industry via an expanded product range in the decorative segment.

As anticipated, the company's cost of raw materials has grown largely due to its inputs which include derivatives of crude.

The industry had raised prices in late December by about 4-5 per cent due to higher input costs and the benefits from this move were largely realised in the March quarter. Also, a stronger rupee in the last quarter of FY05, has helped Berger offset some of the escalating input costs.

Meanwhile, higher input costs led Asian Paints' operating profit margin to fall marginally to 11.36 per cent in the March quarter. Going forward, the management plans to expand its market share in the rapidly expanding auto and industrial segment through its subsidiary.

However, with input costs showing no signs of easing, is margins could remain under pressure.

With contributions from Shobhana Subramanian and Amriteshwar Mathur