Is Yes Bank worth a nibble?

Yes bank is one of the most talked about financial institution in India. Only the bravest of them could put up with this kind of volatility. But, is it worth your money now? That’s a million dollar question. What with so many head fakes and so much speculation around capital raise, this might just be the investment of the year for the patient investor for several reasons:

  • Much of NPA has already been recognized. If anything many of the legacy NPA’s are getting closer to resolution (Essel Group, CCD to name a few), which would mean money coming in.
  • The old management is gone, replaced with professionals with global experience.
  • Ex-Deutsche Bank CEO (Anshu Jain) is helping with the fund raising.
  • RBI is completely aware of the inner workings of the group with an RBI appointed board member.
  • Indian economy seems to be in the mend with early signs of growth shoots.
  • Yes has a fairly strong retail franchise, and management was clear in its previous conf call that additional capital is mainly to accelerate growth.
  • Bank is decently capitalized and no panic as of now.
  • Forty percent holding in UPI, which is the future of payments in India. This business in itself should be worth $8-10B.
  • Wellknown investors showing interest in the latest round of fund raising. They may get this tock at Rs.40-Rs.45, but will do wonders to the condifence in this franchise.

Having said this, an investor needs a lot of patience to play the Yes Bank game. We are long Yes bank. We have sold Feb, 2020 Rs.45 put at Rs.11, effectively buying this stock at Rs.34. We will be happy to add to the position if it drops below Rs.25.

INVITS/REITS as an alternative to Equities in India

Off late SEBI has been generous enough to allow some new asset classes compete for investors’ money in India. Many people are aware of REITs, but has anyone heard of INVITs? Well, they are very similar except they focus on other infrastructure asset classes like roads, power grids, transmission lines, and any other large scale assets with long term contracts. The INVIT managers are mandated to return at least 90% of their free cash flow to the investors on at least a bi-annual basis; most Indian INVITs have been distributing on a quarterly basis. For the uninformed, you could think about these instruments as annuities. Their cash flows are guaranteed by cash flows from toll collection, or transmission line payments. The first public INVIT was launched on May 18th, 2017 by IRB. The second public INVIT was launched by Sterlite just a couple of weeks later. And about a year back the first REIT was launched by EMBASSY. So, we thought it was a good time to do some analyses of these instruments. A performance summary with comparison against NSE 50 performance has been shown below.

Performance Summary

Clearly from the table above we see that Embassy REIT is a winner. However, if we do a drill down we see that INDIGRID is, and can be a good alternative. It has fairly decent, 9% total return from inception at an annualized volatility of 9.7%. But the kicker is in the transformative capital infusion it had sometime in 2019. The INVIT turned around after that investment and has shown a Sharpe ratio similar to that of EMBASSY and an annualized return of 29% from the trough, outperforming NSE by a long stretch.

Why is INDIGRID’s last year important?

  1. This is a buy and hold strategy. There’s no trading.
  2. It has far less volatility compared to NIFTY.
  3. The Rs.12 dividend is almost assured for 10+ years (based on management commentary, and the new assets added to the portfolio).
  4. Strong sponsors in KKR. Governance is not so much of a concern any more with global players.
  5. Even with the current price of Rs.95.8 (at the time of writing), we are looking at an IRR close to 14%.
  6. There’s a realistic chance of DPU going up 2% a year for the next 3-4 years.
  7. Given that the cash flows are based on up time, rather than actual electricity usage, the earnings volatility should be minimal.
  8. There’s a fair chance of assets selling for a premium at the end of concession period (32+ years) due to the constraint on transmission assets.

The more risky, and underperforming asset has been IRBINVIT. In hindsight this looks like a scam to off load debt from its parent IRB Infrastructure. Having said that, not all is lost. The REIT shows a very high implied IRR, with the fast implementation of FASTAG there’s a good chance of improvement in highway traffic. With improving macro environment in India, the traffic should only pick up. There are a few caveats to be privy of when investing in this INVIT.

  1. Two main cash cows will roll off in 2022, leaving the burden on some not so mature assets like Chitradurga-Tumkur road, and Pathankot-Amritsar road.
  2. There’s accrued premium payable to NHAI which is not provisioned for, and could pose a headwind.
  3. The traffic may not pick up and the DPU could drop to Rs.5-6 after 2022.
  4. Negative sentiment in the market given the decrease in DPU from 3 per quarter to 2.5. However it has shown a small uptick in the current quarter to 2.7, and the possibility of keeping this distribution is high.

Even with a drastic drop in cash flow this product is priced for a return similar to that of government bonds. With severe stress testing we are still seeing an IRR of 7-8%. In the best case, if the management is able to add some new cash-flow positive assets we could see a return of 14%+. Obviously this is an instrument for the brave at heart, and the ones who really believe in the improvement of highway systems and traffic in India.

The following table shows some results to highlight our point. We are assuming a 20% drop in DPU( Distribution per unit) post 2023, and DPU continues to fall. With this assumption, we are seeing an IRR of 7.7% which is quite reasonable for someone who is risk averse, and is only looking for a return slightly better than Fixed Deposit.



Discounted cash flow analysis of IRBINVIT.

Summary

To summarize a mix of Embassy, INDIGRID, and IRB INVIT could actually give a decent return to someone who wants to diversify and get returns uncorrelated with the equity markets. The table below shows the correlation analysis of these instruments against NSE 50 stocks. And as expected we see very minimal correlation of less than 10% between theses assets, and the market based on the past one year’s performance.



For someone looking for great risk-adjusted returns with minimal heart ache, we would recommend a portfolio comprising of 45% in INDIGRID, 30% in Embassy, and 25% in IRBINVT.

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