From Rs 6,000 crore to Rs 70,000 crore: The curious case of Yes Bank's market cap

It's too good to be true!  The market cap of beleaguered Yes Bank was down in the dump at Rs 6,000 crore after the RBI announced moratorium on the private lender in early March this year. Then came the news of new investors led by State Bank of India (SBI) to invest Rs 10,000 crore into the bank. Reacting to which, the market cap shot up to Rs 14,500 crore. But there was also another reason - existing investors weren't allowed to sell more then 25 per cent of their shareholding. This led to a superficial rise in the bank's share price for two reasons: the selling was curtailed with the new rule and the market completely ignored the future dilution in bank's equity capital.

The fact is that the equity capital is getting diluted from 233 crore shares to around 1,234 crore shares. The expansion is more than 5 times, which effectively means a market cap of just Rs 3,000 crore. But since the selling of shares is restricted, the current price of Rs 57 per share on the bourses is not reflecting the true picture.

The bank today released the new shareholding pattern for the period ended March 17, 2020, which included the new investors led by SBI and seven other banks. If one takes into account the expanded capital of 1234 crore shares, the market cap comes out to be Rs 70,000 crore, which doesn't reflect the fundamentals of the bank.  

The eight new investors also have a lock in of 3 years with the freedom to sell only 25 per cent share. SBI Chief Rajnish Kumar has already said that the bank will not sell even a single share in the next three years. The other investors would also follow suit. Therefore, the share price of Yes Bank might hold the Rs 58 per share price and show a market cap of Rs 70,000 crore, but  once the three year lock in ends, there will be a huge selling pressure.

The bank's return on equity, dividend and other parameters will take time to get back to normal because of the equity expansion. And this is just the first stage of equity expansion which has helped the bank to meet the minimum regulatory guidelines like the capital adequacy ratio. Post the allotment of shares, the shareholding of promoter Madhu Kapur and family has reduced from 8.33 per cent to 1.68 per cent. Similarly, the LIC's stake has gone down from 8 per cent to 1.64 per cent.

The bank is now owned 98.33 per cent by public shareholders.

Going forward, the equity will expand further as the second stage of capital infusion starts. The bank needs capital for growth as well as for meeting any shortage on the provisioning front since NPAs are not fully settled. The new investors would surely look at the book value rather than the artificial share price to decide their capital infusion. The SEBI formula of deciding the price for new investors won't work because of the restriction on selling shares.

The SBI led banks have paid a price of Rs 10 per share (Rs 2 face value and Rs 8 premium). Even that time the market price of Yes Bank was around Rs 30 per share. The new investors, too, will look at the underlying fundamentals of the bank to work out a price to enter the bank. The bank has capped the authorised capital at 3,000 crore shares, which means equity shares would further double from the existing base post the investment by new investors.

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