Buy Yes Bank; target of Rs 190: DSP ML

DSP Merrill Lynch has recommended buy rating on Yes Bank with a target of Rs 190.

DSP Merrill Lynch report on Yes Bank:

Raising PO to Rs190  

We are raising our PO on Yes bank to Rs190 (v/sRs140 earlier) on back of 8-10% rise in earnings forecast and higher visibility on its growth trajectory. Yes bank, trading at 5x FY08E Adj book, could, in our view, sustain its multiple one year out owing to a) strong earnings growth trajectory (earnings estimated to grow at 66% CAGR), b) rising ROE to >20% by FY09 (factoring in equity dilution of 20%) and c) its attractive positioning as a take over target, underpinning our new PO based on FY09 adj book. Maintain buy, inability to manage growth key risk to PO.  

3QFY07 net income up 73%yoy; healthy asset quality  

Yes bank’s 3QFY07 net income grew 73%yoy (17%qoq) to Rs251mn driven by strong top line (up 84%yoy led by loan growth of 150%yoy and margin expansion of 10bps qoq to 3%), rising fee income (up 50%yoy) and higher treasury gains. Key highlight of result was roll out of 7 new branches (total 29 branches now) enhancing visibility on the growth trajectory. Yes bank maintained its healthy asset quality with Net NPL being Nil.  

Raising Earnings estimate by 8-10% for FY08-09  

We have raised our earnings forecasts for YES Bank by 8% for FY08 and 10% for FY09 and now expect earnings to grow at a CAGR of 66% driven by a) strong loan growth (as Yes bank leverages the rising corporate credit demand and its expanding distribution network) supported by margin expansion of 10bps due to increasing share of low cost demand deposits and b) rising fees (driven by new product launches and growing retail franchise). We have factored in gross NPL rising to 1%; however NPL coverage to remain at 100%.