YES Bank -- Red Flag!

From the Economic Times a few days ago ---

Shagun Kapur Gogia can't succeed her father on the board: YES Bank to Bombay High Court

RanaKapoor-led YES BankBSE 1.28 % on Monday told the Bombay High Court that only a living person has the right to nominate directors, in response to the plea filed by MadhuKapur.

The Kapur family had moved court to establish its claim as an equal business partner to MD and Chief Executive Rana Kapoor. The court will now hear the case on Friday, as the bank's lawyers sought more time to amend their petition.

"The bank is not willing to recognise Shagun Kapur Gogia as the Indian partner after the death of her father Ashok Kapur. This is the point of contention," said a person following the court tussle.

Usually, as minority shareholders, we do not pontificate on all matters however, this is something that caught our attention.

a.    A stock holder is a part owner of the business. A stock is not a piece of paper but part ownership in a business. Shagun Kapur owns about 12% of the stock. She own one-eighth of the bank. One-eighth of every branch, every loan, every deposit belongs to her (net of liabilities)

b.    If a person who owns one-eighth of the bank does not get a voice in the board, who does?

c.    Part of the duty of the board is to protect and shepherd the management towards returning value to shareholders. If big owners are not part of the board and not heard to, where does that leave small minority shareholders?

d.    What is the purpose of the bank if not working for the shareholders?

e.    Apart from Rana Kapoor, who owns a chunk of the shares, what is the incentive for the other directors to take the right decisions for the shareholders? Are they there to protect their jobs or that of the shareholders?

Last few weeks

The last 3 to 4 weeks, the emerging markets stock indices have been underperforming the developed world.

In particular, the Indian stock market which crossed 20K briefly this year is back to the high 18's. While this is not a significant downturn, it is a correction that also caused a carnage among the mid-cap stocks.

As always, at Beowulf Capital, we ignore macros and invest in companies that we believe will grow and thrive in the long run. As the carnage was underway, we were net adders of capital into the market. Some of these bets will take a while to make money but we always like discount sales in the stock market. We especially are tuned to discount sales of stocks on our watchlist. Volatility in the market does not bother us, we have balls of steel. We are interested only in performance and ethical management.

In the last few weeks, we have added to our positions in YES Bank, Shriram Transport Finance, Titan and initiated positions in ICRA and Voltas.

In dec, we had sold out of our positions in ICRA at about 1,450 citing concerns about the IRB model and its impact on ICRA. At 30% lower price, we think we are comfortable owning the security. We bought into the positions when the market cap was a little shy of 1,000 crores. With about 278 crores in marketable investments, a good business model is available at a fair discount. It is a small position that we have initiated and we are comfortable that it does not form a big portion of our portfolio.

In the investing world (especially the value investing world) majority of the folks tend to look at price to book for financial stocks. For a long time, we were firm believers in this logic. One cannot go very wrong with buying stocks at or under liquidation value. However, at Beowulf, we are of the opinion that growth is part of value. We like to underpay for growth as well. Whenever, we find stocks whose growth is underpriced, we look at the probabilities that the stock will be worth a lot more a few years down the line and we buy the stock. Of course, we need to be comfortable to a reasonable extent with the management as well.

Two stocks that has caught our attention are very expensive using traditional price to book ratio. Both of them trade at or around 2.5 times book value. One might argue that at these levels the growth is fully priced in. We are skeptical of it. If the last twelve months earnings are north of 20 to 25% of total book value and if the business model suggests that these level of earnings will continue in the future without taking on undue risks on the balance sheet, our hypothesis is that, 7-8 times pre tax income is a better indicator of the value of the firm. This multiple ensures that all the future growth is still available to investors. Else, the firm will end up trading at 2 to 3 times earnings, which does not make sense to us.

We deliberately tend to keep the portfolio positions in financials at a relatively smaller levels compared to our bigger stocks. Our top three positions make up around 60% of our portfolio. So, net-net, we felt comfortable adding to our positions in YES Bank and Shriram Transport Finance. Both of them are terrific franchises. We had initially initated YES Bank positions in Dec 2011, this is first time we have added to the positions since then. Shriram transport finance is another niche player with little competition that allows them to earn above average ROA. The volatility is higher on the stock but we are not bothered. We use the opportunities to add to our existing positions.

We have also initiated position in Voltas. As the stock crashed through 52 weeks low, we initiated the position and added more as it continued to drift downward. This is an opportunistic stock in a cyclical industry. We are not looking for overnight returns. With an ethical management from Tata group running the companies and with an insiders perspective on the HVAC industry (I work in it) I feel comfortable holding these stocks.