The results of Yes Bank Ltd for the March quarter beat analyst expectations handsomely, sending the stock up 4.6% on Wednesday. The bank’s results had been awaited with much trepidation, primarily because of concerns about the impact of losses on account of forex derivatives. The results did show a jump in provisions and contingencies to Rs22.8 crore from Rs15.7 crore in the third quarter, but the rise in operating profit easily made up for that. The excellent results also led to a bounce in the BSE Bankex index, as investors realised they may have overreacted to the problems facing banks.
Yes Bank continues to notch up over 100% year-on-year growth on a number of parameters. Profit before tax and contingencies went up 102%, slightly lower than the 110% y-o-y growth notched up in the third quarter. That growth has been due mainly to a rise in net interest income (which went up 134% y-o-y in the fourth quarter, compared with 81.5% y-o-y in the third quarter). Non-interest income growth, however, has tapered off significantly, from 123.7% y-o-y in Q3 to 34.4% in Q4. Analysts point out that treasury income growth is likely to slow in future. But interest margins have improved, with interest expenses coming down from 73% of interest income in Q3 to 72% in Q4.
A slowdown is also seen in advances, with y-o-y growth tapering off from 79% at the end of December to 50% by end-March. A similar deceleration is also visible in deposit growth. The bank added seven branches during the quarter, while total employee strength went down from 3,542 in December to 3,150 by end-March. Nevertheless, Yes Bank’s growth momentum, although slowing, is likely to remain high compared with other banks. At the same time, the bank has so far been successful in maintaining asset quality.
At Rs169, Yes Bank trades at 3.8 times its book value as at end-March and a dilution is on the cards on account of a qualified institutional placement. The stock has fallen 38% from its highs, compared with a fall of 35% for the BSE Bankex. That uncharacteristic underperformance should now reverse.
Mastek: unwarranted enthusiasm
Shares of Mastek Ltd jumped by as much as 9% to Rs340 soon after the company’s results were announced, thanks to the impressive growth numbers. Revenues grew by 10% sequentially and net profit jumped by 29% quarter-on-quarter to Rs35.1 crore. These numbers were way higher than analysts’ forecasts.
But once the company disclosed that its recent acquisition, Systems Task Group (STG), contributed largely to the growth in revenues, the company’s shares settled lower at Rs322. STG, a US-based enterprise solutions provider to the North American property and casualty insurance industry, was acquired by Mastek in mid-March. But the company has consolidated its accounts with itself from 1 January. Adjusted for its contribution, growth in revenues is less than 3%.
STG has nothing to do with the jump in profit margin last quarter though. Instead, costs associated with the acquisition and the closure of a large project (which hadn’t been replaced in time) led to a sharp 66% drop in the profit of the US operations. While some credit goes to Mastek for eking out productivity gains, it also benefited from a change in its incentive plan for employees, thanks to which there was a reversal of incentives accounted for previous quarters. As a result, staff costs fell to 53.7% of revenues, down from about 60-61% in the past. The company’s chairman and managing director, Sudhakar Ram, says the sharp drop in staff costs is a discrepancy and that would revert to about 58% of revenues in the future. He did not specify the exact amount of reversals.
But based on the admission that staff costs would revert to 58% of revenues, it seems like the reversals contributed about 400 basis points to profit margin. Overall margins increased about 200 basis points last quarter, which indicates that profit margin would well have fallen but for the reversals. But to be fair to the company, it also had to contend with one-off acquisition-related costs.
In sum, the results aren’t as impressive as the headline numbers suggest. Meanwhile, the Mastek stock has outperformed the National Stock Exchange’s CNX IT index by more than 30% since it announced its buy-back in October. Unless growth is maintained close to last quarter’s levels (and without one-off items), the enthusiasm surrounding the stock seems unwarranted.
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