IPO Analysis: Ujjivan Small Finance Bank
INVEST FOR LISTING GAINS
About the Issue
Ujjivan Small Finance Bank (USFB), a small finance bank, promoted by Ujjivan Financial Services (UFSL), an NBFC that began operations in 2005, is entering the capital market with its initial public offering (IPO). The IPO consists of a fresh issue, aggregating up to Rs. 750 crores. The issue will open for subscription on December 02, 2019, and the closing date for the bid will be on December 04, 2019. The price band has been fixed at Rs. 36-37. Bids can be made for a minimum lot of 400 equity shares and in multiples of 400 equity shares, thereafter. UFSL shareholders discount to eligible UFSL shareholders is Rs. 2 per equity share on the issue price. The same amount of discount is even available to eligible employees.
The prime objective of the issue is to meet the RBI’s listing requirement within three years from the launch of the bank. Despite a reasonable capital position (CAR at 18.8 per cent vs. min. requirement of 15 per cent), USFB raised Rs. 2500 crores in pre-IPO placement at Rs. 35 per share.
Post IPO, promoter (Ujjivan Fin) stake will fall to around 84 per cent, which will have to be pruned further to 40 per cent by Jan 2022, 30 per cent by Jan 2027 and eventually to 15 per cent by Jan 2032. This means there will be a continued dilution.
The equity shares are proposed to be listed on the BSE Limited and the National Stock Exchange of India Limited.
| Ujjivan Bank IPO Details |
| Issue Open | Dec 2, 2019 - Dec 4, 2019 |
| Issue Type | Book Built Issue IPO |
| Issue Size | 208,333,333 Eq Shares of Rs. 10
(aggregating up to Rs 750.00 Cr) |
| Face Value | Rs. 10 Per Equity Share |
| Issue Price | Rs. 36 to Rs. 37 Per Equity Share |
| Market Lot | 400 Shares |
| Min Order Quantity | 400 Shares |
| Listing At | BSE, NSE |
About the Bank
The bank is promoted by Ujjivan Financial Services (UFSL) - an NBFC which began its operations in 2005. It provides a full range of financial services to the ‘economically active poor’ who were not adequately served by other financial institutions. Ujjivan Financial Services is among the 10 recipients of small finance bank license from the Reserve Bank of India (RBI) in 2015. Like other microfinance companies, UFSL's primary business was to provided collateral-free, small ticket-size loans to economically active poor women. It also offered individual loans to micro and small enterprises.
UFSL, after obtaining RBI final approval on November 11, 2016, to establish and carry on business as a small finance bank, transferred its business undertaking, comprising of its lending and financing business to USFB, which commenced its operations from February 1, 2017.
By the end of FY19, USFB spread across 24 states and union territories. The bank served 4.94 million customers and operated from 552 banking outlets, including 141 banking outlets in unbanked rural centres, as on September 30, 2019. By then the bank had a network of 441 ATMs (including 18 ACRs).
The Bank’s CASA profile remains low at ~12 per cent (9 per cent of AUM) when compared against its peers’ range of 20-35 per cent (12-25 per cent of AUM), mainly due to its early-stage strategy focusing on MFI customers for liability. The RBI too had a red-flagged higher concentration of deposits (Top-20 depositors contributed 35 per cent). Nevertheless, it may change with new MD (ex –HDFC Bank) taking the Although the bank has now changed track, we believe that the new MD, Mr. Nitin Chugh (ex-HDFCB), taking the charge of the bank.
The bank still has a high portfolio concentration risk, with MFI being ~79 per cent of loans, which has its own set of credit risks and cycles. The bank has gradually diversified into other products. Although it is a step in the right direction, it needs to be seen that how it moves in that direction as it has recently stopped unsecured SME lending, given the higher NPAs. RHP red-flags a host of operational/compliance lapses including no independent compliance department, non-optimizing of CBS for micro-loans, the concentration of deposits, lack of borrower rating, etc.
The new management has taken corrective measures; however, it needs to be seen how they ramp up the compliance standards.
Bank’s Financials
The gross loan book of the bank has surged from Rs. 6,383.98 crores at the end of March 2017 to Rs. 11,048.59 crores at the end of March 2019 and doubled to Rs. 12,863.65 crores at the end of September 2019, showing a CAGR of 32 per cent. The growth was derived from affordable housing loans and MSE, which grew at a CAGR of 190 per cent and 224 per cent, respectively.
The deposits base has also increased from Rs. 206.41 crores, ending March 2017, to Rs. 7,379.44, ending March 2019, and Rs. 10,129.85 crores, ending September 2019. The share of retail deposits has increased from 3.15 per cent, ending March 2017, to 41.93 per cent, ending September 2019. CASA to total deposits ratio has improved from 1.57 per cent, ending March 2017, to 10.63 per cent, ending March 2019, and was 11.87 per cent, ending September 2019.
The bank has stable asset quality with a gross NPA ratio at 0.85 per cent net NPA at 0.33 per cent, ending September 2019, which remains one of the best in the industries. The bank has raised the share of secured advances from 1.83 per cent, ending March 2017, to 13.59 per cent, ending March 2019, and 19.39 per cent, ending September 2019.
The bank has posted a net profit of Rs. 6.86 crores in FY2018 and Rs. 199.22 crores in FY2019, while net profit stood at Rs. 187.11 crores for H1 of FY2020.
The bank has a healthy capital adequacy ratio of 18.84 per cent with a Tier I capital ratio of 18.16 per cent end September 2019.
Valuation and Recommendation
For the period ending Q2FY20, USFB reported a return on asset (ROA) of 2.4 per cent while a return on equity (RoE) of 19 per cent. This was on the back of strong margins and a lower tax rate. Going ahead, when the share of high margin MFI portfolio will decline, it will lead to a fall in the margins and, simultaneously, diversification to other areas will lead to a higher credit cost. The combined impact will be a decline in return ratios.
At the upper price band of Rs. 37, the shares of the bank are available at a price to book value (P/BV) of 2.25x while after adjusting for its net non-performing assets, it is available at APBV of 2.28 times. Compared to other listed players, such as AU Small Finance Bank, which is available at PBV of 7.16, or Bandhan Bank, which is available at P/BV of 6.25 times, the issue looks attractively priced. Nevertheless, looking at some of the other established listed banks, we can see that they are available at P/BV of lower than 2x. Therefore, only those investors should subscribe to the issue, who are interested in the listing gains, considering strong grey market activities.