Verdict: Small, yet a Firm Buy

IPO Snapshot:

Ujjivan Small Finance Bank (SFB) is entering the primary market on Monday 2^nd December 2019, to raise up to Rs.750 crore, via a fresh issue of equity shares of Rs. 10 each, in the price band of Rs. 36 to 37 per share. 10% of the issue is reserved for shareholders of listed parent Ujjivan Financial, with Rs. 2 per share discount, while net issue of Rs. 675 crore is split 75:15:10 among institutions, HNIs and retail investors respectively. Total issue size represents close to 11.8% of the post-issue share capital on upper end and closes on Wednesday 4^th December, with listing likely on 12^th December.

Objects of Issue and Shareholding:

IPO is being undertaken under RBI’s directive to have direct listing of the small finance bank (and not via holding company, which is already listed as Ujjivan Financial Services) within 3 years of achieving net worth of Rs. 500 crore. Since bank commenced operations with net worth of over Rs. 500 crore, it is listing within the deadline of 31^st January 2020. Fresh issue proceeds of Rs.750 crore will augment Tier1 capital and fund growth over the next 2-2.5 years.

In mid-Nov 2019, Ujjivan SFB raised Rs. 250 crore in a pre-IPO round of 4.7% of fresh equity, at Rs 35 per share, from funds of IIFL, Avendus, Enam among others. Post IPO, parent Ujjivan Financial’s stake in the bank will contract to 83.3%, assuming price discovery at upper end, from current 94.4%. While promoter’s shareholding of minimum 40% is locked in till 31-1-22, it is also required to trim promoter holding to 40% by 31-1-22, to 30% by 31-1-27 and to 26% by 31-1-29. Company had applied for RBI’s in-principal approval for reverse merger, which was pushed to Jan 2022 by the regulator. Thus, like many other banks, trimming of promoter stake will remain an overhang on this stock too, although over the longer term, company aims to convert to a universal bank from a small finance bank.

Company Background:

Promoter Ujjivan Financial was established in 2005 as an NBFC, specializing in micro loans. Post-receipt of small finance banking license in Oct 2015, NBFC operations were transferred to SFB, which commenced banking operations from 1^st Feb 2017. Currently, Ujjivan SFB serves 4.9 million customers from its network of 552 banking outlets and 441 ATMs, across 24 states/union territories, with focus on South and East India. While it’s a new bank with an encouraging branch expansion (287 branches added in FY19, 78 in Q2FY20), parent’s decade-plus experience in the lending business is very vital. 

Rs. 12,864 crore advances as of 30-9-19, are well diversified across Tamil Nadu (17%), Karnataka (16%), West Bengal (14%), Maharashtra (9%) and 20 other states. Based on segments served, 79% of advances are micro loans, with affordable housing (9%), micro and small enterprise loans (MSE 7%), loans to financial institutions (4%) accounting for the rest, Thus, only 20% of the loans are secured. 

Of the Rs.10,130 crore deposits, low-cost CASA deposits account for just 12%. 85% of total deposits are sourced from metro and urban areas, highlighting the industry-wide challenge faced by most new banks (like AU, Bandhan, Ujjivan) to tap liabilities meaningfully from semi-urban and rural areas.

Financials:

Ujjivan SFB’s total income for FY19 grew 29% YoY to Rs. 2,038 crore, with net interest income (NII) also rising by 29% YoY to Rs.1,107 crore. It clocked Rs. 199 crore of PAT for FY19, which rose to Rs. 187 crore in H1FY20, as NII surged 46% YoY to Rs. 740 crore in the first half of FY20, leading to an EPS of Rs. 1.21. With overall yields of 20% (micro banking book yielding 21%) and cost of funds close to 8.4%, NIMs for H1FY20 remain healthy at 10.6% with asset quality also under check, at 0.3% net NPA under I-GAAP. Improved financial performance strengthened FY19 return on assets (RoA) of 1.72% to 2.4% in H1FY20. Bank has Rs.200 crore worth outstanding 11% non-convertible preference shares, issued to parent Ujjivan Financial, on which, dividend was paid for FY19 and H1FY20. On an equity of Rs. 1,526 crore (post pre-IPO fund raise), current net worth stands at about Rs. 2,100 crore, translating into BVPS of Rs.13.7. Thus, bank’s financials have demonstrated healthy growth, which can be replicated, given the sizeable funds being raised via the IPO.  

Valuation:

At Rs. 37 per share, Ujjivan SFB’s market cap will stand at Rs. 6,394 crore, leading to PBV multiple of 2.7x (pre-money) and 2.1x on FY20E (post-money) basis. On FY20E earnings, PE multiple works out to 14x, which is also attractive, based on below peer comparison table:

(included other micro loan financers, small finance banks, and recent banking IPO)

Based on peers, we like the following aspects of Ujjivan SFB -

1. Amongst the banks (barring NBFC-MFI CreditAccess and Spandana), Ujjivan SFB’s double digit NIMs are the highest in the peer set.
2. Low proportion of advances coming from home state Tamil Nadu (only 17%), reducing portfolio concentration risk, in event of any region-specific political, social, environmental event panning out, unlike peers like Equitas, CreditAccess and Bandhan have geographically concentration loan portfolios in Tamil Nadu (56%), Karnataka (51%) and West Bengal (46%) respectively.
3. Healthy asset quality – despite unsecured loans accounting for ~80% of the book and high growth being posted by the bank, net NPAs at 0.3% are within comfortable levels.
4. PE multiple for current year for Ujjivan SFB is the lowest in the above table, while FY20E PBV multiple of 2.1x is also the lowest, except for Equitas Holdings, which has a concentrated portfolio, high bad loans and is a holding company for its small finance bank.
5. Recently concluded IPO of CSB Bank (to list on Wed 4^th Dec), which was subscribed 87 times, was priced similar to Ujjivan SFB, at FY20E PBV multiple of 2.1x. This is despite former’s lower NIMs (3.4% over 10.6% for Ujjivan) and poorer asset quality (1.96% net NPAs over 0.3%) inspite of 33% of loan book being secured gold loans.
6. Small price of sub-Rs.50 per share in absolute terms, may also keep investor interest high in the issue.

Going forward, key monitorable for the stock is within micro loans, only 30% customers are unique to Ujjivan SFB, implying that balance 70% customers have micro loan exposure from other lenders too. This raises a concern whether micro finance sector has saturated or lenders are simply chasing well-profiled customers only. Despite single digit penetration of micro loans in the country, AUM growth is largely supported by higher ticket sizes, whereas growth in number of borrowers is still not keeping pace, as seen for a few listed peers lately. Nevertheless, this IPO of Ujjivan SFB gets our thumps up, based on the above 6 listed aspects.

Is there an opportunity to invest in parent Ujjivan Financial?

Post IPO, since both parent Ujjivan Financial and subsidiary Ujjivan SFB will be listed, Ujjivan Financial’s share price will mirror Ujjivan SFB’s price movement, adjusted for a holding company discount. Currently, this discount stands at 22.5%, which may narrow post listing, if share price of Ujjivan SFB increases. Hence, one can also take a long position in Ujjivan Financial to ride the opportunity, if one misses out on allotment in the IPO. Over the long term though, Ujjivan Financial shares may get culminated into the operating company i.e. Ujjivan SFB. 

Conclusion:

On sound fundamentals, healthy growth outlook and attractive issue pricing, we recommend a ‘subscribe’ to the issue of Ujjivan SFB. 

Grey Market Premium (GMP) of Ujjivan Small Finance Bank: Grey Market Premium of Ujjivan SFB is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.