Incorporated in 2017, Ujjivan Small Finance Bank Limited (Ujjivan SFB or USFB) offers small finance to underserved & unserved segments in India. Ujjivan Bank is promoted by Ujjivan Financial Services Limited (UFSL) which is an NBFC into providing financial services to the economically active poor, who are not served by the Financial Institutions. Following the strong demand of IRCTC and CSB IPOs, Ujjivan is surely going to attract a lot of attention although that doesn’t automatically make it investment worthy. Through this detailed review of Ujjivan SFB IPO, we try to find out if there are any red flags.
Ujjivan Bank has a wide presence across 24 states and union territories in India. As on 30 June 2019, it had 4.72 million customers, 474 Banking Outlets, 387 ATMs, two 24/7 phone banking units (in Bangalore and Pune) and 50 additionally operated Asset Centres. Customers can use Ujjivan Bank mobile banking application in 5 languages.
Promoter and Company Background
Ujjivan Small Finance Bank is promoted by Ujjivan Financial Services Limited (UFSL) which is an NBFC into providing financial services to the economically active poor, who are not served by the Financial Institutions. On 7 October 2015, UFSL received RBI In-Principle Approval to establish an SFB, following which it incorporated Ujjivan Small Finance Bank Limited as a wholly-owned subsidiary. UFSL, subsequent to obtaining RBI Final Approval on 11 November 2016 to establish and carry on business as an SFB, transferred its business undertaking comprising of its lending and financing business to the bank, which commenced its operations from 1 February 2017.
Ujjivan SFB IPO Review: Issue Details
IPO Dates: 2 – 4 December 2019
Issue Size: INR750 crore (including INR75 crore in Shareholder Quota)
Ujjivan SFB IPO Analysis: Objects of the Offer
- Augmenting the Bank’s Tier – 1 capital base to meet Bank’s future capital requirements
- Meeting the expenses in relation to the Issue
- Receive the benefits of listing the Equity Shares on the Stock Exchanges.
Ujjivan SFB IPO Review: Risks
According to RBI guidelines, the promoter is required to reduce its shareholding in Bank to 40% within a period of five years from the date of commencement of business operations and thereafter required to reduce its shareholding in Bank to 30% and 26% of paid-up Equity Share capital within a period of 10 years and 12 years, respectively, from the date of commencement of business operations.
As of 31 March 2017, 2018, 2019 and 30 June 2019, advances in micro banking business accounted for 97.50%, 92.55%, 84.67% and 81.97%, respectively, of total Gross Advances.
The bank has introduced several new products and services, such as personal loans, vehicle, agriculture loans and certain products of MSE loans and affordable housing loan. The bank has incurred substantial costs to expand range of products and services but assured success of such products and services is not guaranteed.
Large number of its banking outlets are located in the southern and eastern states of India, particularly, Karnataka, Tamil Nadu and West Bengal. Consequently, a majority of its advances are from customers in these states. As of 31 March 2019 and 30 June 2019, 45.01% and 45.21%, respectively, of Gross Advances (including securitization/ IBPC) were contributed by these states.
The bank’s insurance cover for fixed assets as a % of total fixed assets as of Sept 2019 was 71.62%.
Sachin Bansal, an independent director on the bank’s board, is a director on the board of Chaitanya Rural Intermediation Development Services Private Limited – a non-deposit taking, systemically-important NBFC. He also holds substantial majority shareholding directly, in Chaitanya Rural, and indirectly, in Chaitanya India Fin Credit Private Limited which is a non-deposit taking systemically important NBFC-MFI. These entities are in similar lines of business as Ujjivan Small Finance Bank, representing a conflict of interest.
Ujjivan Small Finance Bank IPO Review: Debt rating profile
Long term bank facilities have been rated CARE A+; Stable by CARE Ratings Limited, and certificate of deposits have been rated CRISIL A1+ by CRISIL Limited.
Ujjivan Bank IPO Review: Related Party Transactions
Aggregate value related party transactions (income and expenses) to total income in Fiscal 2017, 2018, 2019 and in the six months ended 30 September 2019 were 0.96%, 0.64%, 1.48% and 1.35%, respectively. No red flags here as the quantum is less.
Ujjivan SFB IPO Analysis: Strengths
Deep understanding of mass market serving unserved and underserved segments
Ujjivan Bank provides a variety of banking services in mass market customer segments with a focus on serving the financially unserved and underserved segments in India. A large section of the Indian population lacks access to formal banking services or is served by informal providers. The rural penetration of its promoter UFSL is tremendously helpful in expanding the bank’s services.
As of 31 March 2019, Ujjivan Bank was among the leading SFBs in terms of branch count and geographical spread across India (Source: CRISIL Report). As of 30 September 2019, it was present in 24 states and union territories encompassing 232 districts in India. As of 30 September 2019, it operated from 552 Banking Outlets that included 141 outlets in URCs (of which seven were business correspondent centers) and additionally operated four Asset Centres. Its diversified operations also allow de-risking business by mitigating political and state-specific risks. As of 30 September 2019, it operated 131, 167, 173 and 81 Banking Outlets (including in URCs) in the North, South, East and West regions, respectively. Its operations are well-diversified and in Fiscal 2019, no single state constituted more than 18.00% of overall loan portfolio. As a result of geographic spread, it has been able to reduce concentration risk and diversify loan portfolio.
Ujjivan SFB IPO Review: Observations from Financial Statements
Contingent liabilities at INR26 crore represent only about 1.5% of net worth of the bank.
Ujjivan SFB IPO Analysis: Valuation and Peer Comparison
For Ujjivan and others, EPS taken for H1 2019 and multiplied by 2 to annualize.
Ujjivan Bank IPO Analysis: Should you subscribe?
Quite clearly, Ujjivan has priced its IPO at attractive valuations. As of now, AU SFB is the only listed peer and others are either holding companies or full service banks. Ujjivan Bank is priced at a P/E ratio of 16.5, nearly half of AU SFB. The latter also trades at high price to book value ratio of 6.9 while Ujjivan Bank is available at just 2.3. AU has an upper hand on some parameters such as cost of funds and cost to income ratio but Ujjivan SFB makes up with excellent NPA numbers. Its NPA levels are actually lowest among SFBs. In the wider context, it is second only to CreditAccess Grameen which works on a more risky model of pure microfinance. In our analysis of AU SFB, we highlighted that asset financing players have a much better chance of recovering their dues without exposing themselves to political pressures.
Ujjivan SFB has posted good results in 6MFY20 and has improved its operational and financial performance. We believe the bank should do well with the recent capital raise and its strong risk management frameworks. Taking into account its growth prospects and excellent asset quality, stock looks attractive not only for listing gains (grey market movement indicating to a strong opening) as well as for long term. We give ‘SUBSCRIBE’ rating for the IPO.
Ujjivan Small Finance Bank IPO Review: Analyst Meet Takeaways
IPO Rationale – Mainly to meet regulatory requirement and protect shareholder interests of the holding company. IPO Holding of promoter post IPO will be 85%
Customers – Number of customer on the asset side are 4.3 million and on the liability side are 3.3 million which is favorable.
Ujjivan SFB at a glance – Ujjivan SFB’s main focus is on the mass market. Its aim is to serve the unserved and under-served. In Vehicle loans, it is only financing 2-wheelers and electric 3 –wheelers as such loans are for livelihood and repayments schedule is much better in this segment. In the EV segment, it has tied up with major EV manufacturers and is in the process of tying up with other EV players as well. Important to highlight that Ujjivan Bank does not offer car loans.
Loan book breakup – Affordable Housing is 10%, SME is 6.5% and Microfinance is 80% (which was 98% when the bank started, the % has come down because other segments have grown in proportion)
Cost to Income– Cost to income dip was seen in H1 FY20 results owing to efficiency in system, improving productivity and improving scale of business. Management further adds this should be favourable going ahead due to scale of business.
Clarification on RBI Shareholding Reduction Norms – Since the bank is expected to reduce promoter shareholding to 40% by 2022 (5 years since inception), the management said their first option is to ask RBI permission for reverse merger and the second option is to do OFS with strategic shareholders.
Assam Crisis Clarification – With the Assam NBFC problems, the management clarified that exposure in Assam is less than 1% of total portfolio (in troubled districts). Overall, Assam Portfolio comprises 3.7% of loan book.
Digital/Technological Update – Ujjivan SFB is soon coming out with APIs and this should help in playing a larger part in the tech ecosystem.
Fun Fact – Their visiting cards from top to bottom level employees have no designation written as management feels that no one should pre judge someone on their designation or weigh the person down. Even employee benefit expenses are same for all the level hierarchy employees.
Workplace Environment – The Company has been awarded #6 rank in Great place to work. They are the only BFSI in the top 6 companies as the top 5 are all tech companies.