Ujjivan Small Finance Bank IPO gets SEBI nod, what you need to know

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Ujjivan Financial Services Limited (UFSL) has received the approval of SEBI to float the IPO of its Small Finance Bank (SFB) subsidiary. The Bengaluru-based firm filed its Draft Red Herring Prospectus (DRHP) with the market regulator in August 2019. Ujjivan Small Finance Bank IPO aims to mobilize INR1,200 crore (INR12 billion) by issuing fresh shares.

The IPO proceeds will be used for augmenting the SFB’s capital base to meet future requirements, said its draft prospectus.

Since Ujjivan Small Finance Bank IPO will be following the massively subscribed IRCTC IPO, expectations will be running high at investors’ end. Here are five things you need to know about Ujjivan SFB:

#1 Corporate History

Ujjivan Financial Services – Ujjivan SFB’s corporate parent – started operations as an NBFC in 2005 with the mission to provide a full range of financial services to the ‘economically active poor’ who were not adequately served by financial institutions. The company followed the joint liability group-lending model for providing collateral-free, small ticket-size loans to economically active poor women.

Subsequent to getting the Reserve Bank of India (RBI) approval in 2016 to launch an SFB, UFSL transferred its lending and financing business to Ujjivan SFB which commenced its operations from 1 February 2017. In between, Ujjivan Financial  Services also launched its successful IPO.

Going by RBI’s rule book, Ujjivan needs to list the SFB within three years of commencing operations which means it has time until 31 January 2020 to launch the Ujjivan Small Finance Bank IPO and list the shares.

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#2 Ujjivan has most diversified portfolio among SFBs

As of 31 March 2019, the bank’s presence was spread across 24 states and union territories. Ujjivan claims this vast banking network makes it the most diversified player among leading SFBs in India. As of 30 June 2019, it served 47.2 lakh (4.72 million) customers and operated from 474 banking outlets that included 120 banking outlets in Unbanked Rural Centres (URCs) (of which seven were business correspondent centres). In terms of branch count, it trails only Fincare which has 569 branches. It also has second largest ATM network with 387 ATMs as of 30 June 2019.

Despite its extensive network, the company is charging ahead with aggressive expansion plans. In FY2019, Ujjivan SFB operationalized 287 banking outlets.

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#3 Soaring profits

As seen in the numbers below, the SFB’s efforts in expanding its reach have resulted in a corresponding increase in interest, commission, brokerage and other income. It is important to note that the figures for FY2017 aren’t comparable since that was the year Ujjivan Financial Services transferred its lending and financing business to Ujjivan SFB. Nevertheless, the company’s marked improvement in topline and bottomline has been visible in this timeframe.

Ujjivan SFB’s financial performance (in INR crore)

FY2017
(from 4 July 2016)
FY2018FY2019
Revenue223.9 1,579.4 2,037.6
Expenses223.8 1,572.5 1,838.4
Net income0.0 6.9 199.2
Net margin (%)0.0 0.4 9.8

In a similar vein, the company’s performance in the Q1 FY2020 has been phenomenal. According to the DRHP, Ujjivan SFB posted a massive 53% increase in top-line to INR705.5 crore in the latest quarter. In the same timeframe, the company’s net income more than doubled to INR94.5 crore.

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#4 Non Performing Assets (NPAs) and Provisions

Ujjivan SFB has another distinction to its name in the NPA department. At the end of FY2019, its Gross NPAs (GNPAs) stood at just 0.90% of gross advances, marking the lowest value among SFBs. Although CreditAccess Grameen had a lower Gross NPA of 0.6%, it is following a pure microfinance model.

Similarly, its percentage of Net NPAs (NNPA) to Net Advances stood at a comfortable 0.26% in FY2019.

To cover the prospective losses due to bad loans, banks are required to make provisions and Ujjivan SFB has second highest provision coverage ratio among SFBs. Including technical write-offs, its provision coverage ratio stood at 71.9% for FY2019.

#5 Declining cost of funds

One of the biggest advantages of becoming a bank is the access to funds at lower costs. In the last three years, Ujjivan SFB has seen a marked increase in retail deposits which formed just 3.15% of its total deposits in FY2017 but increased to 37.07% for FY2019. As a result, its cost of funds declined from 10.01% in FY2017 to 8.33% in FY2019.

Krishna Bagra

Coming from a family of investors and financial analysts, Krishna learnt wading through regulatory filings pretty early in her career. At IPO Central, Krishna plays twin roles of contributor and head of research desk. She can also be reached at +krishnabagra .

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