Ujjivan Small Finance Bank is launching an IPO from 2nd to 4th December at an issue price of Rs 36-37/share.
10% of the issue is reserved for shareholders of listed parent Ujjivan Financial, with Rs. 2 per share discount, while the 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 the upper end with listing likely on 12th December.
Why is Ujjivan Financial Services Ltd listing it's subsidiary, Ujjivan SFB?
IPO is being undertaken under RBI’s directive to have a 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 a net worth of Rs. 500 crore. Since bank commenced operations with a net worth of over Rs. 500 crores, it is listing within the deadline of 31st January 2020.
Fresh issue proceeds of Rs.750 crore will augment Tier 1 capital and fund growth over the next 2-2.5 years.
Company Background:
Promoter Ujjivan Financial was established in 2005 as an NBFC, specializing in microloans. Post-receipt of small finance banking license in Oct 2015, NBFC operations were transferred to SFB, which commenced banking operations from 1st 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 microloans, 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 the 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:
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, the dividend was paid for FY19 and H1FY20. On equity of Rs. 1,526 crore (post-pre-IPO fund-raise), current net worth stands at about Rs. 2,100 crore, translating into Book Value per share of Rs. 13.7. Thus, the bank’s financials have demonstrated healthy growth, which can be replicated, given the size-able funds being raised via the IPO.
Valuation:
At Rs. 37 per share, Ujjivan SFB’s market cap will stand at Rs. 6,394 crores, leading to P/B 2.1x on FY20E (post-money) basis.
Risks:
1. USFB’s nearly 79% loan book comprises of micro banking, Therefore, there is a greater risk of loan loss if any natural, social, political or regulatory disruption happens.
2. RBI regulations in SFB industry are stringent vs. that of NBFCs. To ensure compliance, the bank might have to limit its revenue. SFBs are subject to periodic inspections by the RBI and during the recent inspection conducted between January and February 2019, for FY18. Although over the longer term, the company aims to convert to a universal bank from a small finance bank.
3. The holding company will have to gradually reduce its stake in the SFB, as per RBI guidelines. 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 (from after IPO: 83.3%), to 30% by 31-1-27 and to 26% by 31-1-29. The company had applied for RBI’s in-principal approval for a 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.
4. Top 20 depositors account for 34.99% of total deposits and a loss of such customers could materially and adversely affect deposit portfolio.
Grey Market Premium:
Listing gains
The Grey Market does suggest a Rs 17 premium. However all listing gains are subject to manipulation by stock market operators.
Micro-finance by nature is an extremely risky business and therefore risks need to be monitored carefully.Highly risk seeking investors can look at the issue for the long term as well.
Disclaimer:-The author of this report is a Chartered Financial Analyst (CFA) from CFA Institute, USA, the views expressed in the above report are personal and at no point should be construed as an investment advise. Please consult your financial advisor before making any decisions. Reproduction of the above report is strictly prohibited.
If you are looking for investment advice, click here and we will reach out to you within 2 days
Our Blog Links: