Ujjivan Small Finance Bank IPO: Should you invest?

Experts say: At the upper price band of Rs 37, Ujjivan Small Finance Bank is available at P/BV of 2.5x FY19, which is at a significant discount to its peers

Kavya Balaji Dec 2, 2019

Ujjivan Small Finance Bank is looking to garner Rs 750 crore through the Initial Public Offer (IPO) that will open on December 2, 2019. The IPO sale will close on December 4. The IPO price band has been set in the range of Rs 36-37.

You can make bids for a minimum of 400 equity shares and in multiples of 400 shares thereafter. The share allotment will be finalised on December 9, 2019 and listing might be around December 12, 2019.

Along with the fresh issue of equity shares, a reservation of equity shares worth Rs 75 crore will be available for subscription by eligible shareholders of Ujjivan Financial Services. The shareholders of Ujjivan Financial Services will get the shares at a discount of Rs 2 per share to the final issue price.

The proceeds from the IPO will be used for augmenting the bank’s Tier-1 capital base to meet its future capital requirements. Here are the details on the bank.

About the bank

Ujjivan Financial Services is the promoter of Ujjivan Small Finance Bank. This promoter had commenced operations as a Non-Banking Finance Company (NBFC) in 2005. Ujjivan Small Finance Bank was launched in 2017. This is a mass market focused small finance bank.

The bank’s portfolio of products and services include microfinance loans that include group loans and individual loans, personal loans, vehicle loans, agriculture and allied loans, Medium and Small Enterprise (MSE) loans, affordable housing loans and financial institutions group loans. The bank offers savings accounts, current accounts and a variety of deposit accounts too. In addition to these, the bank provides Aadhaar enrolment services and distributes third party insurance products.

As of June 30, 2019, the bank had over 4.9 million customers and more than 470 banking outlets across 24 states and union territories. Primary reason for listing is to comply with RBI guidelines. RBI guidelines say that small finance banks with a capital of Rs 500 crore or more have to list at the end of the third year or by the end of the third year.

What is in favour

Increasing deposits and advances

The gross advances of the bank have grown from Rs 6,384 crore as of March 31, 2017 to Rs 12,864 crore as of September 30, 2019. The bank’s deposit base has grown from Rs 206 crore as of March 31, 2017 to Rs 7,379.4 crore as of March 31, 2019. The CASA to total deposit ratio is also improving and is at 11.87% as of September 2019.

Lower NPAs and higher provisioning

The bank’s gross Non-Performing Assets (NPA) amounted to 0.90% in FY2019, which was the least among small finance banks.

The provision coverage ratio has been highest for Utkarsh small finance bank followed by Ujjivan Small Finance Bank among all small finance banks. Higher the provision coverage ratio, higher is the covering of prospective losses due to bad loans.

Geographical spread

The bank has the most diversified portfolio among small finance banks as the bank’s reach is spread across 24 states with the top three Indian states accounting for 44.5% of the total portfolio in FY2019. Other players, such as, Equitas SFB and North East SFB are concentrated in southern and eastern regions of India, respectively.

Use of digital lending

The bank encourages customers to conduct their banking operations through digital channels including through internet, phone and mobile banking. With its digital platform, it has enabled paperless and handheld device-based loan origination and cashless disbursements for customers with remittances directly to their accounts. Since commencement of its banking operations, 82.34% of advances have originated through handheld devices.

In FY2019, the bank enabled UPI on its digital platforms. Customers are able to register savings bank accounts on mobile applications to perform financial and non-financial transactions. They are provided the facility to repay loans in a cashless manner and through digital wallets and payment gateways.

The risks

Investors should consider the following points before investing in the IPO.

Portfolio concentration

The bank’s loan portfolio contains significant advances towards the micro banking segment, particularly through group loans. As of March 31, 2017, 2018, 2019 and June 30, 2019, advances in our micro banking business accounted for 97.50%, 92.55%, 84.67% and 81.97%, respectively, of the total Gross Advances. So, the bank’s financial performance significantly depends on the micro banking business. This in turn depends on various factors, including changes in regulations and policies and any adverse publicity or litigation relating to the microfinance sector. Any decline in sales of, or in demand for micro banking products could adversely affect the bank’s business operations, financial condition and cash flows.

Lending risks

In the microfinance business, the bank relies primarily on non-traditional guarantee mechanisms rather than any tangible assets such as collateral. The bank uses the joint liability group model. However, there can be no assurance that such joint liability arrangements will ensure repayment by the other members of a joint liability group in the event of default by any one of them.

Deposits costs

All small finance banks focus on increasing their deposit base immediately after launch. However, they are expected to face competition from public and private sector banks as they typically enjoy a relatively higher trust among customers in rural areas. So, the cost of accepting deposits will be high in the initial years due to high interest rates offered to attract the customers. In addition, the average deposit per customer in the rural areas is low. Only with a customer centric approach, usage of technology and improved reach, the cost of acquisition on deposits will reduce.

Expert Take

Jaikishan Parmar, Senior Equity Research Analyst – BFSI, Angel Broking, says, “At the upper end of the price band, USFB is valued at 2.8x its Q2FY2020 book value (Pre-IPO) and on post dilution basis at 2.3x of BV, which we believe is attractive considering similar businesses are trading at higher valuations. Moreover, experienced management, pan-India presence, and pristine asset quality provides comfort. We recommend a Subscribe to the issue.”

Geojit Financial Services says: “The experience of Ujjivan Financial Services as an erstwhile microfinance institution, coupled with the ability to address mass market customers will further aid Ujjivan Small Finance Bank to be among the leading SFBs in India. At the upper price band of Rs 37, Ujjivan Small Finance Bank is available at P/BV of 2.5x FY19, which is at a significant discount to its peers.”

RupeeIQ take

Given that the industry average is at 4x-5x Price to Book Value (P/BV) ratio, at Rs 37, Ujjivan Small Finance Bank is available at a P/BV of about 2x. This is a reasonable valuation. You can consider applying to this IPO if you have a moderate to high risk appetite.

Kavya Balaji

Kavya Balaji is a senior contributing writer with RupeeIQ. With more than 14 years of experience in the finance space, Kavya loves everything to do with personal finance. She feels financial literacy is important for every household and likes to stick to simple language for explaining personal finance stories. She is a consultant with investment management companies. In spare time, she reads murder mysteries.

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