IPO Review April 27, 2016
Ujjivan Financial Services Ltd
Rating matrix
Rating
:
Price band | 207-210
Unrated
Issue Details Issue Opens Issue Closes Issue Size (| Crore) Price Band (|) No of Shares on Offer (crore) QIB (%) Non-Institutional (%) Retail (%) Minimum lot size (No. of shares)
28-Apr-16 2-May-16 875 -882 207-210 4.2 50 15 35 70
Objects of the Issue The offer for sale is essentially to enhance company's brand name and reduce its foreign shareholding in accordance with the requirements of the SFB In-principle approval to set up an SFB. Net proceeds of the fresh issue are proposed to be utilised for augmenting our capital base
Shareholding Pattern
Pre-Issue Post-Issue
Promoter & promoter group Foreign Others
0.0% 77.0% 23.0%
0.0% 45.0% 55.0%
Financial Summary | Crore Net Interest Inc. Non Interest Inc. Operating profit
FY12 74.1 22.5 5.6 0.1
Net Profit
FY13 125.0 27.3 54.6 32.9
FY14 186.1 32.2 97.1 58.4
FY15 9MFY16 280.9 358.0 61.0 67.9 135.6 204.7 75.8 122.3
Valuation Summary (at | 210; upper price band) (x) P/E* P/BV P/ABV
FY13 42.3 4.6 4.6
FY14 25.1 3.9 3.9
FY15 19.8 2.6 2.6
9MFY16 Pre Post 13.0 15.3 2.2 2.0 2.2 2.0
* EPS annualised for 9MFY16 Research Analyst Kajal Gandhi
[email protected] Vasant Lohiya
[email protected] Vishal Narnolia
[email protected]
Ujjivan Financial Services (UFS) is a micro finance (MFI) NBFC with the objective of providing financial services to the economically active poor who are inadequately served by financial institutions. As on Q3FY16, the gross AUM was at | 4589 crore, which increased at 52% CAGR over FY11-9MFY16. The business is primarily based on the joint liability group lending model for providing collateral free, small ticket-size loans to economically active women. UFS is the third largest MFI in India in terms of AUM and has a pan-India presence with 470 branches across 24 states & union territories and in 209 districts in India. NIM was at 12.3% as on 9MFY16 while PAT was at | 122 crore. UFS is also one of the 10 organisations that received in-principle approval from the RBI to set up a small finance bank (SFB).
Key business aspects Leading MFI with deep pan-India presence UFS has a deep pan India presence unlike regionally concentrated other MFIs. Gross AUM of | 4589 crore as on Q3FY16 for the north, south, east and west regions were | 987 crore (22% of total AUM), | 1424 crore (31%), | 1344 crore (29%) and | 834 crore (18%), respectively. Additionally, AUM is also well diversified in terms of type of location. With UFS’ initial focus on the urban and semi-urban poor, it has gradually catered to an increasing number of rural customers. As on Q3FY16, approximately 29%, 37% and 34% of UFS’s customers comprise rural, semi-urban and urban customers, respectively. UFS’ decision to expand strategically since its inception has enabled it to avoid setting up operations in regions like Andhra Pradesh & Kolar (Karnataka), which experienced crisis in the MFI sector. The evenly spread out operations allow advantages of differentiation and customisation and de-risk the business by mitigating political and state-specific risks. As of 9MFY16, there were 27.7 lakh loan accounts.
Decentralised management structure UFS has adopted a decentralised management structure, comprising four regional offices at Bengaluru, New Delhi, Kolkata and Pune. It has a twotiered management hierarchy consisting of a national leadership team providing overall direction to the business and four regional leadership teams responsible for taking on-ground operational decisions. To satisfy the criteria for corporate structure, ownership & control under the SFB guidelines, UFS proposes to float a wholly-owned subsidiary & transfer the business to subsidiary, which will, be the proposed SFB.
Concerns • • • • •
Inability to manage costs on converting to small finance bank (SFBs) Inability to raise adequate resources to meet CRR and SLR needs Microfinance loans are unsecured and susceptible to credit risks High dependence on southern & eastern states Lending operations involve significant amounts of cash collection
Priced at 2.0x P/ABV (post issue 9MFY16 ABV) on higher band At the IPO price band of | 207-210, the stock is available at a multiple of 2.0x 9MFY16 ABV (post issue) at the upper end of the price band. Post issue market capitalisation is at ~| 2482 crore.
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Company Background Ujjivan Financial services (UFS) started operations as an NBFC in 2005 with the objective of providing a full range of financial services to the economically active poor who are inadequately served by financial institutions. The business is primarily based on the joint liability group lending model for providing collateral free, small ticket-size loans to economically active women. The company also offers individual loans to micro & small enterprises (MSEs). In October, 2015, Ujjivan was one of the 10 companies in India to receive in-principle approval from the RBI to set up a small finance bank (SFB). As of Q3FY16, it had operations spread across 24 states and union territories and 209 districts across India making it the largest MFI in terms of geographical spread across states. It served ~28 lakh active customers through 470 branches and 7,862 employees. As on Q2FY16, it was the third largest NBFC-MFI in India in terms of loans disbursed with gross AUM aggregating over | 4088 crore, at | 4589 crore as on Q3FY16. In terms of loan products, UFS offers a diverse range to cater to the specific requirements of the customers. Its products can be classified under two broad categories, viz. group loans and individual loans. Depending on the end use, these products can be further sub-divided into agricultural, education, home improvement, home purchase and livestock loans. The company’s entire AUM is under priority sector lending (PSL). In addition to loan products, it also provides non-credit offerings comprising life insurance products, in partnership with insurance providers such as Bajaj Allianz Life Insurance Company, Kotak Mahindra Old Mutual Life Insurance and HDFC Standard Life Insurance Company. Exhibit 1: Break-up of AUM in terms of group and individual lending Group lending Individual lending Total
FY13 1,080 46 1,126
FY14 1,504 113 1,617
FY15 2,931 343 3,274
9MFY16 4,018 571 4,589
Source: RHP, ICICIdirect.com Research
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Exhibit 2: Product profile
Source: RHP, ICICIdirect.com Research
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Financial Performance UFS’ gross AUM grew at a strong pace of 52% CAGR in FY11-9MFY16 to | 4589 crore. Margins were at 11.6% as on FY15 and 12.3% as on 9MFY16. UFS earned profit of | 75.8 crore as on FY15 and | 122 crore as on 9MFY16. Asset quality has been benign with GNPA at 0.15% and NNPA at 0.04% as on Q3FY16. RoE and RoA as on FY15 were at 2.5% & 13.7%, respectively while as on 9MFY16 it was 3.7% & 20.4%, respectively. 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0
4589
120
102.4
100
3274
80
60.1
60 1617 43.6
1126
703
40.2
(%)
| crore
Exhibit 3: AUM posts 52% CAGR in FY11-9MFY16
40 20
12.5
0 FY12
FY13
FY14
Gross AUM
FY15
9MFY16
AUM growth (%)
Source: RHP, ICICIdirect.com Research
Exhibit 4: Trends in net interest income
Exhibit 5: Margin trends 358 281
40
186
200.0 100.0
60
125
20
74
(%)
| crore
300.0
80
(%)
400.0
0 -20
0.0 FY12
FY13
FY14
FY15
Net Interest Income
9MFY16
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
13.8
FY12
NII growth (%)
13.6
11.3
FY13
FY14
11.6
12.3
FY15
9MFY16
Net Interest Margins
Source: RHP, ICICIdirect.com, Research
Source: RHP, ICICIdirect.com, Research
Exhibit 6: Trend in profits
Exhibit 7: Return ratios
140
25
122.3
120 100
75.8
80
20
(%)
58.4
60 40
20.4
20
32.9 11.7
0 FY11
2.09
0 FY13
FY14
FY15
PAT
Source: RHP, ICICIdirect.com, Research
ICICI Securities Ltd | Retail Equity Research
9MFY16
13.7
11.8
10.58
10 5
0.1 FY12
15
16.9
FY11
2.9
3.4
2.5
FY13
FY14
FY15
0.1 0 FY12
ROE (%)
3.7
9MFY16
ROA (%)
Source: RHP, ICICIdirect.com, Research
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Microfinance sector in India The RBI granted priority sector status to MFIs in 2000-01, following which, the microfinance sector witnessed rapid growth in value of outstanding loans. The growth was owing to large scale availability of funding in terms of both debt and equity. The gross loan portfolio (GLP) grew at a CAGR of almost 50% from | 7100 crore in FY08 to around | 23500 crore in FY11. The Andhra Pradesh (AP) state government ordinance on MFIs in FY11 adversely impacted the business models of MFIs. This ordinance led to a decline of almost 14% YoY in the industry portfolio in FY12. The issuance of RBI guidelines for MFIs in 2011 increased the confidence of commercial banks in MFIs’ business model leading to a revival in banking credit being extended to the sector, resulting in an almost 35% and 43% YoY increase in GLP in FY14 and FY15, respectively. According to a Crisil report, over the next two years, GLP of MFIs is expected to record CAGR of 28-30%.
(| crore)
Exhibit 8: Loan portfolio of MFI industry witnessed strong growth in the past 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0
47200
32900 20600
23500
24400
20500
13800 7100
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
MFI industry loan portfolio
Source: RHP, ICICIdirect.com Research
Exhibit 9: Top 5 MFIs account for ~50% of gross loan portfolio (GLP) of industry
Bandhan 20%
SKS 9%
Others 51%
Janalakshmi 8% Ujjivan Equitas 7% 5%
Source: RHP, ICICIdirect.com Research
In terms of market share, the top 5 MFIs (Bandhan Financial Services Pvt Ltd, SKS Microfinance Ltd, Janalakshmi Financial Services Pvt Ltd, Ujjivan Financial Services Pvt Ltd and Equitas Micro Finance Ltd accounted for close to 50% of the overall GLP in the industry as of FY15.
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Key strengths and strategies: Leading MFI with deep pan-India presence Ujjivan Financial Services (UFS) is entirely a microfinance (MFI) NBFC with AUM of | 4589 crore as on Q3FY16. It was the third largest NBFC-MFI in India in terms of loans disbursed as on Q2FY16. It has a deep pan-India presence unlike other regionally concentrated MFIs. Gross AUM as on Q3FY16 for the north, south, east and west regions was | 987 crore (22% of total AUM), | 1424 crore (31%), | 1344 crore (29%) and | 834 crore (18%), respectively. In addition to geographical diversification, the AUM is also well diversified in terms of type of location. With UFS’ initial focus on the urban and semi-urban poor, it has gradually catered to an increasing number of rural customers. As on Q3FY16, approximately 29%, 37% and 34% of UFS’s total customers comprise rural, semi-urban and urban customers, respectively. UFS’ decision to expand strategically and in a calibrated manner since its inception has enabled it to avoid setting up operations in regions like Andhra Pradesh and Kolar (Karnataka), which experienced crises in the MFI sector. The evenly spread out operations allows advantages of differentiation and customisation and de-risk the business by mitigating political and state-specific risks.
Decentralised management structure UFS has adopted a decentralised management structure, which comprises four regional offices at Bengaluru, New Delhi, Kolkata and Pune. It has a two-tiered management hierarchy consisting of a national leadership team (NLT) providing overall direction to the business, and four regional leadership teams (RLT) responsible for taking on-ground operational decisions. NLT and RLT members have significant experience in the banking and financial services industry. This structure enables the advantage of understanding ground realities and local diversity of a particular region, enabling quick decision making and proactive responses to regional market changes.
Robust technology driven operating model UFS has adopted an integrated approach to lending, which combines a high customer touch-point typical of microfinance, with the technology infrastructure and related back-end support functions similar to that of a retail bank. This integrated approach has enabled it to manage increasing business volumes and optimise overall efficiencies. UFS utilises IBM’s private cloud services to ensure smooth and secure functioning of business operations. The virtualised server recovery (VSR) services offered through the IBM cloud provide round-the-clock solutions designed to support application continuity and reduce business expenses and data loss. The digitised front end, consisting of android phones for group loans and tablets for individual loans enables UFS to analyse the customer information, financial position and credit bureau details of a potential customer in real time. The automated backend, supported by a robust core banking system has improved efficiencies and minimised turnaround time (TAT). The average number of borrowers per field staff (for group loan products) has increased from 428 in FY12 to 688 as Q3FY16 while TAT reduced significantly from 7.94 days in FY 2013 to 4.49 days as of Q3FY16 for group loan products and from 17.26 days in FY13 to 8.06 days as of Q3FY16 for individual loan products. The cost to income ratio has also reduced from 78.15% in FY13 to 73.48% in 2015 and further to 61.79% for the 9MFY16, respectively.
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Leveraging capabilities as MFI to successfully transit into proposed SFB As stated earlier UFS is one of the 10 companies in October, 2015 to receive RBI’s in-principle approval to set up a small finance bank (SFB) within 18 months. UFS intends to capitalise on its current strengths including geographical outreach, customer base, product portfolio, technology infrastructure, risk management framework and management team to effect a successful transition into an SFB. The SFB regime will enable it to develop and offer a comprehensive suite of products, which will help attract new customers and deepen relationship with the existing customer base. Basic liability products including saving accounts, current accounts, fixed deposits, overdraft facilities and recurring deposits while basic fee based products are a fundamental requirement of unserved and underserved segments. Further, currently, many group loan customers, due to their repayment track record, graduate to becoming individual loan customers. UFS intends to capitalise on this trend by increasing the penetration of individual loan products and by innovating and designing need-specific products and processes. Exhibit 10: Financial Summary | Crore Net Interest Income Pre Provisioning Profit Net Profit EPS (|) Book value per share (|) GNPA (%) RoE (%) RoA (%)
FY12 74.1 5.6 0.1 0.0 39.8 0.9 0.1 0.0
FY13 125.0 54.6 32.9 5.0 45.4 0.1 11.8 2.9
FY14 186.1 97.1 58.4 8.4 53.4 0.1 16.9 3.4
FY15 280.9 135.6 75.8 10.6 81.8 0.1 13.7 2.5
9MFY16 358.0 204.7 122.3 13.4 93.9 0.2 20.4 3.7
Source: RHP, Company, ICICIdirect.com Research
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Proposed structure of Ujjivan Financial Services under small finance bank To satisfy the criteria for corporate structure, ownership and control prescribed under small finance bank (SFB) guidelines, UFS proposes to float a wholly-owned subsidiary and transfer the business to the subsidiary. This will, in turn, be the proposed SFB. The resultant changes in shareholding have been represented as below: Exhibit 11: Proposed structure under SFB framework
Source: RHP, ICICIdirect.com Research; * Without considering dilutive impact of outstanding employee stock options; ^ Assuming full subscription in the Offer
Key norms applicable to small finance bank A small finance bank (SFB) is subject to all prudential norms and regulations of RBI as applicable to existing commercial banks. Some of the key norms are as follows:
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¾
The SFB is required to extend 75% of its adjusted net bank credit (ANBC) to sectors eligible for priority sector loans (PSL)
¾
At least 50% of the loan portfolio of SFBs should constitute loans and advances of up to | 25 lakh
¾
SFBs will be required to maintain minimum capital adequacy ratio of 15% on a continuous basis. Tier I capital should be at least 7.5% of RWA while Tier II capital should be restricted to a maximum of 100% of total Tier I capital
¾
Promoter shareholding of SFB is required to be at least 40% initially. Any shareholding in excess of 40% is required to be reduced to 40% within five years, further to 30% within 10 years and 26% within 12 years from the date of commencement of business of SFB
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Key risks and concerns Inability to manage expenses post converting to small finance bank The business model and regulatory framework governing small finance bank (SFBs) are untested in India. Once the conversion to SFB commences, the company will have to incur large expenses in the early stages on recruiting staff, technology, etc. Revenues may not be commensurate with expenses impacting its profitability and return ratios.
Inability to raise adequate resources to meet CRR, SLR requirements The proposed SFB would be required to meet all liquidity reserve requirements prescribed by the RBI from time to time in the form of SLR and CRR on the date of commencement of the banking business. This would require mobilisation of fairly large amounts of money to meet these investment requirements, which may have a corresponding impact on the growth of the loan book of the SFB. Inability to raise adequate resources to meet these investment requirements within time or at all may have a material impact on the financial performance or future results.
Microfinance loans unsecured; susceptible to credit risks Microfinance customers typically belong to the economically weaker sections, with limited sources of income, savings and credit records. They are, therefore, unable to provide any collateral or security for their loans. Such customers are at times unable to or may not provide accurate information about themselves. Further, in case of emergencies like death or major illness, microfinance customers may find it difficult to pay EMIs on time. These factors may lead to increased levels of NPAs.
Heavy dependence on southern, eastern states While UFS’ operations are spread out in all four zones of the country, a large number of branches are located in the southern (27% of total branches) and eastern states (22%) of India, particularly, Karnataka, Tamil Nadu and West Bengal. A regional slowdown in economic activity in Karnataka, Tamil Nadu or West Bengal, or any other developments including political unrest, disruption or sustained economic downturn in these regions can adversely impact financial condition and results of operations.
Lending operations involve significant amounts of cash collection The company’s lending and collection operations involve handling of significant amounts of cash, including collections of instalment repayments in cash. Such large amounts of cash collection expose it to risk of loss, fraud, misappropriation or unauthorised transactions by employees responsible for dealing with such cash collections.
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Financial Summary Exhibit 12: Profit and Loss Statement (| Crore) Interest Earned Interest Expended Net Interest Income growth (%) Non Interest Income Net Income Staff cost Other Operating expense Operating profit Provisions PBT Taxes Net Profit EPS (|)
FY12 133.8 59.7 74.1 22.5 96.6 60.3 30.6 5.6 5.8 -0.1 -0.3 0.1 0.0
FY13 206.6 81.6 125.0 68.7 27.3 152.3 65.9 31.8 54.6 6.9 47.7 14.8 32.9 5.0
FY14 325.4 139.3 186.1 48.9 32.2 218.3 81.5 39.7 97.1 8.3 88.8 30.4 58.4 8.4
FY15 550.8 269.9 280.9 50.9 61.0 342.0 133.0 73.5 135.6 21.0 114.5 38.7 75.8 10.6
9MFY16 661.7 303.7 358.0 27.4 67.9 425.9 142.9 78.4 204.7 17.0 187.7 65.4 122.3 13.4
Source: RHP, ICICIdirect.com Research
Exhibit 13: Balance Sheet (| Crore) Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total
FY12
FY13
FY14
FY15
9MFY16
57.3 183.0 240.3 0.0 255.1 399.7 895.1
65.6 252.4 318.0 0.0 384.6 654.3 1356.9
65.6 306.9 372.5 0.0 567.4 1138.7 2078.7
86.1 650.3 736.5 0.0 1289.0 1950.8 3976.3
86.1 772.9 859.0 0.0 1517.6 2376.5 4,753.1
Applications of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total
11.2 0.1 658.3 64.2 161.5 895.1
11.1 0.1 956.9 210.1 178.6 1,356.9
13 0 1403 268.1 394 2,078.7
17.9 0.1 2657.4 656.0 644.8 3,976.3
22.1 0.1 3603.1 1071.9 55.9 4,753.1
Source: RHP, ICICIdirect.com Research
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Exhibit 14: Key Ratios (Year-end March) Valuation No. of Equity Shares (Crore) EPS (Rs.) BV (Rs.) ABV (Rs.) P/E P/BV P/ABV Yields & Margins (%) Net Interest Margins Yield on loans Cost of borrowing Quality and Efficiency (%) GNPA NNPA ROE ROA
FY12
FY13
FY14
FY15
9MFY16
5.7 0.0 39.8 39.6 NM 5.3 5.3
6.6 5.0 45.4 45.4 42.3 4.6 4.6
6.6 8.4 53.4 53.4 25.1 3.9 3.9
8.6 10.6 81.8 81.8 19.8 2.6 2.6
8.6 13.4 93.9 93.9 15.7 2.2 2.2
11.3 20.3 11.0
13.8 22.7 10.1
13.6 23.7 10.5
11.6 22.8 11.3
12.3 22.7 11.8
0.9 0.8 0.1 0.0
0.1 0.1 11.8 2.9
0.1 0.0 16.9 3.4
0.1 0.0 13.7 2.5
0.2 0.0 20.4 3.7
Source: RHP, ICICIdirect.com Research
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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
Pankaj Pandey
Head – Research
[email protected]
ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093
[email protected]
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ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. 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