Ujjivan Financial Services

Transcription

1 Strong MFI player; migration into SFB will add to scalability April 26, 2016 Nitin Kumar Pritesh Bumb Vidhi Shah Rating Price Band Subscribe Rs207 Rs210 IPO Fact Sheet Opening Date April 28, 2016 Closing Date May 02, 2016 BRLMs Axis Cap, ICICI Sec, IIFL & Kotak Issue Size Rs 8,750mn Rs 8,825mn Fresh Issue Rs3,582mn Objects of the Issue Capital infusion in subsidiaries of Rs 6,160 to augment capital adequacy to support future growth Issue Details Pre issue equity (m shares) 86.1 Post issue equity (m shares)* Post issue Market Cap (Rs bn)* Ujjivan Financial Services Limited (UFSL) is a diversified financial service MFI focused on serving the economically active poor who are not adequately served by financial institutions. Started in 2005, the company's 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 has also started to offer individual loans to Micro & Small Enterprises and has delivered 51%/59% cagr in AUMs and net earnings over past four years. UFSL has received in principle approval from the RBI to set up a small finance bank which we believe will add scalability to the business. At the upper band of Rs210, UFSL will trade at 1.6x on projected book value of ~Rs130 (post issue) which we believe is fairly priced. We recommend investors to subscribe to the issue. UFSL a key MFI lender: UFSL is a diversified financial services company with total AUMs of Rs45.9 bn. The company offers loans for agriculture, education, home improvement, home purchase and livestock loans. All of company AUMs qualify under the priority sector lending norms prescribed by the RBI. The company reported total revenues and net profits of Rs7.3bn Rs1.22bn during 9MFY16. UFSL has delivered RoA/RoE of 3.7% and 20.4% respectively during the similar period. UFSL has maintained very strong asset quality with GNPL ratio of 0.15% and Net NPL ratio at 0.04% as at Dec UFSL has a pan India presence and operates out of 470 branches. Transformation into Small Finance Bank will add to scalability: Transformation to SFB will enable UFSL to meets its funding requirements through CASA/term deposits which will impart stability to the business. Besides, as SFB the company will be able to offer a wide bouquet of lending products thereby adding to its scalability. While the return ratios are likely to moderate in the near term as UFSL transforms into SFB we expect return ratios to improve gradually. Key financials (Y/e March) M 16 Net interest income (Rs m) 1,246 1,856 2,807 3,592 Growth (%) Non interest income (Rs m) Operating Profit (Rs m) ,356 2,047 PAT (Rs m) ,223 EPS (Rs) Growth (%) NA 77.7 (1.2) Book Value (Rs) IPO Note Share Holding (%) Pre IssuePost Issue* Promoters Foreign Holding Public & Others *Equity issuance calculated on higher band price Profitability & Valuation M 16 Spreads / Margins (%) RoAE (%) RoAA (%) P/E (x) P/BV (x) P/ABV (x) Source: RHP; PL Research Note (1) ROE & ROA for 9M16 are annualized (2) Valuations based on upper band Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Issue details in million No. of Shares offered Value offered Total issue ,825 Fresh Issue ,582 Offer for sale ,243 Elevar Equity Mauritius IFC IFIF Mauritius Unitus Corp FMO Sarva Capital LLC WCP Holding III Women's World Banking Capital Partners Exhibit 2: Fresh capital raised will be used to augment capital base Utilization of net proceeds (Rs m) Augmenting of capital 3,582 Exhibit 3: Post issue valuation is reasonable at 1.6x FY16 P/BV Current number of shares, mn Fresh issue of shares, mn 17.1 Offer for sale equity shares, mn 25.0 Total capital raised at higher end of the price band (Rs210), Rs mn 3,581.6 Total number of shares, post issue Market cap at issue price 24,831 9M FY16E net profits 1,223 FY16E net profits 1,651 FY16E EPS, Rs 14.0 FY15 Networth, Rs mn 7,365 9M FY16 Networth, Rs mn 8,590 Networth including pre ipo placement, Rs mn 11,508 Projected post issue networth, Rs mn 15,403 Projected post issue Book Value, Rs Valuation P/E (FY16E) 15.0 P/BV (pre issue) including pre ipo placement 2.2 P/BV (post issue) 1.6 Note Calculations are done assuming the issue gets subscribed at higher end of the price band April 26,

3 Business Description Ujjivan Financial Services Limited (UFSL) is a diversified financial services company focused on serving the economically active poor who are not adequately served by financial institutions. The company's 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 has also started to offer individual loans to Micro & Small Enterprises ( MSEs ). The company offers loans for agriculture, education, home improvement, home purchase and livestock loans and has total assets of Rs47.5bn. All of company AUMs qualify under the priority sector lending norms prescribed by the RBI. 66% of the company's customers are based in rural and suburban locations. UFSL also provide non credit offerings comprising of life insurance products (Bajaj Allianz Life Insurance, Kotak Mahindra Old Mutual Life Insurance, HDFC Standard Life Insurance Company Limited). The company reported total revenues of Rs6.1bn and Rs7.3bn in FY15 and 9MFY16 respectively and delivered net profits of Rs758mn and Rs1.22bn in over the similar period. The company has maintained very strong asset quality with GNPL ratio of 0.15% and Net NPL ratio at 0.04% as at Dec UFSL has a pan India presence and operates out of 470 branches across 24 states and union territories. The company has 79, 27, 103, 45, 87 and 129 branches in the northern, north eastern, eastern, central, western and southern regions, respectively as per the RBI classification of regions. UFSL has made significant investments in improving business productivity (both human and technological) which has resulted in significant reduction in turn around time in both group loan and individual loan products. Benefitting from economies of scale and productivity gains, UFSL's cost to income ratio has also reduced from 78% in FY13 to ~62% currently. Lending products Group Lending These products are offered for business and family needs of Rs6,000 to Rs50,000, with a tenure of up to 2 years, at a uniform interest rate of 22% per annum across customers. Our Group Lending products are built on joint liability group model which enables individuals to take loans without having to provide collateral or security on an individual basis. The group loan products currently offered are: (i) Business Loan, (ii) Family loan, (iii) Agriculture Loan, (iv) Emergency Loan, and, (v) Education Loan, (vi) Top up Loan and (vii) Vishwas Loan. April 26,

4 Individual Lending the UFSL has started offering individual lending products thereby offering customised products to the customers in order to address the limitations of group lending products, which rely on the joint liability structure. Unsecured individual loans are offered for business needs, higher education, livestock procurement, home improvement, and agriculture. The size of this loan ranges between Rs41,000 to Rs3,00,000 and have a tenure of up to five years. The interest rates here ranges from 15.75% to 24% per annum. UFSL also offers secured loans for business needs and size of these loans ranges between Rs200,000 to Rs1mn and have tenure of up to seven years. Transformation into SFB will add to scalability Transformation to Small Finance Bank (SFB) will enable UFSL to access diversified, short term, low cost capital. The company aims to fund a majority of its funding requirements through CASA deposits, recurring and fixed deposits by building a sticky deposit base (remittances, cash management services) and attracting new customers whose primary avenues of savings and capital building currently include the unorganized sector and other high risk savings schemes. Besides, as SFB the company will be able to offer a wide bouquet of lending products thereby adding to its scalability. While the return ratios are likely to moderate in the near term as UFSL transforms into SFB we expect return ratios to improve gradually over the medium term. Exhibit 4: Trend in AUMs & growth AUM (Rs m) (LHS) AUM growth 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 45,894 32,741 16,173 11,260 7,034 FY12 FY13 FY14 FY15 9M Note 9MFY16 growth is YTD and is not comparable April 26,

5 Exhibit 5: Size of opportunity for SFBs is huge Urban Co operative Banks PAT 32,000 35,000 29,844 35,106 YoY Growth 9.4% 14.7% 17.6% Networth 343, , , ,291 Deposits 2,386,410 2,768,300 3,177,693 3,551,337 YoY Growth 16.0% 14.8% 11.8% Advances 1,577,930 1,810,310 2,003,521 2,243,286 YoY Growth 14.7% 10.7% 12.0% Regional Rural Banks PAT 1,886 2,275 2,694 YoY Growth 5.6% 20.6% 18.4% Networth 151, , ,996 Deposits 1,815,599 2,053,561 2,332,723 2,678,907 YoY Growth 9.2% 13.1% 13.6% 14.8% Advances 1,163,903 1,358,622 1,588,819 1,812,305 YoY Growth 17.7% 16.7% 16.9% 14.1% Source: RBI, PL Research Exhibit 6: List of companies who have received "in principle" license for Small Finance Bank Sr. No. 1 Au Financiers (India) Ltd, Jaipur 2 Capital Local Area Bank, Jalandhar 3 Disha Microfin Pvt Ltd, Ahmedabad 4 Equitas Holdings Ltd, Chennai 5 ESAF Microfinance & Investments, Chennai 6 Janalakshmi Financial Services Private Ltd, Bangalore 7 RGVN (North East) Microfinance Ltd, Guwahati 8 Suryoday Micro Finance Pvt Ltd, Navi Mumbai 9 Ujjivan Financial Services, Bengaluru 10 Utkarsh Micro Finance Pvt Ltd, Varanasi Source: RBI, PL Research April 26,

6 Exhibit 7: Trend in AUMs between Group and Individual Lending Exhibit 8: Trend in composition of Group and Individual Lending Group Lending AUM Individual Lending AUM Group Lending AUM Individual Lending AUM 50,000 5,712 5% 4% 7% 10% 12% (Rs m) 40,000 30,000 20,000 10,000 3,428 1,132 40, ,313 6,713 10,800 15,040 FY12 FY13 FY14 FY15 9M16 95% 96% 93% 90% 88% FY12 FY13 FY14 FY15 9M16 Exhibit 9: UFSL has reported gradual increase in loan account and ticket size # of Loan a/c (mn) Avg Ticket Size (Rs) RHS FY11 FY12 FY13 FY14 FY15 9M16 20,000 15,000 10,000 5,000 Exhibit 10: UFSL has a fairly well distributed geographical spread Branch mix South 27.4% West 18.5% Central 9.6% North 16.8% North East 5.7% East 21.9% Exhibit 11: UFSL liability profile is dominated by term loans from banks W.Cap Loans CPs 1.2% NCDs 12.2% Term Loans 86.7% FY16 April 26,

7 Exhibit 12: State wise AUM distribution West Bengal, Karnataka, Maharashtra & Tamil Nadu are the key states for UFSL accounting for ~60% of total AUMs Assam 3.0% Jharkhand 3.5% Rajasthan 3.9% Gujarat 5.0% Haryana 5.3% Punjab Odisha 2.8% 2.9% UP 5.7% Kerala 2.7% Others 5.9% TN 13.1% Karnataka 16.2% Maharashtra 13.9% WB 16.1% State wise AUM mix as on Dec 15 Exhibit 13: State wise market share for UFSL Kerala 7.0% TN 8.1% Uttarakhand 9.3% Karnataka 11.9% UP 5.8% Maharashtra 12.7% Gujarat 13.7% Haryana 29.8% Rajasthan 16.9% WB 28.5% Jharkhand 25.1% Delhi 22.3% Punjab 19.0% Puducherry 21.6% Assam 22.0% Mkt Share as on Sep 15 Exhibit 14: xxx SKS & others 54.0% Bandhan 2 Janalakshmi 8.0% Disha 0.4% Suryoday RGVN 1.0% 0.5% Ujjivan 7.0% Equitas 5.0% ESAF 2.0% Utkarsh 2.0% April 26,

8 Financial Highlights in charts Exhibit 15: Trend in lending yields, cost of funds and NIMs NIM (%) (RHS) Cost of Funds (%) Yield on loan (%) M16 Exhibit 16: UFSL s cost ratios have improved consistently over past few years Cost Assets % Cost Income % (RHS) M Exhibit 17: Opex to average AUM ratio has also declined to 7.6% Exhibit 18: UFSL has improved its RoE to over 20% for 9MFY16 Opex to Avg AUM RoAE (%) RoAA (%) (RHS) 17.5% 13.8% 10.8% 8.8% 8.5% 7.6% FY11 FY12 FY13 FY14 FY15 9M M16 Exhibit 19: Asset quality remains strong with GNPL ratio at 0.15% GNPA (on book AUM) NNPA (on book AUM) Coverage (RHS) 1.0% 0.8% 0.6% 0.4% 0.2% FY11 FY12 FY13 FY14 FY15 9M16 0.3% 0.3% 0.9% 0.8% 0.2% Exhibit 20: Asset quality in traditional group lending business remains stronger than individual lending business 0.5% 0.4% 0.3% 0.2% Group GNPA (on book AUM) % Individual GNPA (on book AUM) % 0.20% 0.43% FY13 FY14 FY15 9M16 April 26,

9 Risk factors Inability to scale up business: Post the conversion to SFB, if UFSL is unable to scale its business than return ratios may remain suppressed as it will have to invest upfront in capacity building on technology and branch additions. Reduction in ability to raise funds from banks may impact growth: UFSL has reported strong AUM growth as it was able to raise funds from the banking channels under the PSL tag. However as it converts to SFB it will not have the flexibility to raise low cost funds from banks and this may impact company s medium term growth unless it builds a healthy deposit franchise. Cost of funds may not decline as much as envisaged: UFSL will need to diversity its funding mix and fund its growth by raising deposits. Any inability to build up its CASA franchise in a highly competitive environment will limit reduction in it cost of funds. Valuation At upper band of Rs210 UFSL will trade at 1.6x based on post issue book value of Rs130 which we believe is fairly priced. We recommend investors to subscribe to the issue. Exhibit 21: EHL remains fairly priced RoA (%) FY SKS SUF UFSL CIFC EHFL SHTF SCUF LTFH MMFS Magma P/BV FY16 (x) Source: RHP, Bloomberg, PL Research Note EHL s ROA on annualized basis and P/ABV based on 9MFY16 post dilution April 26,

10 Company Background Exhibit 22: About the company Employees 7,862 Customers (Active) 3.13 mn Branches 470 UFSL is a diversified financial services company focused on serving the poor who are not adequately served by financial institutions. Started in 2005, the company's 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 has also started to offer individual loans to Micro & Small Enterprises ( MSEs ). UFSL was one of the 10 companies, out of a total of 72 applicants, to receive in principle approval from the RBI to set up a small finance bank ( SFB ). Promoter and Management Bandwidth Mr. K.R. Ramamoorthy is the Non executive Chairman and Independent Director of the Company. He holds a bachelors degree in arts from Delhi University and bachelors degree in law from Madras University. He is also a fellow member of the Institute of Company Secretaries of India. He is the former chairman and managing director of Corporation Bank and former chairman & CEO of ING Vysya Bank. He has served as an advisor to CRISIL, a reputed credit rating agency in India and as consultant to The World Bank. Mr. Samit Ghosh is the MD & CEO. He founded the Company in 2005 as a microfinance firm. Mr. Ghosh was a career banker for 30 years and worked both in South Asia and the Middle East. He started his career with Citibank in 1975 and later worked with Standard Chartered Bank, HDFC Bank and the Bank Muscat, and holds a master of business administration degree from the Wharton School of Business at the University of Pennsylvania. He was the past President of Microfinance Institutions Network and the chairman of Association of Karnataka Microfinance Institutions (AKMI) and is a board member of Stichting to Promote Women s World Banking. Ms. Sudha Suresh is the chief financial officer of the Company. She is a chartered accountant with a corporate career spanning over 18 years. She is also a qualified cost accountant. At the company, she was responsible for areas of strategic business planning and budgetary controls, treasury management, accounts and taxation, and management of board and regulatory compliances. April 26,

11 Exhibit 23: Board of directors K. R. Ramamoorthy Non Executive Chairman Samit Ghosh MD & CEO Anadi Charan Sahu Non Executive Nominee Director Venkatesh Natarajan Non Executive Nominee Director Jayanta Basu Non Executive Nominee Director Amit Gupta Non Executive Nominee Director Abhijit Sen Non Executive Nominee Director Sunil Patel Non Executive Independent Director Vandana Viswanathan Non Executive Independent Director Nandlal Sarda Non Executive Independent Director Exhibit 24: Pre issue Top 10 Shareholders CDC Group Plc 10.80% Alena Private Ltd 10.66% IFC 10.08% NewQuest Asia Investments II Ltd 8.10% Elevar Equity Mauritius 6.28% Sarva Capital LLC 5.80% Women's World Banking Capital Partners 5.34% Bajaj Holdings & Investment Ltd 5.06% Sequoia Capital Investments III 4.15% India Financial Inclusion Fund 3.47% Total 69.77% April 26,

12 Income Statement (Rs m) Int. Inc. / Opt. Inc. 2,067 3,254 5,520 6,648 Interest Expenses 821 1,399 2,714 3,056 Net interest income 1,246 1,856 2,807 3,592 Growth (%) 63.1% 49.0% 51.2% Non interest income Growth (%) 43.5% 18.1% 85.8% Net operating income 1,519 2,178 3,405 4,241 Expenditure Employees ,330 1,429 Other expenses Depreciation Total expenditure 972 1,207 2,049 2,194 PPP ,356 2,047 Growth (%) 872.8% 77.9% 39.6% Provisions Profit before tax ,145 1,877 Tax Effective tax rate (%) 31.1% 34.2% 33.8% 34.8% PAT ,223 Adjusted PAT ,223 Growth (%) NA 77.7% 29.7% Balance Sheet (Rs m) Sources of funds Equity Reserves & Surplus 2,524 3,069 6,503 7,729 Networth 3,180 3,725 7,365 8,590 Growth (%) 32.3% 17.2% 97.7% Loan funds 9,975 16,500 31,218 37,404 Growth (%) 61.6% 65.4% 89.2% Current Liabilities Others Liabilities Total 13,569 20,787 39,763 47,531 Application of funds Net fixed assets Advances 9,474 13,876 26,299 35,547 Growth (%) 45.1% 46.5% 89.5% Investments Cash Balances 1,786 3,945 6, Other Current Assets Deferred Tax Asset Other Assets 1,980 2,540 6,260 10,454 Total 13,569 20,787 39,763 47,531. Key Ratios Eq. Shrs. O/s. (m) EPS (Rs) Book Value (Rs) Adjusted Book Value (Rs) P/E (x) P/BV (x) P/ABV (x) Cost Income Cost Assets Profitability & Spreads (%) RoAA RoAE Yield on advances Cost of Funds Spreads NIM Asset Quality Gross NPAs (Rs m) Net NPAs (Rs m) Gross NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) Credit Cost (%) Operating Details AUM (Rs m) 11,260 16,173 32,741 45,894 AUM growth (%) Group Lending (Rs m) 10,800 15,040 29,313 40,182 Individual Lending (Rs m) 460 1,132 3,428 5,712 Group Lending share (%) Individual Lending share (%) Capital Details Capital Adequacy (%) Tier I (%) Note Valuation metrics based on the upper band of the issue price April 26,

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