Ujjivan Financial Services

Transcription

1 April 27, 2016 IPO - te Ujjivan Financial Services Recommendation: SUBSCRIBE Ujjivan Financial Services Ltd (Ujjivan) is one of the leading MFIs in the country with a deep pan-india presence. As of December 31, 2015, the Gross AUM of Ujjivan was INR 45.89bn spread across 24 states and union territories and 209 districts. The company served over 2.77mn active customers through 470 branches and 7,862 employees. The business is primarily based on the joint liability group lending model to economically active women. The company also offers individual loans and the share of it has been increasing with the management focused on converting group lending customers to individual lending customers. Ujjivan is amongst the 10 companies in India to receive in-principle approval from the RBI to set up a small finance bank (SFB). Issue Snapshot Issue Open Issue Close 28-Apr-16 2-May-16 Price Band INR Issue Size Market Cap Particulars Issue Size ( of Shares) QIB n Institutional Retail Capital Structure Pre Issue Equity Post Issue Equity INR 8698 mn - INR 8824 mn mn mn 6.30 mn mn INR 1012 mn INR 1182 mn Bid Lot 70 Minimum Bid INR207 INR Minimum Bid INR210 INR Maximum Bid Amount - Retail INR Shareholding Pattern (%) Pre Issue (%) Post issue (%) Promoter & Promoter Groups 0 0 Public Total Total Share Particulars Face Value (INR) INR 10 Book Value/Share (INR) (Dec'15) INR 112 FY15 P/BV 2.46 FY16 P/BV (Annualized)*# 1.65 * Upper band; # Post Issue Objects of the issue Capital infusion in subsidiaries of INR 3,582mn to augment capital adequacy to support future growth. Rest of the issue is OFS. 1 NBFC Investment Rationale Leading MFI with a deep pan-india presence Ujjivan is the third largest NBFC-MFI in India in terms of loans disbursed as of September 30, 2015, with Gross AUM aggregating over INR 40.88bn. In terms of geographical spread, Ujjivan is the largest MFI in India with a pan-india presence across 24 states and union territories in India. As of December 31, 2015, it has 470 branches across 24 states and union territories and 209 districts in India. Customer centric organization Ujjivan serves over 2.77 million active customers as of December 31, 2015, and in addition to constantly assessing customers' requirements and feedback for the introduction of new products, it has also set up a dedicated service quality department to focus on customer retention, customer protection and grievance redressal. Further, since 2011, it has customer care representatives stationed at branches to handle grievance issues to provide its customers with a reliable and easily accessible channel for raising enquiries and complaints. Professional management, experienced leadership and strong corporate governance Ujjivan is a professionally managed company and its senior management team has a diversified track record in the financial services industry, with average experience of approximately 20 years in the industry. It's CEO & MD, Mr. Samit Ghosh, has over 30 years of experience in banking industry. He has been a part of the management teams at Citibank, Standard Chartered Bank, HDFC Bank and Bank Muscat. Robust risk management framework Ujjivan has developed and established robust risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks. It has actively managed its portfolio over the past three years, which has ensured that no single state has contributed more than 20% of its gross AUM. As of December 31, 2015, it's GNPA/NNPA were 0.15%/0.04% with cumulative repayment rate of 99.89%. Robust technology driven operating model Ujjivan has digitized its front end consisting of android phones for group loans and tablets for individual loans enabling it to analyze customer information, financial position and credit bureau details of a potential customer in real time. As a result of the efficiencies introduced by technology infrastructure, the average number of borrowers per field staff (for Group Loan products) has increased from 428 in FY12 to 688 as of December 31, 2015 while TAT reduced significantly from 7.94 days in FY13 to 4.49 days as of December 31, 2015 for Group Loan products, and from days in FY13 to 8.06 days as of December 31, 2015 for Individual Loan products. Its cost to income ratio has also reduced over the years, from 78.15% in FY13 to 73.48% in FY15 and further to 61.79% for the 9MFY16, respectively. Outlook & Valuation We believe that Ujjivan, with its understanding of, and strategic focus on individuals segment, has greater probability of successfully building a strong retail liability franchisee and transforming into a successful SFB. In addition, since Ujjivan's customer segments are underserved by formal financing channels, it provides significant growth opportunities, through cross sell, as it continues to expand its financing product portfolio to cater to the various financing requirements of these customer segments. There are ~57.7 million small business units, mostly individual proprietorships, which operate manufacturing, trading or services activities in India. At the higher band of issue price, the stock is valued at ~1.7x its FY16E P/BVPS. We feel that valuation is undemanding given its high growth trajectory and high RoE of ~20%. We recommend SUBSCRIBE for long term investors.

2 Investment Rationale Under penetration of micro credit to drive robust growth for MFIs As per CRISIL Research (Microfinance, vember 2015), AUMs of non-andhra Pradesh MFIs is expected to rise at 30-34% CAGR, while total AUMs of all MFIs (including those in AP) will rise at 29-31% over FY15-18E. The growth in loan portfolio will be driven by non-ap states, where micro-credit penetration is low. Commercial Banks are finding it more comfortable to lend indirectly to borrowers through MFIs who are specialized institutions. Leading MFI with a deep pan-india presence Ujjivan is the third largest NBFC-MFI in India in terms of loans disbursed as of September 30, 2015, with Gross AUM aggregating over INR billion (Source: MFIN Micrometer Report, September 2015), which stood at INR billion as of December 31, In terms of geographical spread, Ujjivan is the largest MFI in India with a pan-india presence across 24 states and union territories in India (Source: Bharat Microfinance Report 2015 and the MFIN Micrometer Report, September 2015). As of December 31, 2015, it has 470 branches across 24 states and union territories and 209 districts in India and operate 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. As of December 31, 2015, Ujjivan has 186 branches located in 92 under-banked districts, and approximately 37% of its branches were in the central, east and north east regions of India, where a majority of the underbanked districts are located. The penetration of its distribution network to remote un-served and underserved regions of India has enabled it to develop the expertise to understand and differentiate customers on the basis of their specific requirements. Customer centric organization Ujjivan serve over 2.77 million active customers as of December 31, 2015, and in addition to constantly assessing customers' requirements and feedback for the introduction of new products, it has also set up a dedicated service quality department to focus on customer retention, customer protection and grievance redressal. Further, during 2011, it implemented a three-point escalation system comprising of customer care representatives stationed at branches to handle grievance issues, a national tollfree customer helpline and regional grievance redressal officers to provide its customers with a reliable and easily accessible channel for raising enquiries and complaints. In 2013, in addition to the Code of Conduct and Client Protection guidelines of the RBI and MFIN's Code of Conduct, it adopted Smart Campaign's global standards of Client Protection Principles. Since January 2013, the Company has held the 'Smart Campaign Certification' for Client Protection Principles, awarded by the Micro Credit Ratings International Limited (M-CRIL). Further, in 2014, it engaged a professional call centres to proactively seek feedback from customers and to work on improving services and products. As a result of its customer centric approach and welfare initiatives, its customer retention rates have improved from 73% in FY10 to 88% as of December 31, Professional management, experienced leadership and strong corporate governance Ujjivan is a professionally managed company and its senior management team has a diversified track record in the financial services industry, with average experience of approximately 20 years in the industry. Its Chief Executive Officer and Managing Director, Samit Ghosh, has over 30 years of experience in banking industry. He has been a part of the management teams at Citibank, Standard Chartered Bank, HDFC Bank and Bank Muscat. In the past, he has also served as president of MFIN, which is an umbrella self-regulatory organization for MFIs, as well as the chairman of AKMI. Its COOs, Carol Furtado, Abhiroop Chatterjee, Jolly Zachariah and Manish Raj who are in-charge of regional operations and key enablers of the decentralized management structure, and Aryendra Kumar, Head, Housing Finance, have an average of 17 years experience in the financial services industry. The heads of functional groups, such as finance, strategy and planning, operations & service quality and vigilance, enhance the quality of its management with their specific and extensive industry experience. 40% of the Board comprises of experienced independent directors, which ensures adequate levels of transparency and accountability in its operations. Robust risk management framework Ujjivan has developed and established robust risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks. This framework is driven actively by the Board through its Audit, Risk Management and ALCO committees, and supported by an experienced senior management team. Its Risk Management Committee, consisting of an independent director, the Managing Director, and two nominee directors conducts a meeting every quarter, and is responsible for the review of prudential risks including, but not limited to, credit, market, liquidity and operational risks. It has implemented credit management models such as decentralized loan sanctioning and stringent credit history checks which have enabled it to maintain a stable portfolio quality. Its 2

3 portfolio quality has remained consistent in spite of the increase in the size of operations, and it venturing into new products and customer segments. It has actively managed its portfolio over the past three years, which has ensured that no single state has contributed more than 20% of its gross AUM. As of December 31, 2015, it's GNPA/NNPA were 0.15%/0.04% with cumulative repayment rate of 99.89%. Robust technology driven operating model Ujjivan has digitized its front end consisting of android phones for group loans and tablets for individual loans enabling it to analyze customer information, financial position and credit bureau details of a potential customer in real time. The paperless processing of applications and documents at branches has enabled efficient and secure document management with low turnaround time (TAT). Further, an automated backend, supported by a robust core banking system and document management system, has improved efficiencies and minimized TAT. Over the years, use of technology has improved work place engagement and governance, increased the accessibility of its products to the customers and enabled it to rapidly scale up operations in a secure and efficient manner. As a result of the efficiencies introduced by technology infrastructure, the average number of borrowers per field staff (for Group Loan products) has increased from 428 in FY12 to 688 as of December 31, 2015 while TAT has reduced significantly from 7.94 days in FY13 to 4.49 days as of December 31, 2015 for Group Loan products, and from days in FY13 to 8.06 days as of December 31, 2015 for Individual Loan products. Its cost to income ratio has also reduced over the years, from 78.15% in FY13 to 73.48% in FY15 and further to 61.79% for the 9MFY16, respectively. Key Strategy Leveraging its capabilities as an MFI to successfully transition into the proposed SFB business Ujjivan intend to capitalize on its current strengths like geographical outreach, customer base, product portfolio, technology infrastructure, risk management framework and management team to effect a successful transition into an SFB. It proposes to build on its existing practice of hiring local staff indigenously, especially in rural areas, to ensure that a relationship of trust is built between its 'feet on street' and the target customers. Transitioning into a SFB Ujjivan is well positioned for the transition from microfinance operations to banking operations given its resources, operational strength and capabilities. In order to satisfy the criteria for corporate structure, ownership and control prescribed under the SFB Guidelines, Ujjivan would float a wholly owned subsidiary and transfer the existing business to the subsidiary, which will, in turn, be the proposed SFB. Increased focus on the un-served and underserved segment There is a large un-served and underserved segment of the population, generally referred to as the 'missing middle', which is not adequately served by standard MFIs or commercial banks on account of their informal income profile or low savings profile. This segment essentially consists of MSEs, low income salaried workers, and tenant and marginal farmers. The lack of options also forces this population segment to access financing avenues in the unorganized sector, thereby exposing them to risks inherent to unorganized lending, such as exorbitant rates of interest and lack of flexibility in repayment options. Ujjivan intend to increase its focus on this segment and capitalize on the lack of viable savings and product options, inadequate customer services offered by informal, unorganized avenues of credit, and the resultant financial exclusion of this population segment. It intends to develop a wide range of simple savings, credit and fee-based products for facilities such as cash management and overdraft specifically targeted towards the missing middle. Diversification of product offerings The SFB regime will enable Ujjivan to develop and offer a comprehensive suite of products which will help attract new customers and deepen its relationship with existing customer base. Basic liability products including saving accounts, current accounts, fixed deposits, overdraft facilities and recurring deposits; and basic fee based products are a fundamental requirement of this segment. While regular banks currently do provide these services, the lack of suitable products, channels and service orientation for this population segment has led to poor utilization of such products. Ujjivan propose to offer simple and flexible liability products to its customers. To make these products accessible, it intend to focus on delivery channels such as a three-tier branch structure, business correspondents, ATMs, mobile and internet, etc. While initially these delivery channels will be assisted, it proposes to gradually convert delivery channels into self service channels. Currently, many of its group loan customers, due to their repayment track record, graduate to becoming individual loan customers. Ujjivan propose to capitalize on this trend by increasing the penetration of individual loan products, and by innovating and designing needspecific products and processes. In addition to the transition from Group Loan products to individual loan products, it also intend to increase the proportion of secured to unsecured products, thereby further enhancing the quality of its credit portfolio. 3

4 Increased automation and digitization of products and services The optimum use of advanced, cost-effective technology has been the backbone of Ujjivan's operations, and going forward, it intend to strategically invest resources for further integration of technology into its operations to form a hybrid model comprising of advanced technological and physical infrastructure. To achieve this, it proposes to evaluate and include corporate business correspondents into alternate channels. Going forward, it proposes to guide customers through this evolutionary process from assisted hybrid channels to self-driven technology channels. In this regard, it intend to gradually shift its wallet customers to being mature bank customers, and continue to support banking transactions through mobiles, debit cards, aadhar cards and handheld devices. It further intend to set-up low cost bio-metric enabled ATMs to reduce workload of branches. Further automation and digitization of operations will reduce errors and lower costs, in addition to the existing advantages of scalability, efficiency, security and centralized data processing. Building a strong liability franchise Historically, Ujjivan has relied on a combination of wholesale funding from banks and DFIs, equity infusions, issue of debt instruments such as commercial paper, non-convertible debentures and securitization of loan portfolio to fund its business and operations. Subsequent to its transformation into the SFB regime, it proposes to raise a part of its funding through retail customers deposits. Currently, a large part of its target population segment is offered savings and other deposit products only by various unorganized players. With simple, flexible products which are accessible through assisted and self-serviced channels, Ujjivan can position its SFB as a reliable alternative to these informal players. This shift will enable it to access diversified, short term, low cost capital. Subsequently, it propose to fund majority of its funding requirements through CASA deposits and recurring and fixed deposits maintained with the SFB 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. Key strengths of Ujjivan 1) Leading MFI with a deep pan-india presence; 2) Strong track record of financial performance; 3) Experienced leadership and strong corporate governance; 4) Robust technology driven operating model 5) Robust risk management framework 6) Focus on employee welfare. Outlook & Valuation We believe that Ujjivan, with its understanding of, and strategic focus on individuals segment, has greater probability of successfully building a strong retail liability franchisee and transforming into a successful SFB. In addition, since Ujjivan's customer segments are underserved by formal financing channels, it provides significant growth opportunities, through cross sell, as it continues to expand its financing product portfolio to cater to the various financing requirements of these customer segments. There are ~57.7 million small business units, mostly individual proprietorships, which operate manufacturing, trading or services activities in India. At the higher band of issue price, the stock is valued at ~1.7x its FY16E P/BVPS. We feel that valuation is undemanding given its high growth trajectory and high RoE of ~20%. We recommend SUBSCRIBE for long term investors. 4

5 Financials Income Statement Y/E (INR mn) FY13 FY14 FY15 9MFY16 Operating income Growth (%) 42.36% 56.34% 72.27% 19.00% Interest Expended Net interest income Growth (%) 4.93% 48.13% 57.63% 24.31% Oth Income Net Income Operating Expenditure Operating Income Provisions & Contingencies PBT Tax PAT Extra-ordinary Items APAT Growth (%) % 29.74% 61.38% EPS (INR) Key Ratios Y/E FY13 FY14 FY15 9MFY16 Per Share Data (INR) EPS BVPS ABVPS DPS Profitability Ratios Yield on Loans 22.74% 23.73% 22.78% 22.74% Cost of Fund 10.11% 10.53% 11.31% 11.80% Net Interest Margin 13.76% 13.57% 11.62% 12.31% RoA 2.92% 3.40% 2.50% 3.74% RoE 11.78% 16.92% 13.67% 20.44% Balance Sheet Ratios Loans/Borrowings 94.98% 84.10% 84.24% 95.04% Debt/Equity (x) Capital Adequacy Ratio (CAR) 27.27% 22.73% 24.24% 19.64% Balance Sheet Y/E (INR mn) FY13 FY14 FY15 9MFY16 Equity Share Capital Reserves Total Shareholders Funds Borrowings Growth (%) 61.60% 65.42% 89.20% 19.82% Other Current Liabilities Total Liabilities APPLICATION OF FUNDS Current Assets Investments Loans Growth (%) 45.07% 46.47% 89.53% 35.16% Fixed Assets Total Assets Tier I 27.03% 21.81% 21.70% 17.80% Aseet Quality Ratios Gross NPA 0.08% 0.07% 0.07% 0.15% Net NPA 0.08% 0.01% 0.02% 0.04% Provision Coverage Ratio 0.00% 85.71% 71.43% 73.33% Slippage Ratio Efficiency Ratios Cost to Income Ratio 78.15% 65.12% 73.48% 61.79% AUM per Employee (in INR mn) Profit per Employee (in INR mn) Valuation Ratios P/E P/ABV Dividend Yield 0.12% 0.24% 0.24% - 5

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