Ujjivan Financial Services Ltd

Transcription

1 08 September 2016 Retail Research I BUY Current Price Rs. 432 Target Price Rs. 545 Upside % 26 STOCK DATA BSE Code NSE Code UJJIVAN Bloomberg Code UJJIVAN IN 52 Week High / Low (Rs.) 547 / 210 Face Value (Rs.) 10 Diluted Number of Shares (Crore.) 10.1 Market Cap. (Rs Crore.) 5102 Avg. Yearly Volume (NSE) 34,24,229 SHAREHOLDING PATTERN JUNE 2016(%) 29% 0% 7% Initiating Coverage Sector: Micro Finance Ujjivan Financial Services Ltd. We initiate coverage with a BUY rating on Ujjivan Financial Services Ltd (Ujjivan) with a target price of Rs545 giving an upside potential of 26%. Ujjivan is India s largest MFI (Micro Financial Institution) in terms of pan India presence with 470 branches (including 185 in 91 underbanked districts) spread across 24 states and 209 districts. None of the regions amongst four contributes more than 33% of loan assets whereas no single state contributes over 16% of loan assets. The company after successful launch of its IPO recently, is now looking forward to convert itself into a Small Finance Bank (SFB) beginning FY18. Ujjivan, with its vast presence at grassroots level has nearly a 3.4 million strong customer base that has 86% customer retention ratio. It presents them with an immense opportunity to build a robust retail franchise post conversion from NBFC to SFB. Our valuation of Ujjivan with Target Price of Rs545 is based on 3.5x of its oneyear forward book after duly comparing it with other MFIs and its own historical multiples. We find Ujjivan is fairly valued at this juncture considering most valuation parameters and therefore expect the target to achieved on the strength of its business growth. While we expect Ujjivan to face some pressure on RoA emanating from its Opex during the process of conversion from NBFC to SFB, we foresee its retail franchise coupled with higher yield on advances providing cushion over the longer term given that there exists no upper cap on micro credit interest rates. Promoters Other Institutions RETURNS STATISTICS (%) 64% FII's Public & Others As the basic business model will not materially change post conversion to SFB, Ujjivan would continue to enjoy robust growth opportunity in the MFI space due to underserved & underpenetrated nature of market. We like Ujjivan due to 1) pan India presence with absent single state concentration, 2) very high growth prospects 52% CAGR growth in last 5 years, 3) attractive ratios NIM of 10%+, RoA of 3.5% and RoE of 1718%, 4) strong asset quality GNPA of 0.2%, 5) 3.4 million customer base a prospective bank s depositordelight, 6) experienced management and 7) diversified asset and liability mix backed by strong rating and credit assessment. Particulars 1W 1M 3M YTD Ujjivan Fin. Services Ltd 0.6 (7.6) Sensex** **Sensex return is for last one year Stock Performance (1year) May16 Ujjivan Financial Services Ltd May16 Jun16 Jul16 Jul16 Aug16 Sensex Sep16 FINANCIAL SUMMARY Particulars FY15 FY16 FY17E FY18E FY19E NII (Rs Cr) ,119.7 Growth (%) PAT (Rs Cr) Growth (%) (7.9) 40.2 EPS (Rs) BV (Rs) ABV (Rs) P/BV (x) PE (x) P/ABV (x) Div Yield (%) ROE (%) ROA (%) NIM (%) Spread (%) Rajesh Gupta (Rajesh.Gupta@sbicapsec.com);

2 Investment Rationale 4th largest MFI by asset base and largest in terms of geographical spread: Ujjivan is India s 4th largest MFI in terms of asset base and largest MFI in terms of pan India presence with 470 branches (including 185 in 91 underbanked districts) spread across 24 states and 209 districts. None of the regions amongst four contributes more than 33% of loan assets whereas no single state contributes over 16% of loan assets. Strong growthlikely to continue going ahead: The company has been registering 52% CAGR in loan assets in the 5 year period between FY11 and FY16. The growth is backed by high customer retention ratio where Ujjivan has 3.4 million customer base. We believe the growth will continue unabated due to the underpenetrated and underserved nature of market. Only 64% of Indian population has bank accounts with surge in penetration happening post implementation of PMJDY from 48% in Incidentally only 42% accounts are active. Conversion to SFB may be painful initially but large customer base is a strong prospect for a robust retail franchise: The conversion from NBFC to SFB may be painful initially as Ujjivan will have to upgrade its existing branches to bank branches with a simultaneous incurrence of huge costs on IT upgradation and infrastructure. This move would lead to higher opex as the costtoincome ratio will cross 60% in FY18e. However, it will also open a window of opportunity to lower cost deposits post buildup to retail liability. Exceptional asset quality backed by robust risk management framework: The company in spite of over 8x expansion in its balance sheet size in last five years and a 3.2x jump in customer base to 3.4 million has kept its asset quality under check to one of the best in the industry with GNPA at mere 0.2% along with 74% PCR. The company has robust credit risk management practices to identify, assess, monitor and manage credit, market, liquidity and operational risks. The company has ensured that no single state has contributed more than 20% of their gross AUM. As of March 2016, 61% of disbursements were effected through the cashless route. 92% of the high risk centers in Bihar and Jharkhand and UP have been secured through customer carrying repayment to the branch to minimize cash handling risk. SBICAP Securities Limited 2

3 Professional management with extensive industry experience: The senior management team has a diversified track record in the financial service industry with an average experience of approximately 20 years in the industry. The heads of functional groups, such as finance, strategy and planning, operations & service quality and vigilance, enhance the quality of their 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 their operations. Valuation: At premium but fairly valued versus peers: The company post listing saw its price jump over 250% from its issue price of Rs210 and is currently trading at 3.7x of its FY16 book value. The valuation, though prima facie looks stretched when viewed alone, is not so when compared to its peers. Moreover, given its high growth numbers, we believe, the stock valuations will endure as growth is traversed. We believe that, barring initial pain during the process of conversion from NBFC to SFB where higher opex (to be capitalised) and lower return ratios to drag the performance untill FY18e, the prospects will only brighten once the company builds its retail franchise there upon making Ujjivan look attractive. Its return ratio will bounce back once again to the current levels. At current price of Rs432, the stock is trading at 15.5x, 16.8x and 12.0x of its FY17e, FY18e and FY19e earnings respectively whereas on P/BV, the same is trading at 3.0x, 2.6x and 2.1x respectively. We recommend a buy on the stock with price target of Rs545 valuing it at 3.5x of its oneyear forward BVPS thus providing an upside potential of 26%. Key Risk: a) high opex in FY18, b) inability to build retail deposit c) adverse movement in growth rates and d) any unfavorable changes in asset quality. SBICAP Securities Limited 3

4 4th largest MFI by asset base and largest in terms of geographical spread: Ujjivan is India s 4th largest MFI in terms of asset base and largest MFI in terms of pan India presence with 470 branches. The above branches include 185 branches in 91 underbanked districts which are spread across 24 states and in 209 districts. Interestingly none of the regions amongst four contributes more than 33% of loan assets whereas no single state contributes over 16% of loan assets. The penetration of distribution network to remote unserved and underserved regions of India has enabled Ujjivan to develop the expertise to understand and differentiate customers on the basis of their specific requirements. The calibrated expansion plan has enabled it to avoid setting up operations in regions such as Andhra Pradesh and Kolar (Karnataka) which have experienced crises emblematic of the MFI sector woes thus helping it to derisk business by mitigating political and statespecific risks. Region wise Loan Book (Rs. in Core) Branches and Loan Book Distribution (%) East North South West Branches Loan Book Distribution (%) East North South West Source: Company / SSL Research Source: Company / SSL Research State wise Branch Spread(%) Karnataka West Bengal Tamil nadu Maharashtra Uttar Pradesh Haryana Gujarat Bihar Assam Rajasthan Jharkhand Punjab Orissa Kerala New Delhi Madhya Pradesh Other States SBICAP Securities Limited 4

5 State level branch concentration (%) State Ujjivan SKS Micro Andhra Pradesh 12.9 Karnataka West Bengal Tamil nadu 13.2 Maharashtra Uttar Pradesh Haryana Gujarat 4.9 Bihar Assam 3.4 Rajasthan Jharkhand Punjab Orissa Kerala New Delhi Madhya Pradesh Other States Total No. Of Branches Even while comparing with SKS Micro Finance (Bharat Financial Inclusion) with similar loan asset size, Ujjivan has the advantage of being present in almost every state barring Andhra Pradesh even as SKS Micro does not have presence in TN, Assam and Gujarat. Major MFIs Loan Book (Rs Cr) 8, , , , , ,000.0 Bandhan Bharat Financials Janalakshmi Ujjivan Source: Industry, SSL Research The company has over a 3.4 million customer base that has grown at a CAGR of 26.4% over last six years from a one million mark. The average ticket size of loan has clocked a CAGR of 20% from Rs6400 per client to Rs16027 helped mainly by larger ticket sizes of loan in SME, Auto and Housing loan. While comparing in terms of loan assets, Ujjivan ranks 4th largest after Bandhan, Bharat Financials and Janalakshmi. No. Of Customers (Lakh) Average Ticket Size (Rs) and Growth (YoY) , , , , , ,000.0 Average Ticket Szie (Rs) Growth (YoY) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Source: Company / SSL Research Source: Company / SSL Research SBICAP Securities Limited 5

6 The credit offerings of the company are classified into four heads MSE (Medium Small Enterprise), Group Loan (Micro Finance), Housing and Agro & Animal Husbandry credit. Group lending forms bulk of its credit exposure comprising 86% of total lending under group micro credit and rest is for individual lending. The company within these four segments has multiple products catering to diversified need of the customers. Credit Offerings: Source: Company / SSL Research SBICAP Securities Limited 6

7 Group Loan Products (peer guarantee loan model) Individual Loan Offerings Business Loan Family Loan Business Top Up Emergency Loan Education Loan Self Employment (Fruits and Vegetable Vendors, Petty Shop Owners, Tailors) Rs6,00050, % PA on reducing Balance 1224 Months Family Needs ( Education, Medical, Social and Religious needs, housing repairs, consumer durables) Rs6,00035, % PA on reducing Balance 1224 Months Additional funding over and above initial amount Rs3,0006, % PA on reducing Balance 9 Months / 36 weeks Medical needs Rs2,0005, % PA on reducing Balance 6 Months / 24 weeks KG to 12th Rs5,00015, % PA on reducing Balance 12 Months / 48 weeks Business Loan (Existing Borrower) Live Stock Loan Higher Education Loan Secured Individual Loan Unsecured Housing Loan Self Employment (Fruits and Vegetable Vendors, Petty Shop Owners, Tailors) Rs51,0001,50,000 28% PA on reducing Balance 624 Months Individual livestock loan is offered to dairy farmers living in villages for the purchase of cattle (cows and buffaloes) Rs51,0001,00,000 26% PA on reducing Balance 924 Months Secured Home Improvement Loan Higher Education Loan Rs51,0003,00,000 26% PA on reducing Balance 1260 Months To SME to expand and augment their business, or handle working capital and capital expenditure. Collateral for this loan consists of land and building. Rs2,00,00010,00,000 24% PA on reducing Balance 2484 Months Used for improvements, extensions, toilet installations, renovation of existing or new premises (within housing premises) Rs51,0001,50,000 24% PA on reducing Balance 1236 Months Construction, purchase, and incremental housing in the form of extensive improvement or extension Rs2,00,0005,00, % PA on reducing Balance 2448 Months Secured Self Construction Loan / Ready Buy Purchase of house or Self construction Rs2,00,00010,00, % PA on reducing Balance Months Source: Company / SSL Research SBICAP Securities Limited 7

8 NIM and NII Strong growthlikely to continue going ahead: The balance sheet of Ujjivan has expanded 32x in last 7 years from Rs172 crore in FY09 to Rs5500 crore in FY16. The company has been registering 52% CAGR in loan assets over the last 5 years between FY11 and FY16 from Rs641 crore to Rs5130 crore. The net interest income (NII) has grown at CAGR pace of 43% between FY11 to FY16 from Rs85 crore to Rs508 crore. The growth in next three years between FY16 and FY19 is expected to be at 30% CAGR to Rs1120 crore. The net profit in last five years has clocked a 73% CAGR pace from Rs11.4 crore in FY11 to Rs177.2 crore in FY16. The growth is backed by high customer retention ratio where Ujjivan relies upon a 3.4 million customer base. We believe, the growth will continue due to the underpenetrated and underserved market nature. Just about 64% of Indian population has bank accounts and this figure has recently increased from 48% in 2013 post implementation of PMJDY even as only 42% accounts are active. As regards financial inclusion scorecard, India is well below the global averages across different parameters ranging from Bank account to borrowing from formal sources. The penetration level in micro credit is highly concentrated towards southern market followed by East, Central, West and balance from North and North East. The southern market concentration, though has reduced from 62% in FY08 to 41%, still accounts for a substantial share and interestingly, North which accounts for bulk of population has just 6% of penetration level and thus offers huge scope of growth. The total numbers of branches per one Lakh adults in India is lower even on comparisons with some of the developing nations. Such poor banking channels force people to source credit from informal channels eventually ensnaring them into a debt trap. Micro Finance thus can play a very important role to achieve financial inclusion goals. Advances and YoY Growth Net Interest Income (Rs Cr) Net Interest Income Growth (%) Total Advances ( Rs Cr) Growth (YoY) 1, , , , , , , , FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E (20.0) FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E SBICAP Securities Limited 8

9 Distribution of loan assets (%) The company mainly provides micro finance credit under two segments viz Group Lending providing collateral free, small ticketsize loans to economically active women and Individual Lending Micro & Small Enterprises (MSE). Group lending products forms bulk of the loan assets which are built on the peerguarantee loan model (joint liability group), which enables individuals to take loans without having to provide collateral or security on an individual basis. Individual lending products, which are slowly catching up, is offered to matured group lending customers for diverse needs. Individual loan product offerings are highly specialized, and are targeted towards customers on a casetocase basis depending on their financial requirements and disbursed mainly to existing customers. Such loan comes under both secured and unsecured categories. Adjusted Net Profit (Rs. Cr) Group Lending Individual Lending Adjusted Net Profit (Rs Cr) CAGR 54% FY13 FY14 FY15 FY16 Q1FY17 (50.0) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Penetration Level (%) FY08 FY South North East North West Central East Micro Finance Debt per Household (Rs) Andhra Pradesh 55,246 Karnataka 27,916 Kerala 38,800 Tamil Nadu 35,285 Rajasthan 5,009 UP 4,393 Bihar 3,613 MP 5,244 Maharashtra 8,856 Source: NABARD Source: SaDhan SBICAP Securities Limited 9

10 P Branches per 1 Lakh adult population Nature of Financial Inclusion India (%) World Average (%) Bank Account Debit Card Credit Card Usage Financial Savings Borrowing from Financial Inst Borrowing from informal sources Source: World Bank Financial Inclusion Database India South Africa Brazil Poland Turkey Malasiya USA Ireland Austria UK Belgium Source: World Bank Financial Access Report 2010 States Total Household (mn) MFI Client Base as % of total Household Poor Household (%) Gross Loan Portfolio as % Tamil Nadu Karnatka West Bengal Assam Odisha Madhya Pradesh Maharashtra Bihar Gujarat NA UP Source: MFIN, Consensus of India 2011 Looking at the above statistics, we believe that micro finance companies would continue to grow at double digits. Ujjivan being present across the span of India with a marked presence in a low penetration market of North India finds itself at the base of an enormous opportunity of growth given the size of population and under penetrated financial market. Going ahead, the management would focus more on individual lending (micro and small SME Finance, affordable housing) rather than group lending which also have better yields. Conversion to SFB may be painful initially but large customer base is a strong prospect for a robust retail franchise The company has received inprinciple approval for Small Finance Bank and its conversion process would start from last quarter of current year. Post conversion from NBFC to SFB, Ujjivan would be required to maintain SLR and CRR from the day one of its operation. This will affect their overall yield on advances as SLR would bring them sub8% return whereas CRR would not generate any cash flow. Assuming 21% SLR and 4% CRR, the company will have 25% of its portfolio under lower yield category unlike micro finance credit generating 2425% of yield. The overall yield on assets is set to therefore decline by 100 bps in FY18e and FY19e after touching just about 20% in FY17e. SBICAP Securities Limited 10

11 Average Yield on Assets (%) The process of conversion therefore would be painful initially as Ujjivan will have to upgrade its existing branches to bank branches at the same time incur huge cost on IT upgradations and infrastructure. The above move would lead to higher opex as the cost to income ratio is likely to cross 60% in FY18e. The lower yield on assets would be partially compensated by lower cost of funds as the company would have the advantage of sourcing cheaper source of finance from its retail network. The company is likely to incur Rs370 crore of capex that includes cost of new branches, cost of upgradation of existing branches and IT cost. The above capex will be capitalised over next 34 years thereby limiting the extent of earnings downfall. The costtoincome ratio as a result would peak out during FY18e at 61%+ followed by a drop to 56% in FY19e and once the banking operation is stabilised, the costtoincome ratio will furtherslide. The conversion from NBFC to Bank would put pressure on return on assets initially as RoA is likely to fall by over 100 bps from 4.2% in FY17e to 3% in FY18e and it is expected to bounce back to 3.5% in FY19e. Avg. Cost of Borrowing (%) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E 5.0 FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Source: SSL Research Source: SSL Research ROA (%) Cost to Income Ratio (%) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Source: SSL Research Source: SSL Research SBICAP Securities Limited 11

12 As per the RBI guidelines, the MFIs with GLA of more than Rs100 crore cannot charge more than 26% or maximum margin cap of 10% whichever is higher. Post conversion into SFB, the company would not face such constraint and once the retail liability base is built, it can slowly charge higher rates to maintain its desired RoA and NIM. Exceptional asset quality backed by robust risk management framework The company in spite of over 8x expansion in its balance sheet size in last five years and 3.2x jump in customer base to 3.4 million, has preened its asset quality to levels comparable to one of the best in the industry with GNPA at 0.2% along with 74% PCR. The company has robust credit risk management practices to identify, assess, monitor and manage credit, market, liquidity and operational risks. The 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. Asset Quality GNPA (%) NNPA (%) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E The company has implemented credit management models such as decentralized loan sanctioning and stringent credit history checks. The company has ensured that no single state has contributed more than 20% of their Gross AUM. As of March 2016, 61% of disbursements were effected through the cashless route. 92% of the high risk centers in Bihar and Jharkhand and UP have been secured through customer carrying repayment to the branch to minimize cash handling risk. For Group Lending products, the joint liability group model ensure that members are jointly and severally liable for timely payments at centre meetings. This leads to greater discipline among customers and minimal credit risks. The bureau checks help in ascertaining the creditworthiness of the customer at the time of disbursement. SBICAP Securities Limited 12

13 Professional management with extensive industry experience The senior management team has a diversified track record in the financial service industry, with an average experience of approximately 20 years in the industry. 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 selfregulatory organization for MFIs, as well as the chairman of AKMI. The heads of functional groups, such as finance, strategy and planning, operations & service quality and vigilance, enhance the quality of their 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 their operations. CEO & MD Samit Ghosh Head of Retail Liabilities G. Santosh Kumar (21+ years exp.) Head of MSE & Housing Finance S. Aryendra Kumar (18+ years exp.) Head of Audit S. Aryendra Kumar (18+ years exp.) CFO Sudha Suresh (20+ years exp.) Head of Strategy and Planning Rajat Singh (9+ years exp.) Head of Human Resources & SQ Carol Furtado (23+ years exp.) COO & Head of Transition Ittira Davis (35+ years exp.) Head of Channel Jolly Zachariah (22+ years exp.) Chief Marketing Officer Vijay Valakrishnan (20+ years exp.) Head of Credit Sneh Thakur (8+ years exp.) Head of Microfinance Abhiroop Chatterjee (8+ years exp.) COO North Manish Raj (8+ years exp.) Head of Treasury Ravi Subramanian (27+ years exp.) Company Secretary & Compliance Officer Sanjeev Barnwal (12+ years exp.) Head of Investor Relations Hiren Shah (17+ years exp.) Chief Information Officer Deepak Ayare (25+ years exp.) Chief Risk Officer Arunava Banerjee (25+ years exp.) Head of Operation Martin Pampilly (14+ years exp.) Head of Vigilance & Administration Premkumar G. (15+ years exp.) SBICAP Securities Limited 13

14 1 year rolling Forward P/BV May16 May16 Close Price 1.6x 2.1x 2.6x 3.1x Jun16 Jul16 Jul16 Aug16 Valuation: At premium but fairly valued versus peers The company post listing saw its price jump over 250% from its issue price of Rs210 and is currently trading at 3.7x of its FY16 book value. The valuation, though prima facie looks stretched when viewed alone, is not so when compared to its peers. Moreover, given its high growth numbers, we believe, the stock valuations will endure as growth is traversed. We believe that, barring initial pain during the process of conversion from NBFC to SFB where higher opex (to be capitalised) and lower return ratios to drag the performance untill FY18e, the prospects will only brighten once the company builds its retail franchise there upon making Ujjivan look attractive. Its return ratio will bounce back once again to the current levels. At current price of Rs432, the stock is trading at 15.5x, 16.8x and 12.0x of its FY17e, FY18e and FY19e earnings respectively whereas on P/BV, the same is trading at 3.0x, 2.6x and 2.1x respectively. We recommend a buy on the stock with price target of Rs545 valuing it at 3.5x of its oneyear forward BVPS thus providing an upside potential of 26%. Particulars Ujjivan Financials Arman Financials Satin Credit Equitas Holding CMP NIM (%) ROA (%) ROE (%) Net Interest Spread (%) PE (x) P/BV (X) GNPA (%) NNPA (%) Loan Book (Rs Cr) 5, SBICAP Securities Limited 14

15 Company Background & Business Model Ujjivan started its operation in 2005 as an NBFC to provide full fledge financial services to economically poor people living in under penetrated financial market. The company has pan India presence with 470 branches spread across 24 states and union territories. It also has large pool of 3.4 million small borrowers which are also a perspective bank customer which would help to build retail liabilities going ahead. The company is able to manage its risk though geographical and product diversifications as none of the single state contributes more than 16% of total loan assets. Ujjivan provides loans which is primarily based on the joint liability group lending model (collateral free, small ticketsize loans) to economically active poor women. It also offers individual loans to Micro & Small Enterprises ("MSEs") for various purposes. Group lending forms over 86% of total loan book and rest from individual segment. The customer centric approach enables it to have over 86% customer retention ratio. The core strengths are.. Pan India presence Huge customer base with healthy retention ratio Professionally managed company with an average experience of approximately 20 years in the industry Robust risk management ensuring good asset quality Strong growth prospects Diversified product offerings Building strong liability franchisee Key Management: Mr. Samit Ghosh MD and CEO: Mr Samit Ghosh has over 30 years of experience in the banking industry, and was part of the management team involved in setting up retail operations of Citibank, Standard Chartered Bank, HDFC Bank and the Bank Muscat in India. 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 Women s World Banking Capital Partners L.P. Mr. K.R. Ramamoorthy Nonexecutive Chairman and Independent Director: Mr. K.R. Ramamoorthy is the former chief managing director, Corporation Bank and former chairman & chief executive officer, 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. SBICAP Securities Limited 15

16 Mrs. Sudha Suresh CFO: She is a chartered accountant with a corporate career spanning over 18 years. She was awarded the CFO 100 Recognition of Excellence in She is also a qualified cost accountant. She is responsible for areas of strategic business planning and budgetary controls, treasury management, accounts and taxation, and management of board and regulatory compliances Mr. Anadi Charan Sahu NonExecutive, Nominee Director: Started his career with IDBI in 1982 and has over 30 years experience. While his stint with SIDBI, he has headed its various departments/branches at different states in the country. Key Risks: High opex in FY18e and FY19e: The company during the process of conversion from MFI to SFB, will have to incur huge costs initially in order to upgrade its existing branches and incur capex on IT. This will lead to high costtoincome ratio for the first two years of operation as a bank thereby affecting the margins and return ratios. The company will also have to maintain SLR and CRR right from the first day of the operation as bank. Ability to build retail deposit: The key to success as bank would depend upon the ability of the company to build large retail deposit under the current competitive environment. Adverse movement in growth rate: The company has registered over 50% CAGR growth in its loan assets. Any adverse movement in growth would affect the overall performance of the company. Any unfavorable changes in asset quality: Going forward, the company would focus on individual high ticket size loan in SME and Affordable housing, this may lead to deterioration in the asset quality. SBICAP Securities Limited 16

17 Return Ratios Yield, Cost and Spread ROA (%) ROE (%) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Avg. Yield on Assets (%) Avg. Cost of Borr. (%) Interest Speard (%) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Employees and Productivity Branches and Business per Branch No. of Employees (Nos) Business per Employee (Rs Cr) Branches (Nos) Business per Branches (Rs Cr) , , , , , , FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E Net Interest Margin (%) BVPS and EPS (Rs) 14.0 BVPS (Rs) EPS (Rs) FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E FY11A FY12A FY13A FY14A FY15A FY16A FY17E FY18E FY19E SBICAP Securities Limited 17

18 Financial Statements Income Statement Figures in Cr. Particulars FY15 FY16 FY17E FY18E FY19E Interest Income , , ,908.8 Total Finance Cost Net Interest Income ,119.7 Fee & Other Income Balance Sheet: Figures in Cr. Equities & Liabilities FY15 FY16 FY17E FY18E FY19E Equities & Liabilities Equity Share Capital Reserves and surplus , , , ,965.9 Net Worth , , , ,067.0 Net Revenue , ,305.0 Total Expenditure Employee Cost As % of Net Revenue 39.0% 32.6% 24.4% 29.4% 27.3% Other Operating Cost As % of Net Revenue 21.2% 18.2% 25.4% 32.6% 28.5% Operating Profit Before Prov Provison PBT Tax Net Profit Important Ratios Particulars FY15 FY16 FY17E FY18E FY19E Return Ratios Total Borrowings 3, , , , ,790.2 Other Cur. Liability and Prov Total Liability 3, , , , ,183.9 Assets Net Fixed assets Advances 3, , , , ,087.0 Investment , , ,746.9 Other Assets ,192.2 Total Assets 3, , , , ,183.9 Source: SSL Research ROE (%) ROA (%) NIM (%) Op. Profit Margin (%) PAT to Interest Income (%) Cost to Income (%) Earning Ratios Yield on Assets (%) Cost of Borrowing (%) Spread (%) CAR TierI (%) TierII (%) Total (%) Leverage (Asset / Net Worth) Asset Quality GNPA (Rs Cr) GNPA (%) Provision Coverage (%) Valuation Ratios PE (x) P/BV (x) P/ ABV (x) Div. Yield (%) SBICAP Securities Limited 18

19 Regd. Office: SBICAP Securities Limited, 191, Maker Towers 'F', Cuffe Parade, Mumbai Tel.: (Board) Fax: (022) Corporate Office: SBICAP Securities Limited, 2 nd Floor, Mafatlal Chamber, N. M. Joshi Marg, Lower Parel (East), Mumbai I Tel.: / 3301 (Board) For any information contact us: Toll Free: I helpdesk@sbicapsec.com I Web: DISCLOSURES &DISCLAIMERS: Analyst Certification: The views expressed in this research report ("Report") accurately reflect the personal views of the research analysts ("Analysts") employed by SBICAP Securities Limited (SSL) about any and all of the subject issuer(s) or company(ies) or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. The Analysts engaged in preparation of this Report or his/her relative: (a) Have financial interests in the subject company mentioned in this Report (b) do not own 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report; (c) do not have any material conflict of interest at the time of publication of the Report. The Analysts engaged in preparation of this Report: (a) have not received any compensation from the subject company in the past twelve months; (b) have not managed or comanaged public offering of securities for the subject company in the past twelve months; (c)have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) has not received any compensation or other benefits from the subject company or third party in connection with the Report; (f) has not served as an officer, director or employee of the subject company; (g) is not engaged in market making activity for the subject company. Name Qualification Designation Rajesh Gupta PGDBM (Finance) Research Analyst Other Disclosures : SBICAP Securities Limited ("SSL"),a full service Stock Broking company, is engaged in diversified financial services business including equity broking, DP services, distribution of Mutual Fund, insurance products and other financial products.ssl is a member of National Stock Exchange of India Limited and BSE Limited. SSL is also a Depository Participant registered with NSDL & CDSL. SSL is a large broking house catering to retail, HNI and institutional clients. It operates through its branches and authorized persons spread across the country and the clients are provided online trading through internet and offline trading through branches and call & trade facility. SSL is a wholly owned subsidiary of SBI Capital Markets Limited ("SBICAP"), which is engaged into investment banking, project advisory and financial services activities and is registered with the Securities and Exchange Board of India as a "Category I" Merchant Banker. SBICAP is a wholly owned subsidiary of State Bank of India. Hence, State Bank of India and all its subsidiaries, including, SBICAP and banking subsidiaries are treated and referred to as Associates of SSL. We hereby declare that our activities were neither suspended nor we have materially defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty for certain procedural lapses. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. SSL or its Associates, may: (a) from time to time, have long or short position in, and buy or sell the securities of the company mentioned in the Report or (b) be engaged in any other in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company discussed herein or act as an advisor or lender/borrower to such company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. SSL does not have actual / beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the Report. However, since Associates of SSL are engaged in the financial services business, they might have in their normal course of business financial interests or actual / beneficial ownership of one per cent or more in various companies including the subject company mentioned herein this Report. SSL or its Associates might have managed or comanaged public offering of securities for the subject company in the past twelve months and might have received compensation from the companies mentioned in the Report during the period preceding twelve months from the date of this Report for services in respect of managing or comanaging public offerings/corporate finance, investment banking or merchant banking, brokerage services or other advisory services in a merger or specific transaction. Compensation paid to Analysts of SSL is not based on any specific merchant banking, investment banking or brokerage service transaction. SSL or its Associate did not receive any compensation or any benefit from the subject company or third party in connection with preparation of this Report. This Report is for the personal information of the authorized recipient(s) and is not for public distribution and should not be reproduced, transmitted or redistributed to any other person or in any form without SSL's prior permission. The information provided in the Report is from publicly available data, which we believe, are reliable. While reasonable endeavors have been made to present reliable data in the Report so far as it relates to current and historical information, but SSL does not guarantee the accuracy or completeness of the data in the Report. Accordingly, SSL or any of its Associates including directors and employees thereof shall not be in any way responsible or liable for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this Report or in connection with the use of this Report. SBICAP Securities Limited 19

20 Please ensure that you have read "Risk Disclosure Document for Capital Market and Derivatives Segments" as prescribed by Securities and Exchange Board of India before investing in Indian securities market. The projections and forecasts described in this Report should be carefully evaluated as these : 1. Are based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. 2. Can be expected that some of the estimates on which these were based, will not materialize or will vary significantly from actual results, and such variances may increase over time. 3. Are not prepared with a view towards compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these. 4. Should not be regarded, by mere inclusion in this report, as a representation or warranty by or on behalf of SSL the authors of this report, or any other person, that these or their underlying assumptions will be achieved. This Report is for information purposes only and SSL or its Associates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Though disseminated to recipients simultaneously, not all recipients may receive this report at the same time. SSL will not treat recipients as clients by virtue of their receiving this report. It should not be construed as an offer to sell or solicitation of an offer to buy, purchase or subscribe to any securities this report shall not form the basis of or be relied upon in connection with any contract or commitment, whatsoever. This report does not solicit any action based on the material contained herein. It does not constitute a personal recommendation and does not take into account the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this Report may not be suitable for all the investors. SSL does not provide legal, accounting or tax advice to its clients and you should independently evaluate the suitability of this Report and all investors are strongly advised to seek professional consultation regarding any potential investment. Certain transactions including those involving futures, options, and other derivatives as well as noninvestment grade securities give rise to substantial risk and are not suitable for all investors. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. The price, value and income of the investments referred to in this Report may fluctuate and investors may realize losses on any investments. Past performance is not a guide for future performance. Actual results may differ materially from those set forth in projections. SSL has reviewed the Report and, the current or historical information included here is believed to be reliable, the accuracy and completeness of which is not guaranteed. SSL does not have any obligation to update the information discussed in this Report. The opinions expressed in this report are subject to change without notice and SSL or its Associates have no obligation to tell the clients when opinions or information in this report change. This Report has not been approved and will not or may not be reviewed or approved by any statutory or regulatory authority in India, United Kingdom or Singapore or by any Stock Exchange in India, United Kingdom or Singapore. This report may not be all inclusive and may not contain all the information that the recipient may consider material. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this Report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. Distributing /taking/sending/dispatching/transmitting this document in certain foreign jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Failure to comply with this restriction may constitute a violation of laws in that jurisdiction. Legal Entity Disclosure Singapore: This Report is distributed in Singapore by SBICAP (Singapore) Limited (Registration No R), an Associate of SSL incorporated in Singapore. SBICAP (Singapore) Limited is regulated by the Monetary Authority of Singapore as a holder of a Capital Markets Services License and an Exempt Financial Adviser in Singapore. SBICAP (Singapore) Limited's services are available solely to persons who qualify as Institutional Investors or Accredited Investors (other than individuals) as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and this Report is not intended to be distributed directly or indirectly to any other class of persons. Persons in Singapore should contact SBICAP (Singapore) Limited in respect of any matters arising from, or in connection with this report via at singapore.sales@sbicap.sgor by call at United Kingdom: SBICAP (UK) Limited, a fellow subsidiary of SSL, incorporated in United Kingdom is authorised and regulated by the Financial Conduct Authority. This marketing communication is being solely issued to and directed at persons (i) fall within one of the categories of "Investment Professionals" as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "Financial Promotion Order"), (ii) fall within any of the categories of persons described in Article 49 of the Financial Promotion Order ("High net worth companies, unincorporated associations etc.") or (iii) any other person to whom it may otherwise lawfully be made available (together "Relevant Persons") by SSL. The materials are exempt from the general restriction on the communication of invitations or inducements to enter into investment activity on the basis that they are only being made to Relevant Persons and have therefore not been approved by an authorised person as would otherwise be required by section 21 of the Financial Services and Markets Act 2000 ("FSMA"). SBICAP Securities Limited 20