INVESTMENT RESEARCH. DARK HORSE -Ujjivan financial services Ltd. Introducing whole array of agri related products- Rural business

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1 Dated : 18th Sep Price ` 327 Upside - Div Yield 0.15% New Product Launches- to drive growth Tenure 2-3Years Sensex 37, Nifty 11, Group/Index ACCUMULATE Accumulate A / S&P BSE 500 INVESTMENT RESEARCH DARK HORSE -Ujjivan financial services Ltd. Investment Rationale Transition from micro-finance lender to a bank and facing the Post effects of demonetization, with strong NPA recovery plans and a proactive cost efficient technology support system, has & would help in establishing a firm foundation Uiijivan initiated new loan product initiatives like two-wheeler finance, personal loans and also wholesale lending to NBFCs. Have already started a pilot launch of two-wheeler product in few branches and would be launching it on a pan India basis as well. The personal loan against salary product has also been piloted (started with top 13 cities which contributes 32% of current PL market). For both of these initiatives have partnered with external players including Fintech. Expected to launch by 2nd Quarter Stock Details M.cap (` in cr) 3952 Equity (` In cr) wk H/L ` / Face Value ` NSE code UJJIVAN BSE code Key Valuation Ratios RONW 0.40% P/E - P/BV 2.2 IN ` Key Financial Data EV (`in cr) BV (`in cr) NW(`in cr) EPS 0.60 Introducing whole array of agri related products- Rural business Starting with agri loans to male customers- the first time to come into play, focus would be on Small/Marginal farmers, specially addressing the male customers (to offer Composite Agriculture Term Loans, Dairy Loans, Two Wheeler Loans). Currently ujjivan have 48 banking outlets in the unbanked rural areas and would be opening more during the course of the year. Begined with initial stages of work for these outlets & have already started with microfinance lending in these locations. Further, is in process of launching more agricultural related products largely focusing on small and marginal farmers and also male farmers- to raise deposits from the entire populations of these areas. Scaling up to create a strong retail deposit base Ujjivan is continuously evolving segments and segmenting customers understanding their needs to offer better suited retail products on the liability side. To being with have also started marketing to open market customers both in the retail and the wholesale side. This year aim is to convert half of the microfinance customers to banking customers. For the year it has plan to cover 75% to 80% of total assets by deposits of which retail would be about 35%. The Q1 of this year has seen good traction. As of June have retail deposit base of 20% of the total deposit, CASA forms about one third of this total retail deposit. Share Holding Pattern Foreign Investors Resident Individuals/HUFs Bodies Corporate Mutual Funds Insurance Companies AIFs 5% 2% 7% 12% 9% 27% 38% Emerged from shadows of Demonetisation Despite demonetization challenges, have made good progress on retail liability build up, the branch rollout, launch of new products, also recovery of loans, which were written off or fully provided for last year. Moreover, have also started on the digital technology initiatives and building up analytics capability. The Bank leadership team and the rank and file rose up to the manifold challenges admirably, still had rolled out 187 branches, with plan to take the number to 475 by the end of the year. Deposit build up happened quickly, with a base of over ` 3000 crore, albeit wholesale, and funding cost dropped by 140 bps from 10.4% to 9%. Micro and Small Enterprises business and Housing saw a growth momentum at 7.2% of the overall portfolio by year end as against 2.4% in the previous year. VALUATION (` In Cr except per share) FY 20Est. Net worth Equity Share Capital FV No. of Equity Shares BV (FY20Est.) Estimated Price/share 562 Note: Valuation has been done as per P/BV, taken at aprrox. 3x Source: Google Page 1

2 Move towards digitalization- Well poised for future growth Putting in efforts to move towards cashless disbursements and collections- went live on UPI and payments. To reduce the workload overall, provide convenience to its customers, ease of operations and reduce the turnaround time for loans, this is the great initiative started which would definitely bear fruits in long run. To further build on the brand awareness as a bank, have started to rollout national TV campaigns in a phased manner, which were in tandem with the branch opening rollout. The TV campaign is being complemented with radio and print media, also a lot of below the line activities are carried out at the branch level Key Developments } Insta-kits and Insta debit cards live across all branches } GLOW had led to improvement in TAT. 92% of the loan disbursements in Q1FY19 happened through GLOW mechanism. } Digi-buddy program-to deepen digital banking penetration. On an average, Digi-buddy branches reported double the number of card transactions than in a non-digi-buddy branch. } Tie up with Paytm and Instamojo to drive cashless repayments. } Network of 232 biometric ATMs } 8,000+ hand held devices for account opening } 93% of FD and RD accounts were sourced through hand held device, mobile and internet banking Banking Outlets Roll Out in FY19 & ahead As of June 2018, have 462 branches with 187 asset centers and 275 banking outlets including 48 URCs In Q1FY19, have converted 87 asset centers into banking outlets and added one Unbanked Rural Centre(URC) Expanding Geographical Presence- have expanded banking outlets reach in the states of Bihar, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, TamilNadu and WestBengal Total 475 banking outlets planned in FY asset centers to be converted in FY19 7 new outlets in Chennai, Gurugram, Noida, Mumbai and Kolkata 62 new URCs in WestBengal, Bihar, Odisha, Gujarat, Karnataka and TamilNadu Remaining 49 asset centres to be converted in FY-20 Why Ujjivan???? Provides Doorstep Banking- Mobile ATMs carried to centre meetings with Aadhaarbased authentication Internet/Mobile Banking- Remote solutions enabling customers to bank on their own Phone Banking- 24x7 helpline; No lengthy IVRs with Balance and mini-statement just a Miss call away. Altogether, provides the ease of access to banking at just a click through multiple channels (including ATM's & Digi buddies which have already been mentioned. Liability Offerings Update Fee Based Products (Third Party Insurance products) Partnered with Bajaj Allianz Life Insurance Co Ltd, HDFC Standard Life Insurance Co Ltd, Aditya Birla Sun Life Insurance Co Ltd to cover Loan Borrowers. Pilot Launched in 103 Bank Branches with 15 Individual Insurance Products in association with Bajaj Allianz Life Insurance Co Ltd, Aditya Birla Sun Life Insurance Co Ltd and HDFC Life Insurance Co Ltd targeted at existing and new to Bank customers. Motor & Property Insurance to be rolled out on a pilot basis from 23rdJuly 2018 with Bajaj Allianz General Insurance Page 2

3 Cost of Funds RESULTS CORNER Q1FY19 Performance The first quarter performance marked a good beginning. The overall loan book went up by 20.5% year-on-year, on the non-mfi portfolio growth stood over 267% in June On the Affordable housing and MSE business side, though, has been in an incubation stage for a few years, however has been back on traction. On the other side, eyeing on the new products that ujjivan has launched, will fuel the overall growth journey. In the microfinance business, have finished resurvey of all branches affected by the demonetisation in this quarter and opened up many new areas for business and is confident of building momentum from the second quarter itself. Also, Ujjivan have the benefit of ` 2,000 Crores of legacy borrowings from the MFI base, has helped reduce Cost of funds from 9.0% in FY17 to 8.6% even though the interest rate is trending upwards. "We are witnessing impressive growth performance every month and we expect this growth trajectory to continue", stated by the management. The number of branches, that have been converted as of June 30, 2018 is 275 including 48 unbanked rural centers and total of branches including asset centers is 462. Moreover, as the number of branches is picking up pace and will be completed during the current tenure, the deposit base is expected to grow as a result of this as well as because of marketing efforts that is been carried out. Review of Operations Ujjivan have performed well despite multifaced challenges Year-on-year basis, overall disbursements were up 22.9%, Net interest income for the bank is up 41.2%, net interest margin, a key gauge of profitability stood at 11.6% on a consolidated basis and 10.8% for the bank. Net profit for the quarter stood at ` 45 Crores against a loss in the previous year first quarter of ` 75 Crores and capital adequacy is at 23.8% of which the Tier 1 is 23.1%. Total income during April-June increased by 28.4% to ` crore as against ` crore in the same period last year. Company's asset quality improved as the gross non-performing assets (NPAs) as a percentage of gross lending fell to 2.7% as on June 30, 2018, from 6.2% as of June Net NPAs or bad loans also fell to 0.3% from 2.3%. There was a fall in provisions and contingencies by 68.2% to ` crore in June quarter from ` crore a year ago, helping the company to register gains. Quick view on the business highlights Loan Book at 7,787 crore; growth of 20.5% over Q1-FY18. Plan to grow around 30-35% during the CY Non-MFI portfolio now contributes 9.8% to the portfolio against 7.3% in March 2018 Disbursement for Q1-FY19 at 2,092 crore; an increase of 22.9% over Q1-FY18 Secured portfolio increased to 544 crore in Q1-FY19 and constitutes 7.0% to the portfolio compared to 5.4% as of March 2018 Write off of 56 crore in Q1-FY19 (covered by provisions), PCR at 87.5%, PAR>0 at 3.3% (vs. 4.0% in Q4- FY18) GNPA at 2.7% and NNPA at 0.3% in Q1-FY19 against 3.6% and 0.7% respectively in Q4-FY18 Deposit base at 3,803 crore in Q1-FY19 covering 49% of total advances Retail deposits at 19.7% to total deposits against 11.3% in Q4-FY18; CASA ratio improved to 6.3% from 3.7% in Q4-FY18 launched overdraft facility for MSE customers Net Interest Income of crore in Q1-FY19, an increase of 60.9% over Q1-FY18 Cost to Income ratio at 72.3% in Q1-FY19, a decrease from 78.0% in Q1-FY18 ROA at 1.8% and ROE at 10.1% for Q1-FY19 against (3.5%) and (17.4%) respectively for Q1-FY18 Diluted EPS for the quarter at 3.7, an increase from ( 6.1) in Q1-FY18 Page 3

4 Gross Loan Book Composition Total Borrowings So far FY18- FIRST YEAR OF BANKING OPERATIONS Focused on acquiring liabilities from existing and new to bank customers. Two key target markets were identified: retail mass market and institutional liabilities. Had leveraged major business from Construction & Purchase products which sums up close to 67% of total business, followed by Home Improvement & Loan against Property at 12% & 22% respectively MSE recorded a robust growth of 390% in loan book over the previous year and a substantial increase in the customer base during the year- will be one of the key drivers of the bank s growth in FY19 and subsequent years. Mobilized deposits worth Rs. 67 Crores from our existing microfinance customers, and on-boarded around 3 lakh customers into banking. INDUSTRY ANALYSIS MSE (MICRO AND SMALL ENTERPRISES) The Micro, Small and Medium (MSME) sector is a significant contributor to the GDP of the country. Due to its significant contribution towards economic growth, employment generation and balanced regional development, the MSME sector has been given a priority by the Government of India and it has launched a number of programs to accelerate the growth of the sector. As per the estimates of the Planning Commission, there are over 30 million MSMEs in India. Out of these, nearly 95% of the enterprises are unregistered and belong to the Micro & Small Enterprises (MSE) segment. Of the total MSEs, over 70% of them are engaged in services, and the balance 30% in manufacturing. Additionally, Government of India has set up a dedicated refinancing agency MUDRA (Micro units development and refinance agency limited) to facilitate flow of funds to this segment of customers. The unmet financial needs of MSE offer a great opportunity to banks and NBFCs to develop a strong business line dedicated to this particular sector. Page 4

5 Company Overview Ujjivan Financial Services Ltd. is registered as an NBFC-Non-Deposit-taking Systemically Important - Core Investment Company (NBFC-ND-SI-CIC) with RBI and is the holding company and promoter of its 100% subsidiary Ujjivan Small Finance Bank Limited, which is a small finance bank and licensed under Section 22 (1) of the Banking Regulation Act, 1949 to carry on the business of small finance bank in India. Ujjivan Financial Services Ltd. has a robust CSR Initiative in operation in collaboration with Parinaam Foundation and Piramal Foundation. These include a range of services in the areas of health & sanitation, education and financial literacy programs and drinking water facilities. Many community development programs under the head Chote Kadam have been initiated with the support of Parinaam Foundation. Valuation Conclusion Although the bank has suffered effects of demonetization, it has posted strong numbers for the Quarter. Going ahead, the bank plans to leverage fully on the branch network and build the growth momentum in all its businesses segments. Geographies expansion in Microfinance, while maintaining steady growth overall, excellent branding initiatives, non-linear growth in MSE and Housing vertical, foray into rural banking, New product pilots and launches on both the asset and liability front, opening up new business lines, ramp up of deposit mobilization with focus on retail, are the various strategies planned. Also, India is undergoing rapid urbanization which requires expansion of urban amenities. A major deficit among urban population is housing. As a key focus area the government has set 2022 as the target year to realize this objective by making specific initiatives for the promotion of urban housing. On the Rural area side, Rural growth has continued to outpace urban growth. There have been early signs of a revival in rural, as it outpaced urban growth in the last three quarters of FY18. The stock has been fuelled by outstanding Q1 numbers. Microfinance in today's world has great potential and is possibly one of the next great innovation hub. Ujjivan could turn out to be a POWER ELITE Stock during the course of time. Estimating the share price of the company on the basis of P/BV- P/BV of FY20E at around 3x, Estimated BV at ` 190cr, the estimated share price for next 2-3 years tenure turns around to be ` 560. We recommend to ACCUMULATE the stock at current levels to enjoy long term gains. Page 5

6 Income Statement and Estimates ( ` in Cr except per share) Particulars E 2020E 2021E Interest Income Interest Expense Net Interest Income Other operating Income Total Revenue Total Inc. from operations TOTAL EXPENDITURE* Rep. profit before other income., fin.cost,tax & excp. Item (126.50) OTHER INCOME Profit from ordinary act. Before Fin.Cost,Tax & Exp.Items Profit & Loss Net financials Reported Pre-tax profit Reported Tax charge (114.07) (4.55) (113.09) (172.02) (227.41) Reported Net profit Extra Ordinary income Rep.Net Income after extra ordinary items * Total expenditure includes interest expenses & depreciation EPS and Dividend Dividend Paid (9.55) (6.04) (6.03) (6.05) (6.05) Retained earnings Reported EPS DPS - originally declared Number Of Shares Opening Balance Issued Bought Back Closing Balance FV Wtd. Avg. no. of shares Note:- The figures shown in the brackets means NEGATIVE. Page 6

7 BALANCE SHEET Particulars E 2020E 2021E Equity & Liabilities Shareholders' Fund Share Capital Reserves and Surplus Minority Interests Total Shareholders' Fund Non-Current Liabilities Long-term Borrowings Other LT Liabilities Deferred Tax Liability Long term Provisions Total Non-Current Liabilities Current Liabilities Short term Borrowings Trade Payables Other current liability Short term Provisions Total current Liabilities Total Equity & Liab Assets Non-Current Assets Fixed Assets Tangible fixed Assets G/W On Consolidation Non-current Investment Long term L&A Other Non current Ass Deferred tax receiv Total Non-Current Assets Current Assets Current Investments Inventories Trade Receivables Cash & cash Equi Short Term L&A Other current Assets Total current Assets Total Assets Investments Tangible assets Gross capex (141.93) (99.85) (89.27) (99.02) (124.62) Sale of fixed assets Net capex (125.77) (99.46) (89.27) (99.02) (124.62) Depreciation tangibles (12.63) (41.38) (46.02) (54.50) (65.72) Note:- The figures shown in the brackets means NEGATIVE. RATIO ANALYSIS Particulars E 2020E 2021E Return on assets % 2.21% 3.06% 3.66% Return on equity % 12.15% 16.07% 17.99% ROCE % 3.51% 7.05% 9.81% EBIT Margin % 19.08% 22.49% 22.02% Pre tax margin % 19.08% 22.49% 22.02% Net Profit Margin % 12.74% 15.02% 14.72% CAR % 23.41% 25.49% 27.60% Financial Leverage Effect Debt to Capital Debt to Equity Note:- The figures shown in the brackets means NEGATIVE. Page 7

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