Ujjivan Financial Services

Transcription

1 Initiating Coverage Institutional Equities 17 March 217 Reuters: UJVF.NS; Bloomberg: UJJIVAN IN Transformation To Small Finance Bank Ensures Longevity (Ujjivan) has the widest geographical network, impeccable management pedigree and superior competitive positioning in micro lending, making it the most optimal candidate for transformation into a small finance bank or SFB. Such an evolution provides an opportunity to build a strong, sticky and granular deposit base which can insulate its balance sheet from liquidity risk arising from any cyclical event. Also, better scale, product diversification and build-up of regulatory assets allows better risk management and aid efforts towards obtaining a full-fledged mass market banking licence after five years. We have assigned Buy rating to Ujjivan with a target price of Rs57, valuing the stock at 3x P/ABV FY19E financials (2% premium to RoA). Healthy AUM growth with focus on individual lending: Ujjivan has witnessed a spectacular CAGR of 54% over the past five years with 6%-7% of loan disbursement in non-cash mode. Given the latent demand, under-penetration and lack of relevant financial products in its target borrower segment, we expect assets under management or AUM CAGR of 3% over FY1E-FY22E. Growth is likely to be a tad lower in FY1E at 25% to ensure smooth transition. Incremental focus will be on individual lending and its proportion is expected to increase from 13% currently to 36% in FY22E. Core spread stable, net interest margin or NIM to compress: We expect the core spread between lending yields and cost of funds to largely remain stable as the decrease in yields on advances on account of moving towards secured advances will be largely set off by decrease in the cost of funds driven by falling cost of borrowings and accretion to CASA. Yet, the buildup in regulatory assets (CRR/SLR) is likely to compress NIM by 22bps by FY2E. However, on the flip side, lower NIM will be compensated by higher composition of secured assets. Historically pristine asset quality, but lending to individuals could be challenging: Notwithstanding the stupendous growth in AUM, asset quality has been stable throughout. With the contribution of existing customers to its individual loan business expected to fall to 6% in FY19E from % currently, we expect gross non-performing assets or GNPAs to increase from.3% currently to 1.4% by FY22E. The company conservatively makes 2% standard asset provisioning on individual loans as against 1% for group loans. Transition costs to hit return ratios in the medium term, but recover in the long run: RoA has significantly improved post Andhra Pradesh crisis level of.2% in FY12 to 3.7% in FY16. One-time transition cost will compress RoA to 2.4% in FY1E and after it that will continue its journey towards 2.% by FY22E. Similarly, RoE will compress to 12% in FY1E and then improve to 16% in FY2E and 21% in FY22E. Valuation and outlook: Converting into a SFB will ensure business longevity as well as stability. Branch relocation/refurbishment will be phased over FY1-FY2 and as a result associated cost will be accordingly spread out. Post completion of the transition, return ratios will trend toward the pre-transition level. It currently trades at 2.7x/2.3x FY1E/FY19E earnings, respectively. We have assigned Buy rating to Ujjivan with a target price of Rs57. Y/E March (Rsmn) FY15 FY16 FY17E FY1E FY19E Net interest income 2,795 5,75 7,544 9,72 11,33 Pre-provision profit 1,356 2,973 4,442 3,992 5,447 PAT 75 1,772 2,139 2,27 3,34 EPS (Rs) ABV (Rs) P/E (x) P/ABV (x) RoA RoE BUY Sector: Small Bank CMP: Rs444 Target Price: Rs57 Upside: 2% Hatim Broachwala, CFA Research Analyst hatim.broachwala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$mn) 52./ Wk H / L (Rs) 54/217 Daily Vol. (3M NSE Avg.) 1,261,552 Shareholding 3QFY17 2QFY17 1QFY17 Promoter FII DII Others One Year Indexed Stock Performance May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Price Performance 1 M 6 M 1 Yr Ujjivan Financial Nifty Index Source: Bloomberg UJJIVAN FINANCIAL Nifty 5

2 Valuation and outlook When we compare banks with NBFCs, banks have significantly higher diversified lending in terms of products offered as well as the type of customers they cater to. Also, banks fund their needs through far more stable sources with a major portion of it coming from retail depositors. Banks also offer a one-stop shop for all financial products, enabling them to cross-sell a lot more and generate higher non-interest income. Political risk largely gets mitigated as well as the longevity feature gets added to growth outlook. Regulatory reserve requirement for banks helps them in better risk pricing. Banks can have a much better scale of operation and linked cost advantage. As a result, historically bank stocks have traded at a significant premium to their NBFC counterparts. In the data compiled below, mid-cap private sector bank stocks are trading at P/BV of 1.9x one-year forward earnings, which is at a 75% premium to expected RoA of 1.1%. On the other hand, NBFC stocks trade at a P/BV of 2.9x one-year forward earnings, which is at a 5-1% premium to expected RoA of 2.7%. RoA for Ujjivan is expected to compress from 3.7% in FY16 to 2.4%-2.5% in FY1E-FY19E, which can be primarily attributed to one-time cost on transition to SFB. RoA is likely to recover to ~2.% by FY22E. Given the benefits post transition into a SFB, we have valued the stock at 3.x FY19E P/ABV (2% premium to FY19E RoA). We have assigned Buy rating to the stock with a one-year target price of Rs57. Exhibit 1: Valuation comparison RoA FY1E P/BV FY1E (x) Mid-cap banks City Union Bank DCB Bank Federal Bank IDFC Bank Karu Vysya Bank Lakshmi Vilas Bank. 1.5 RBL Bank South Indian Bank.6. Yes Bank Average MFIs/NBFCs Bajaj Finance Bharat Financial Inclusion Canfin Homes Capital First L&T Finance holdings LIC Housing Finance M&M Financial Services Manappuram Finance Muthoot Finance Satin Creditcare Network Shriram City Union Finance Average

3 May-16 May-16 Jun-16 Jun-16 Jul-16 Jul-16 Aug-16 Aug-16 Aug-16 Sep-16 Sep-16 Oct-16 Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Jan-17 Jan-17 Jan-17 Feb-17 Feb-17 Mar-17 Institutional Equities Exhibit 2: Short trading history (x) P/Adj. BVPS Mean Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 3: Our estimates versus Bloomberg consensus estimates Y/E March Our estimates Bloomberg cons. estimates Variation (Rsmn) FY17E FY1E FY19E FY17E FY1E FY19E FY17E FY1E FY19E NII 7,544 9,72 11,33 7,7 9,14 1,1295 (4.3) (.).3 NIM bps 21bps 14bps Non-int. inc. 1,6 1,624 2,256 1,374 1,2 2, (11.2) (6.4) Non-int.exp. 4,71 6,74,139 4,69 6,592, Op.profit 4,442 3,992 5,447 4,11 4,424 5,59.1 (9.) (2.5) Loan prov. 1, (35.) (19.1) PAT 2,139 2,27 3,34 2,259 2,56 2,37 (5.3) EPS (Rs) (7.) BV (Rs) RoA (3bps) (9bps) - RoE (14bps) 9bps 69bps Loans 59,756 74,422 97,779 64,32 7,653 97,74 (6.7) (5.4) - Deposits 2,27 14,11 32,697 5,5 27,936 52,595 (61.1) (49.) (37.) Source: Bloomberg, Nirmal Bang Institutional Equities Research 3

4 Exhibit 4: MFI/SFB comparison FY16 Ujjivan Equitas Bharat Financial Business segments Microfinance: 7% MSE finance: 5% Housing finance: 5% Others 3% Microfinance: 53% Vehicle finance: 25% MSE finance: 1% Housing finance: 5% Microfinance: 1% Business mix Rural: 2% Urban: 72% Rural: 2% Urban: % Rural: 75% Urban: 25% Geographic mix Karnataka : 16% West Bengal: 15% Tamil Nadu: 13% Maharashtra: 12% Gujarat: 5% Haryana: 5% Others: 34% Tamil Nadu: 57% Maharashtra: 15% Madhya Pradesh: 5% Rajasthan: 4% Karnataka: % Gujarat: 4% Others: 7% Orissa: 1% Karnataka: 14% Maharashtra: 12% Bihar: 11% West Bengal: 1% Uttar Pradesh: 9% Others: 26% Disbursement Cashless: 5% Cashless: <1% Cashless: <1% Collection Monthly Fortnightly Weekly AUM (Rsbn) NIM Cost-to-income Cost-to-AUM RoA RoE Branches ,324 Employees,49,5 11,991 Employees/branch (x) GNPAs NNPAs EPS (Rs) ABV P/E (x) P/ABV (x)

5 Exhibit 5: Healthy growth in AUM Healthy AUM growth in the past Ujjivan witnessed spectacular CAGR of 54% over the past five years. The company started its business 12 years ago and progressed to become the third-largest microfinance organisation in India with a customer base of 3.mn. Most of the growth came by offering microfinance loans for up to two years through the joint liability group (JLG). Since the past four years, it started offering individual loans as well. While loan officers source loan proposals, disbursement happens only at the branch and collection happens at the customers door step at a monthly interval. Despite having no presence in Andhra Pradesh, funding freeze for the entire industry restricted disbursement and impacted asset quality. The management demonstrated its capabilities and understanding of the microfinance business by successfully navigating the company towards robust growth and profitability after the crisis in the microfinance sector. Exhibit 6: Similar trend in loan disbursement (Rsbn) (Rsbn) FY12 FY13 FY14 FY15 FY16 Total AUM AUM Growth (RHS) (5.1) FY12 FY13 FY14 FY15 FY16 Disbursement Disbursement Growth (RHS) (2) Growth in customers outpaces the rise in loan ticket size While we have dissected AUM growth over the past five years, customers have quadrupled whereas loan ticket size roughly doubled. Despite the increase in the limit for lending and indebtedness of borrowers, the management has been quite cautious in increasing loan ticket size. Exhibit 7: Customers have quadrupled Exhibit : Loan ticket size grew at a relatively slow pace (mn) FY11 FY12 FY13 FY14 FY15 FY16 No of Customers (Rs) 1, 16,39 16, 14,2 14, 12,44 12, 11,26 1,,79 7,14, 6, 4, 2, FY11 FY12 FY13 FY14 FY15 FY16 Ticket Size 5

6 Superior positioning in MFI Most of the growth was driven by superior positioning in microfinance, which is primarily driven by group lending segment of the company. A typical group has at least five to eight members, who live in the same area and within the operating radius of the same branch. Ujjivan is the third-largest microfinance institution in India with a fairly diversified branch network across various states. 7% of its total portfolio comprises microfinance group lending. Exhibit 9: Top 5 MFIs/SFBs in India March 216 AUM (Rsbn) Active clients (mn) Ticket size (Rs) Janalakshmi ,773 Bharat Financial Inclusion , ,665 Equitas ,961 Satin Credit ,669 Higher customer retention driven by improvement in turnaround time While the loan rejection rate is low, customer retention remains healthy despite increased competition from peers and large private sector banks. This is because of significant improvement in turnaround time (TAT) in loan processing over the past three years. For group loans, TAT fell from 7.9 days in FY13 to 4. days in 3QFY17. For individual unsecured loans, TAT declined from 17.3 days in FY13 to 5. days in 3QFY17. TAT in individual secured products stood at 25.4 days. Exhibit 1: Healthy customer retention ratio QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Customers retention ratio Exhibit 11: TAT improves (Days) Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 GL - Microfinance IL - Unsecured IL - Secured Exhibit 12: Loan rejection ratio is low QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Rejection ratio Exhibit 13: Higher repeat loans QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Repeat Loans 6

7 Exhibit 14: Most diversified Most diversified MFI in india Ujjivan has the largest geographical spread with a pan-india presence through 469 branches across 24 states and Union territories and 29 districts. Some of the other large MFIs do not have such kind of geographical spread. Also, unlike some of its competitors, Ujjivan is not skewed towards any particular state or region. Of its total branch network, ~9 branches are in under-banked districts. Also, 66% of its presence is in the underserved rural and semi-urban areas. Exhibit 15: Strong presence in rural/semi-urban areas (nos) Number of States Ujjivan Bharat Financial Janalakshmi Satin Equitas ESAF 37 Rural Semi-Urban Urban No state contributes more than 16% to its AUM. Ujjivan internally restricts exposure to any region at the state level, district level and branch level. High-risk areas are avoided even in states where the presence is strong (like Vidharbha and Marathwada in Maharashtra). Ujjivan is also not present in states like Andhra Pradesh and Jammu & Kashmir. In addition, 37% of its branches are located in central, eastern and northeast regions of India, where most of the under-banked districts are located. Exhibit 16: Branches spread across regions Exhibit 17: No concentration of AUM (Nos) East North South West Karnataka West Bengal Tamil Nadu Maharashtra Gujrat Haryana Uttar Pradesh Bihar Assam Rajasthan Jharkhand Punjab Orissa Kerala New Delhi Madhya Pradesh Tripura Others

8 Transition into SFB Loans to individuals to take lead Ujjivan has started looking at new opportunities in lending which are beyond its traditional group-based microfinance lending. The company is now actively looking to build a business in traditional credit products that is focused more on lending to individuals, rather than group-based lending. As a result, we expect the composition of group loans to decrease from 7% in FY16 to 7% in FY19E and 64% in FY22E. Most of the individual products will be linked to micro lending needs in SME, affordable housing, used vehicle loan and gold loan segments. Exhibit 1: Higher growth in non-group segments (Rsbn) FY16 FY17E FY1E FY19E FY2E FY21E FY22E Group Loans Individual - Secured Individual - Unsecured Exhibit 19: Increase in composition of non-group category 1% % % % 6% 5% 7 4% % 64 2% 1% % FY16 FY17E FY1E FY19E FY2E FY21E FY22E Group Loans Individual - Secured Individual - Unsecured Growth to be relatively slower during the transition phase On account of demonetisation-induced cash crunch, growth slowed down significantly in FY17. Given the management s efforts on improving collection efficiency, loan disbursement will grow at a relatively slower pace for some time. Also, as the focus of the management will shift towards smooth transition to SFB, we have factored in slightly lower AUM growth of 25% for FY1E. Post transition, given the latent demand, underpenetration and lack of relevant financial products in its target borrower segment; we expect CAGR AUM of 3% over FY1E-FY22E. Exhibit 2: Expect 3% CAGR post transition into SFB (Rsbn) FY15 FY16 FY17E FY1E FY19E FY2E FY21E FY22E Total AUM AUM Growth (RHS)

9 Ample scope to increase loan ticket size Ujjivan has done an incredible job in acquiring customers over the past few years. Loan ticket size increase has been fairly under control and roughly doubled over the past five years as against 4x increase in the customer base. While there has been significant customer penetration in some southern and western states, there is significant scope to increase loan ticket size. Its MFI loan ticket size as of 3QFY17 end stood at Rs1,34 as against Rs1,, allowed by the Reserve Bank of India or RBI. Vintage good quality customers will move up the chain in loan ticket size. As some of the customers prosper, their need for credit will only increase and thus the likely shift towards individual loan segment. Increased credit needs will be towards expanding their existing business, purchase or upgradation of home or any other requirement. Ticket size of individual loans will be far higher and will contribute towards the increase in overall ticket size. We expect an increase of 1%-15% in the number of customers and rest of the growth can be attributed to loan ticket size. Exhibit 21: Disbursement average ticket size across products Products Microfinance 23,172 MSE - Unsecured 69,36 MSE - Secured 42,72 Housing - Unsecured 67,439 Housing - Secured 379,37 Agri and animal husbandry 57,32 Others 61,754 Products offered Group and individual loans Disbursement - Average ticket size (Rs) Apart from group loans, Ujjivan has started individual loan business, offering loans preferably to customers with a successful credit record under the group loan category. It has started looking beyond converting the captive eligible pool of higher vintage group loan customers and focused on open market business to expand its outreach and ramp up volume. Open market business contributed 22% to overall volume in FY16 compared to 1% a year ago while group loan (GL) to individual loan (IL) conversion contributed 6% to overall volume in FY16 compared to 75% a year ago. Repeat loan business contributed 1% to overall volume in FY16 compared to 15% a year ago. Client outreach increased from 71, active borrowers in March 215 to 151, active borrowers in March 216. Individual lending business is operational at 374 branches. The offering was rolled out in 69 additional branches during FY16. Exhibit 22: Product profile Microfinance Loan range (Rs) Interest rate Repayment tenure Processing fee (% of loan) - Group 2,-5, yrs 1 - Indiviual 51,-1,5, yrs 1-2 Home loan - Construction/ purchase 2,,-15,, yrs Home improvement 2,,-7,, yrs 2 - Loan against property 3,,-1,, yrs 2 Small business loan - Secured 1,5,-3,, yrs NA - Unsecured 1,5,-3,, yrs NA Enterprise business loan - Secured 1,,-25,, yrs NA - Unsecured 3,,-5,, yrs NA 9

10 Gradual improvement in the liability profile One of the major bargains in getting a SFB licence is it opens up avenues to increase retail liabilities. As a small finance bank, Ujjivan will be able to offer savings products like savings account, current account, recurring deposit and fixed deposit to its customers. We understand that building a retail deposit franchise will take its own time and it will continue to rely on borrowings and bulk deposits for the next couple of years. The management has given guidance that 4% of the funding will be done via deposits in three years of which 6% constitutes retail deposits. 65% funding will be done by deposits for five years of which 75%-% will be retail deposits. CASA collection will be a slow and gradual process and is expected to be ~25% of retail deposits. The plan to disburse all amounts through customers savings accounts can provide immediate fillip to CASA deposits through floats on disbursed funds. Exhibit 23: Funding profile to tilt towards deposits 1% 4 9% 17 % 29 7% 3 6% 4 5% 55 4% 3% 2% 1% % FY15 FY16 FY17E FY1E FY19E FY2E FY21E FY22E Borrowings Deposit Exhibit 24: Gradual increase in CASA deposits FY17E FY1E FY19E FY2E FY21E FY22E CA SA While material reduction in the cost of funds will be dependent on collection of retail deposits and CASA deposits, the cost of funds is likely to clearly ease from its current level of 11%. During the initial couple of years, falling cost of funds can be attributed to lower incremental cost of borrowings post conversion to SFB. During later years, the reduction in cost of funds will be driven by higher composition of CASA deposits. Ujjivan has bank loan and NCD rating of A+ and for short-term CP it is A1+. Exhibit 25: Expensive bank borrowings dominate funding mix Term Loan/CC Securitisation NCD Sub Debt CP Exhibit 26: Cost of funds to ease significantly FY16 FY17E FY1E FY19E FY2E FY21E FY22E Cost of Funds Cost of Borrowings CASA (RHS) 1

11 Shift in loan mix to impact lending yield As the AUM mix moves away from MFI, loan yield of new categories will be lower than current MFI loan yields. We have factored in yields for secured individual loans at 5bps-6bps lower than group lending MFI. Whereas for individual unsecured products, we have factored yields at ~2bps-3bps higher than group lending MFI. We have factored in yields on AUM falling by 23bps to 19.2% by FY2E. Exhibit 27: Loan yields to fall gradually FY17E FY1E FY19E FY2E FY21E FY22E Yield on AUM Group - MFI Individual - Secured Individual - Unsecured Core spread relatively stable, NIM to compress We expect core spread between the lending yields and cost of funds to largely remain stable as the decrease in yield on advances on account of moving towards secured advances will be largely set off by decrease in the cost of funds driven by declining cost of borrowings and accretion to CASA deposits. Yet, the build-up in regulatory assets (CRR/SLR) will lead to sharp fall in yield on assets by 4bps to 1.5% by FY2E. As a result NIM is likely to compress by 22bps by FY2E. However, on the flip side, lower NIM will be compensated by relatively higher composition of secured assets. Exhibit 2: Core spread relatively stable, NIM to compress FY16 FY17E FY1E FY19E FY2E FY21E FY22E Spreads Core-Spreads NIM 11

12 Exhibit 29: Costs to peak in FY1 One-time transition costs to impact operational leverage in the medium term There are a number of transition-related costs which are likely to increase operating costs in the medium term. First and foremost, all existing branches will have to be converted into SFB branches to enable them to collect deposits from existing customers and other basic IT-related costs of Rs.1mn per branch. One of the major costs involved will be in refurbishing and relocating the existing branches which will cost Rs2.5mn per branch. Other operating expenses are likely to double post refurbishment. Ujjivan will refurbish branches in phases with 22 branches in FY1, and 12 each in FY19 and FY2. The management has given guidance that total technology cost of Rs4bn will be spread over the next five years. Approximately, half of the technology costs will be in the form of capex and the remaining will be opex. As per the RBI guidelines, 25% of the branches should be in unserved/under-served areas. It needs ~13 additional branches to comply with the norm. However, under one of the draft papers issued by the RBI, branches in northeast and Naxalite-affected areas will be deemed to be in unserved/under-served areas. As a result, it only needs an additional ~65 branches in FY1, which are expected to cost ~Rs.4mn per branch. After factoring in all the above mentioned costs, the cost-to-income ratio is expected to peak at 63% in FY1E and then gradually improve to 5% in FY2E and 51% in FY22E. Similarly, the cost-to-aum ratio is expected to peak at 9% in FY1E and then improve to % in FY2E and 6.6% in FY22E FY16 FY17E FY1E FY19E FY2E FY21E FY22E Cost-to-income Cost-to-AUM (RHS) AUM per branch/employee set to improve Exhibit 3: Increase in opex (Rsbn) Company, Nirmal Bang Institutional Equities Research Incremental focus is to increase growth in the individual secured segment where typically the ticket size is substantially higher than its MFI business. As a result, AUM per branch and AUM per employee are likely to significantly improve going forward which will contribute towards improving the cost-to-aum ratio for the company. Exhibit 31: Branch/employee productivity to improve with increase in scale FY16 FY17E FY1E FY19E FY2E FY21E FY22E Staff Cost 5.2 Other opex (Rsmn) (Rsmn) FY16 FY17E FY1E FY19E FY2E FY21E FY22E AUM per Branch AUM per Employee (RHS) 2 12

13 Historically pristine asset quality, but demonetisation to be a stress test Notwithstanding the stupendous growth in AUM, asset quality has been stable throughout. GNPA as of 3QFY17-end was low at.25%, but PAR (3 days) showed an increase to 3.7% as against.25% in the previous quarter. Collection for November 216 improved to 97.5% from 95% earlier. Similarly, collection for December 216 improved from 91% to 92%. This is a testament to Ujjivan s ability to avoid troublesome geographies, select best-quality customers and build loyal relationships with them. Large part of the pain can also be attributed to political consideration of not repaying a loan taking into account the general propaganda before the elections. With assembly elections over in some states, collection is expected to improve significantly from here on. Exhibit 32: Pristine asset quality in line with industry FY11 FY12 FY13 FY14 FY15 FY16 GNPA NNPA PAR>3 Days Exhibit 33: GNPAs Group and Individual loans With the contribution of existing customers to its individual loan business expected to fall to 6% in FY19E from % currently, GNPAs in individual books are expected to increase from the current level. Ujjivan conservatively makes 2% standard asset provisioning on individual loans as against 1% for group loans. Exhibit 34: Factoring in the rise in GNPAs FY16 FY17E FY1E FY19E FY2E FY21E FY22E GNPA - Overall GNPA - Group loans GNPA - Individual loans FY16 FY17E FY1E FY19E FY2E FY21E FY22E GNPA NNPA Company, Nirmal Bang Institutional Equities Research 13

14 Transition costs to hit returns ratio in the medium term, to recover in long run RoA significantly improved from post Andhra Pradesh crisis level of.2% in FY12 to 3.7% in FY16. There are certain one-time-related costs such as transition-related costs like relocation/refurbishing exisiting branches, technology-related costs and the need to add ~65 branches to comply with the RBI norms. As a result, we expect RoA to compress to 2.4% in FY1E and after it that will continue its journey towards 2.% by FY22E. Similarly RoE is likely to compress to 12% by FY1E. With the improvement expected in operating as well as financial leverage, RoE is likely to improve to 16% in FY2E and 21% in FY22E. Exhibit 35: RoA to bottom out in FY1, improve from thereon Exhibit 36: Similar trend likely in RoE FY16 FY17E FY1E FY19E FY2E FY21E FY22E FY16 FY17E FY1E FY19E FY2E FY21E FY22E 14

15 Healthy capital adequacy ratio Ujjivan is well capitalised with CRAR of 27.1% and Tier I of 26.2% (against the RBI s requirement of 15.%) expected in FY17. Hence, there is no need to raise capital for the next couple of years. Exhibit 37: Well-capitalised FY15 FY16 FY16 FY17E FY1E FY19E FY2E Tier I Tier II Exhibit 3: DuPont analysis FY15 FY16 FY17E FY1E FY19E FY2E FY21E FY22E Interest income Interest expenses Net interest income Non-interest income Net revenues Operating expenses Employee expenses Other expenses Operating profit Provision Standard assets Loan loss PBT Tax RoA Leverage RoE

16 Company background started its operations as an NBFC in 25, providing credit to economically active poor who are not adequately served by regular financial institutions. It is one of the largest players in the MFI space and a leader in terms of geographical spread. The company has nearly 3.mn customers through 469 branches and ~95 employees with AUM of nearly Rs66bn. It has a market share of approximately 1-11% of MFI business in India. The company is a formidable player in the fast-growing microfinance space and occupies a unique spot because of its ongoing transition to a small finance bank (SFB). While its diversified geographic presence and huge customer base will offer cross-selling opportunities, its strong technology backbone and processes will ensure a rather smooth transition to SFB. Exhibit 39: Branch network States/UT Branches Karnataka 6 Tamil Nadu 56 Maharashtra 54 West Bengal 52 Gujrat 32 Haryana 2 Bihar 24 Rajasthan 21 Uttar Pradesh 21 Assam 17 Punjab 17 Jharkhand 15 Madhya Pradesh 13 Kerala 12 Odisha 12 New Delhi 11 Tripura Chattisgarh 6 Uttrakhand 5 Meghalaya 2 Chandigarh 1 Goa 1 Himachal Pradesh 1 Pondicherry 1 Total 469 Exhibit 4:Equity shares issued by Ujjivan Date of allotment Issue size (Rsmn) Offer price (Rs) Allottees Type of allotment 3-Jan Bajaj Holdings and Investments Preferential allotment 5-Feb CX partners Fund 1 Preferential allotment 16-Feb Elevar Equity Mauritius Preferential allotment 1-Feb International Finance Corporation Preferential allotment 1-Mar-215 1, CDC Group PLC Preferential allotment 1-May-216 3, NA IPO 16

17 Exhibit 41: Management team/ board members Name Designation Experience Mr. Samit Ghosh Ms. Sudha Suresh Managing director and chief executive officer Managing director and chief executive officer, holding co Mr. Ghosh is a career banker with over 3 years of experience who worked in South Asia as well as the Middle East. He started his career with Citibank in 1975 and later worked with Standard Chartered Bank, HDFC Bank and Bank of Muscat. He was the past president of Microfinance Institutions Network and the chairman of Association of Karnataka Microfinance Institutions (AKMI). He was executive managing director and chief executive officer of till 21 January 217. Ms. Suresh is a chartered accountant with a rich corporate career spanning over two decades. She received the 'CFO 1 - Recognition of Excellence' award in 213. She is also a qualified cost accountant and company secretary. In her association with Ujjivan, she is responsible for areas of strategic business planning and budgetary controls, equity capital and debt syndication, treasury management, accounts and taxation as well as management of board and regulatory compliances. Mr. Ittira Davis Chief operating officer and head of transition Mr. Davis is an international banker with over 36 years of corporate and investment banking experience having worked extensively in the Middle East and Europe. He was with the Europe Arab Bank from July 2 to October 212 as managing director corporate and institutional banking and then as an executive director of Europe Arab Bank. He joined Ujjivan in March 215. Mr. Rajat Singh Head - strategy and planning Mr. Singh has been with the company since 25. In June 21, he was appointed as chief of staff for the eastern region, overseeing the regional business and was thereafter promoted to chief operating officer eastern region in October 211. In April 213, he became the chief operating officer northern region and is currently heading the strategy and planning division. Mr. Vijay Balakrishnan Chief marketing officer Mr. Balakrishnan has over two decades of strategic marketing experience with reputed corporates, including Bharti Airtel and Tata Group. He joined Ujjivan in November 215 where he leads the products and marketing functions nationally. His executive experience spans leading mass marketing roles, category creation and national -level brand launches across fast moving consumer goods, telecommunications and early stage technology companies. Mr. G.Santhosh Kumar Head liabilities and financial products Mr. Kumar has 21 years of experience across industries in various parts of the country. In the banking sector, he has worked with ING Vysya, Kotak Bank and ICICI Bank. His last stint was as senior vice president and head of branch banking in Andhra Pradesh and Telangana for ING Vysya in Hyderabad overseeing a network of 77 retail branches. Mr. Arunava Banerjee Chief risk and compliance officer Mr. Banerjee has over 35 years of experience, primarily in the banking industry. Starting his career with the State Bank of India, he later on worked with Standard Chartered Bank in itsmerchant banking division. He moved to Bahrain in 1996 as manager-corporate banking at Bahraini Saudi Bank, before making a career shift to work as the chief financial officer with Remza Investment Company W.L.L. Ms. Upma Goel Chief financial officer Ms. Goel is a chartered accountant with an experience spanning over 23 years in strategic financial planning, analysis and reporting, tax optimisation, risk management, business restructuring and regulatory compliance. Her extensive experience includes the roles of deputy group CFO at L&T Finance Holdings, reporting head of CFOs of subsidiaries of L&T Finance Holding, DGM at Larsen & Toubro, and financial controller at Escorts Securities. 17

18 Exhibit 42: Board members Name Designation Experience Mr. K.R. Ramamoorthy Non-executive chairman and independent director Former chairman and managing director of Corporation Bank and former chairman & chief executive officer of ING Vysya Bank. Served as an advisor to CRISIL and as consultant to World Bank. Independent director on the boards of National Securities Clearing Corporation, Subros, and Nilkamal. Trustee of Canara Robeco Mutual Fund. Mr. Abhijit Sen Ms. Vandana Viswanathan Non-executive, independent director Non-executive, independent director Former managing director - chief financial officer, Citibank N.A. India. Former director of Citicorp Services India and other Citigroup entities. Serves on the board of IDFC Bank and Trent. Co-founder of Cocoon Consulting, a management and human relationship consulting firm. Ms. Sudha Suresh Managing director and chief executive officer Was responsible for areas of strategic business planning and budgetary controls, equity capital and debt syndication, treasury management, accounts and taxation as well as management of board and regulatory compliance within the company. Mr. Venkatesh Natarajan Non-executive director Serves as a director in Lok Advisory Services, Equitas Finance and Suryoday Micro Finance. Mr. Jayanta Basu Non-executive director 19 years of experience in the field of investments. He is currently a designated partner at CX Advisors LLP. He previously worked with Citibank India. Mr. Amit Gupta Non-executive director Founding partner and chief operating officer of NewQuest Capital Advisors (HK). Capital structure Exhibit 43: Key shareholders Promoter Non - promoter CDC GROUP PLC 9.2 ALENA PRIVATE LIMITED 9. INTERNATIONAL FINANCE CORPORATION 6.1 NEWQUEST ASIA INVESTMENTS II 5.91 SEQUOIA CAPITAL INDIA INVESTMENTS III 3.54 SUNDARAM MUTUAL FUND A/C SUNDARAM SMILE FUND 2.94 HDFC STANDARD LIFE INSURANCE COMPANY 2.93 CINNAMON CAPITAL 2.59 ELEVAR EQUITY MAURITIUS 2.41 CX PARTNERS FUND SHRIRAM LIFE INSURANCE COMPANY 1.6 BAJAJ ALLIANZ LIFE INSURANCE COMPANY 1.54 UTI - TOP 1 FUND 1.54 BIRLA SUN LIFE INSURANCE COMPANY 1.44 KEMNAY INVESTMENT FUND 1.3 Exhibit 44: Shareholding pattern Foreign Investors Mutual funds Insurance Companies Bodies Corporate Banks/Fis/NBFCs/Trusts Resident Individuals/HUFs Employees & Directors Others 1

19 Key risks Aggressive expansion plan Ujjivan plans aggressively for non-group products and is set to increase its share in AUM to ~5% as against 13% currently. These products don t entail the joint liability model of group lending. Hence, aggressive growth involves execution and credit risks. Acquisition CASA could be challenging Ujjivan is venturing into unchartered territory as an SFB. Diversification from an MFI to SFB requires significant investment in branch conversion and employee training as well as a shift in mindset for its employees as well as customers. High transition costs Setting up of new branches and conversion of existing ones could lead to higher-than-expected costs and impact profitability. Development of new products, setting up a treasury and re-training of employees could lead to significantly higher costs. Low key personnel stake Currently, no shareholder is classified under the promoter group. The founder, Mr. Samit Ghosh, holds just ~.9% stake. Political intervention risk As the customer segment comprises the lower income strata, political motivation to not repay is a key risk. However, the risk stands reduced after the regulator laid down a framework for the sector after a crisis situation in Andhra Pradesh 19

20 Financials Exhibit 45: Income statement Y/E March (Rsmn) FY15 FY16 FY17E FY1E FY19E Interest income 5,5 9,31 12,39 16,373 2,433 Interest expenses 2,714 4,235 5,295 7,31 9,12 Net interest income 2,795 5,75 7,544 9,72 11,33 Loan origination fees ,141 1,636 Other Income Net revenues 3,45 6,41 9,144 1,695 13,56 Operating expenses 2,49 3,6 4,71 6,74,139 -Employee expenses 1,32 1,967 2,773 3,424 3,91 -Other expenses 722 1,12 1,92 3,2 4,22 Operating profit 1,356 2,973 4,442 3,992 5,447 Provisions , PBT 1,146 2,72 3,291 3,492 4,66 Tax ,152 1,222 1,634 PAT 75 1,772 2,139 2,27 3,34 Exhibit 47: Balance sheet Y/E March (Rsmn) FY15 FY16 FY17E FY1E FY19E Share capital 61 1,12 1,1 1,1 1,1 Reserves & surplus 6,53 1,966 16,553 1,752 21,715 Networth 7,364 11,97 17,741 19,94 22,93 Deposits - - 2,27 14,11 32,697 Borrowings 31,21 43,3 61,14 69,436 1,2 Other liability & provisions 1,1 1,915 2,149 3,1 4,316 Total liabilities 39,763 57,273 3,92 16,47 14,91 Fixed assets ,242 2,21 2,944 Investments ,147 17,49 23,957 Loans 32,17 5,643 59,756 74,422 97,779 Cash 6,44 4,913,67 1,233 13,69 Other assets 947 1,475 1,77 2,124 2,54 Total assets 39,763 57,273 3,92 16,47 14,91 AUM 32,741 53,5 66,396 2,692 1,644 Exhibit 46: Key ratios Y/E March (Rsmn) FY15 FY16 FY17E FY1E FY19E Growth Net interest income Operating profit (1.1) 36.5 Profit after tax Business Deposit growth CASA Advance growth AUM growth Spreads Yield on AUM Yield on BS loans Yield on assets Cost of funds Core spreads NIM Operational efficiency Cost-to-income Cost-to-assets Productivity (Rsmn) AUM per branch AUM per employee Employee per branch CRAR Tier I Tier II Total Asset quality Gross NPAs Net NPAs Provision coverage Credit costs (excluding std. assets) Credit costs (including std. assets) Return ratios RoE RoA Per share EPS BV ABV Valuation (x) P/E P/BV P/ABV

21 Annexure 1: SFB regulations Capital Initial equity capital >= Rs1bn Total CRAR >= 15% Tier I >= 7.5% Promoter contribution Initial contribution >= 4% Next 5 years <= 4% Next 1 years <= 3% Next 12 years <= 26% Prudential norms Prioirty sector target >= 75% Loans up to Rs2.5mn >= 5% of loan portfolio CRR/SLR To comply, no forbearance Exposure limit Single borrower <= 1% of capital funds Group <= 15% of capital funds Branches In rural areas >= 25% Source: RBI, Nirmal Bang Institutional Equities Research Annexure 2 SFB licence awardees 1. Au Financiers (India), Jaipur 2. Capital Local Area Bank, Jalandhar 3. Disha Microfin Private Ltd., Ahmedabad 4. Equitas Holdings, Chennai 5. ESAF Microfinance and Investments Private Ltd., Chennai 6. Janalakshmi Financial Services Private Limited, Bengaluru 7. RGVN (North East) Microfinance, Guwahati. Suryoday Micro Finance Private Ltd., Navi Mumbai 9. Private Ltd., Bengaluru 1. Utkarsh Micro Finance Private Ltd., Varanasi Source: RBI, Nirmal Bang Institutional Equities Research 21

22 Annexure 3: MFI regulations Qualification for MFI Microfinance loans/total assets >5% Loan for income generating purpose >5% Annual income of household (Rs) <1,, for rural areas <1,6, for urban areas Disbursement (Rs) <6, in first cycle <1,, in second cycle Indebtedness of borrower (Rs) <1,, Tenure of loan >Rs15, >= 24 months Margin Margin cap < 1% for large MFI (loans > 1bn) < 12% for others Interest rate Rate of interest Lower of following a) Cost of funds + margin b) 2.75x average base rate of five largest commercial banks Processing charges <= 1% of loan amount Capital adequacy Total CRAR >= 15% Tier I >= 7.5% Provisioning Higher of the following: a) 1% of loan portfolio b) 5% of overdues over 9-1 days 1% of overdues over 1 days Source: RBI, Nirmal Bang Institutional Equities Research 22

23 Annexure 4: MFI - Player-wise data Market Outstanding loan Disbursement Outreach GLP per GLP per Client per Client per GLP Share per client 3QFY17 Districts Branches Employees Loan officers Clients branch employee branch employee Rsmn (Rs) Rsmn mn Rsmn Rsmn 1 JFS 124, ,99 15, ,9 1, , BFIL 5, ,426 29, ,25 14,157, , Ujjivan 65, ,34 16, ,593 4, , Satin 33, ,73 2, ,72 3, , GK 3, ,21 7, ,62 3, , ESAF 25, ,464 6, ,499 2, , Utkarsh 17, ,24 3, ,352 1, , Asirvad 16, ,36 4, ,699 2, , Disha 14, ,329 2, ,713 1, , Spandana 12, ,39 4, ,769 1, , Muthoot 12, ,511 3, ,2 2, , Sonata 11, ,14 2, , , Annapurna 1, ,351 2, ,3 1, , Suryoday 9, ,4 1, ,117 1, , Arohan 9, ,249 2, ,372 1, , SVCL 9, ,344 1, ,161 1, , Fusion, ,737 1, , , Madura 7, ,93 1, , , RGVN 5, , , Share 5, ,594 1, , BSS 5, , , Belstar 4,55. 17, , , Intrepid 3, , , Chaitanya 2, , , VFS 2, , , Vedika 2, , , Margdarshak 2, , , Svatantra 2, , , Saija 1, , , Samasta 1, , , Uttarayan 1, , , Hindusthan 1, , , Midland 1, , , Pahal 1, , , Jagaran 1,44.25, , Namra 1, , , M Power 1, , , GO 1, , , Sambandh 1, , , Adhikar 1,4.1 11, , Light , , Navachetna.16 14, , Varam , , IDFF , , Nirantara , , Shikhar , , Unnaco 45. 9, , MSM , , Nightangle , , Unnati , , Agora , , Total 5,66,36 1 1,19 1,2, , Note: SKS data does not include that of Andhra Pradesh Source: Mfin, Nirmal Bang Institutional Equities Research 23

24 Annexure 5: MFI - State-wise data Outstanding loan Disbursement GLP per GLP per Client per Client per No of MFI GLP % of per client 3QFY17 Branches Employees Clients branch employee branch employee Rsmn total (Rs) Rsmn mn Rsmn Rsmn 1 Karnataka 2, ,379 17, , , Tamil Nadu 15 7, ,427 16,9 14 1, , Maharashtra 31 64, ,69 13, , , Uttar Pradesh 19 59, ,64 7, , , Bihar 2 39, ,614 1,3 71 5, , Madhya Pradesh 25 39, ,943 6,3 1 7, , West Bengal 14 34, ,33 9, , , Orissa 15 31, ,3 1,7 56 3, , Kerala 9 3, ,493, , , Gujrat 16 21, ,179 3, , , Haryana 14 15, ,432 2, , , Punjab 9 13, ,253 2, , , Jharkhand 17 12, ,2 3, , , Rajasthan 16 12, ,436 2, , , Assam 1 11, ,2 2, , , 4 16 Chandigarh 21 1, ,57 2, , , Uttrakhand 13 6, , , Delhi 5,6.9 2,24 1, , , Pondicherry 7 1, , , Tripura 5 1,4.2 14, , Meghalaya , , Himachal Pradesh , , Total 563,53 9,943 7, , ,995,97 Source: Mfin, Nirmal Bang Institutional Equities Research 24

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