IPO Note: Ujjivan Financial Services Ltd. Industry: Microfinance Recommendation: Subscribe Date: April 25, 2016 Issue Snapshot Company Name Ujjivan Financial Services Ltd. Issue Opens April 28, 2016 to May 02, 2016 Price Band Rs. 207 to Rs. 210 Bid Lot The Offer Issue Size IPO Process 70 Equity Shares and in multiples thereof. Public issue of 4,20,23,618 Equity shares* of Face value Rs.10 each, (Comprising of fresh issue of, 1,70,55,286 Equity Shares* (Rs. 358.16 cr) and Offer for Sale of 2,49,68,332 Equity Shares (Rs. 524.3 cr*) by Selling Shareholder). Rs. 875.0 882.5 Crore 100% Book Building Face Value Rs. 10.00 Exchanges BRLM Registrar NSE & BSE Kotak Mahindra Capital Company Limited, Axis Capital Limited, ICICI Securities Limited and IIFL Holdings Limited Karvy Computershare Private Limited Objects of the Offer Offer for Sale The Company will not receive any proceeds of the Offer for Sale by the Selling shareholder. Fresh Issue Utilise the Net Proceeds from the Fresh Issue towards augmenting its capital base to meet future capital requirements.; and General corporate purposes. Issue Break up Issue Size Allocation Equity Shares QIB 50% 21,011,809 HNI 1 6,303,543 RII 3 14,708,266 Total Public 100% 42,023,618 * Based on higher price band @ Rs. 210 Company Highlights Incorporated on December 28, 2004, Ujjivan Financial Services Private Limited is the third largest NBFC-MFI in India in terms of s disbursed as of September 30, 2015, with Gross AUM aggregating over Rs 40.88 billion (Source: MFIN Micrometer Report, September 2015). Company s business primarily based on the joint liability group-lending model for providing collateral free, small ticket size s to economically active women. The company also offers individual s to Micro & Small Enterprises ( MSEs ). The issue consists of fresh issue (of Rs 358.16 crore) and an offer for sale of ~Rs 524.33 crore (at the higher price band) thus totaling Rs 882.5 crore. The objects of the issue comprises of taking advantage of being listed at the stock exchanges as well as to utilize the net proceeds from the Fresh Issue towards augmenting its capital base to meet future capital requirements. Ujjivan is one of the prospective candidates to have received the small finance bank (SFB) license and thus just like Equitas, it is also mandatory to bring down the foreign investment in the company to 49%. Thankfully, almost all the foreign investors continues to stay invested in the company even after trimming their stake, thus speaks of confidence in the company and management. 1
Speaking of management, Ujjivan s Chief Executive Officer and Managing Director, Samit Ghosh, is a seasoned campaigner with over 30 years of experience in banking industry. He has been a part of the management teams at Citibank, Standard Chartered Bank, HDFC Bank and Bank Muscat. In the past, he has also served as president of MFIN, which is an umbrella self-regulatory organization for MFIs, as well as the chairman of AKMI. Under his able leadership, the company flourished as one of the largest MFIs in India with a focus on financial inclusion. However, it differentiates itself by focusing on urban and semi-urban poor and presently increasingly focusing on rural poor. As of December 2015, approximately 29%, 37% and 34% of its total customers comprise of rural, semi-urban and urban customers, respectively. The company s business is primarily based on the joint liability group lending model for providing collateral free, small ticket-size s to economically active women. Ujjivan also offers individual s to Micro & Small Enterprises ( MSEs ). In addition to products, they also provide non-credit offerings comprising of life insurance products, in partnership with insurance providers such as Bajaj Allianz Life Insurance Co., Kotak Mahindra Life Insurance Co. and HDFC Life Insurance Co. As of December 31, 2015, the company s operations spread across 24 states and union territories and 209 districts and have served over 2.77 million active customers through 470 branches and 7,786 employees and their Gross AUM stands at Rs.40.88 billion. Further, as of September 30, 2015, Ujjivan has approximately 11.1 of market share of the NBFC-MFI business in India, making them one of the leading providers of microfinance in India. Being a customer centric organization, the customer retention ratio stood high at 88% as of December 31, 2015. Ujjivan has recorded a phenomenal 51% CAGR in Gross AUMs between 2011 and 2015 and all this despite the Andhra Pradesh fiasco affecting the microfinance industry back in 2010. Thankfully, it has no presence in Andhra Pradesh and Telengana and thus remains unscathed from the tremors. As of 9MFY16, Karnataka, West Bengal, Maharashtra and Tamil Nadu form ~56% of its total AUM. Thus, the asset quality (Gross NPA / Net AUM) has always remained comfortable over the years despite providing s to individuals without collateral. During 2011 and 2015, Ujjivan has been able to clock 3 CAGR in net interest income (NII) and the NIM (net interest margins) came down from 17% in 2011 to more stable levels of 12-13% off late. The management has shown operational improvement with decline in operational costs (as% of AUM) from 17. in 2011 to 8. in FY15. Thus, this resulted in strong growth in PAT from Rs 12 crore in 2011 to Rs 76 crore in 2015. Over the past three years, the ROAA have averaged ~3% while ROAE have averaged at ~14%. The company is one of the 10 applicants to have received the small bank license and is a strong player to eventually set up its banking business successfully leveraging its existing business set up and customer base. Nevertheless, transition to small bank will raise regulatory costs (on maintain CRR, SLR, provisioning norms) as well as operating costs (manpower, setting up branches, technology up gradation) and higher provisioning thus keeping the ROEs and ROAs under pressure for the next two-three years. However, the access to interbank markets and accepting deposits will lower the cost of funds. Leveraging the existing customer base, the company would be able to slowly and surely build a CASA franchisee over medium to long term. According to the management, future growth for the firm is going to come from individual lending to the micro SME sector as well as from housing. Finally, they plan to tie up with insurance companies to provide third party insurance. Group, which constitutes 88% of their business, will continue being the major contributor to their revenues going ahead. Being the third largest MFI player backed by institutional investors, having a diverse presence, strong operational parameters and a sound management, we believe that the company will successfully transform and emerge as a successful SFB. On the valuation front, at the higher price band of Rs 210, the issue is priced at P/B of 1.6x post issue BV and appears to be attractive compared to listed players Equitas Holdings (2.44x), SKS Microfinance (6.2x 9MFY16) and Cholamandalam Investment and Finance (3.17x 9MFY16). Thus, we advise our investors to SUBSCRIBE for the issue for a long term perspective. 2
Breakup of current AUM of the company Number of Loan Accounts business 62% family 26% others -1% Individual - business 8% Individual - others 4% Bihar 4% Others Gujarat 26% Uttar Pradesh Haryana Maharashtra 12% Tamil Nadu 13% Karnataka 1 West Bengal 1 Financial Statement (In Rs. Mn) FY11 FY12 FY13 FY14 FY15 9MFY16 Balance sheet Share capital 34.8 57.3 65.6 65.6 86.1 86.1 Net worth 115.4 240.3 318.0 372.5 736.5 810.2 Borrowings 472.1 617.2 997.5 1650.0 3121.8 3365.2 Other Liabilities 123.3 37.5 41.4 56.2 118.0 141.0 Receivables 625.1 691.2 1126.0 1617.3 3218.7 4079.8 Other Assets 85.7 204.0 230.9 461.4 757.6 236.6 Total Assets 710.9 895.1 1356.9 2078.7 3976.3 4316.3 Income statement Interest Income 151.9 148.2 222.5 347.9 599.3 713.2 Non-Interest Income 4.6 8.1 11.4 9.8 12.6 16.4 Total Income 156.4 156.3 233.9 357.7 611.9 729.6 Interest Expense 48.1 60.9 82.1 139.9 271.4 305.6 Net Interest Income 108.3 95.4 151.9 217.8 340.5 424.1 Operating Expense 91.1 95.5 104.2 129.0 226.0 236.4 Net Profit 11.7 0.1 32.9 58.4 75.8 122.3 Source: RHP Comparison with listed industry peers Co Name Ujjivan Financial Services Limited 10.62 1.60* 13.67 Equitas Holdings Limited 4.47 2.44 11.20 SKS Microfinance Finance Limited 15.22 7.06 17.93 Shriram City Union Finance Limited 86.18 2.57 13.61 Sundaram Finance Limited 40.88 4.45 15.25 Source: RHP, Ashika Research EPS FY15, P/B TTM, RoNW FY15 EPS (Rs.) P/B (x) RONW (%) 3
(In Rs. Cr) FY11 FY12 FY13 FY14 FY15 9MFY16 Return on Equity and Assets Net Profit 11.69 0.13 32.87 58.42 75.79 122.31 Average Total Assets 559.84 802.99 1,125.99 1,717.78 3,027.48 4,364.68 Average Net Worth 110.52 177.88 279.15 345.24 554.49 797.73 Total Debt 472.13 617.24 997.46 1,649.96 3,121.77 3,740.40 Average Debt 354.54 544.69 807.35 1,323.71 2,385.87 3,431.08 Return on Average Assets (%) 2.09% 0.02% 2.92% 3.40% 2.50% 3.74% Return on Average Net Worth (%) 10.58% 0.07% 11.78% 16.92% 13.67% 20.44% Average Debt / Average Net Worth 3.21 3.06 2.89 3.83 4.3 4.3 Average Net Worth % of Avg Total Assets 19.74% 22.1 24.79% 20.10% 18.32% 18.28% Earnings Per Share 3.09 0.03 4.97 8.38 10.62 13.37 Book Value Per Share 30.52 39.81 45.41 54.43 81.76 93.92 Financial Ratios Cost of Funds 13.36% 10.96% 10.11% 10.53% 11.31% 11.80% Credit Cost 4.54 5.76 6.9 8.29 21.05 17.03 Yield 26.64% 20.33% 22.74% 23.73% 22.78% 22.74% Spread 13.28% 9.37% 12.63% 13.20% 11.47% 10.94% Net Interest Margin 17.13% 11.26% 13.76% 13.57% 11.62% 12.31% Cost to Income ratio 78.1 65.12% 73.48% 61.79% Operating Expense / Average AUM 17.53% 13.82% 10.7 8.84% 8.54% 7.60% Gross NPA 1.81 6.32 0.95 1.18 2.35 7 Gross NPA / Net AUM (%) 0.29% 0.91% 0.08% 0.07% 0.07% 0.1 Net NPAs 1.62 5.6 0.85 0.22 0.6 1.79 Net NPAs / Net AUM (%) 0.26% 0.81% 0.08% 0.01% 0.02% 0.04% Debt/Equity 3.14 4.43 4.24 4.35 CAR 27.27% 22.73% 24.24% 19.64% Gross AUM 625.15 703.42 1126 1617.27 3274.14 4589.4 Net AUM 625.15 691.16 1126 1617.27 3218.69 4540.13 Securitised AUM - 12.27 - - 55.45 49.25 Net AUM Growth % 68.61% 10.56% 62.91% 43.63% 99.02% 54.74% Average AUM 497.96 658.15 908.58 1,371.63 2,417.98 3879.41 Disbursements 1,141.45 1,082.86 1,540.92 2,104.96 4,328.42 4529.28 Disbursement Growth (%) 84.34% -5.13% 42.30% 36.61% 105.63% 39.52% Total Loan Accounts 2,364,013 899,274 1,021,818 1,311,305 2,417,120 3,130,381 Source: RHP 4
Name Designation Email ID Contact No. Paras Bothra VP Equity Research paras@ashikagroup.com +91 22 6611 1704 Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646 Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647 Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645 SEBI Registration No. INH000000206 Disclosure The Research Analysts and /or Ashika Stock Broking Limited do hereby certify that all the views expressed in this research report accurately reflect their views about the subject issuer(s) or securities. Moreover, they also certify the followings:- The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, has any financial interest in the subject company (ies) covered in this report. No The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relative, have actual/beneficial ownership of 1% or more in the subject company, at the end of the month immediately preceding the date of the publication of the research report. No The Research Analyst or Ashika Stock Broking Limited or his/its Associates or his/its relatives has any material conflict of interest at the time of publication of the research report. No The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or compensation for investment banking or merchant banking or brokerage services or for product other than for investment banking or merchant banking or brokerage services from the companies covered in this report in the past 12 months. No * The Research Analyst or Ashika Stock Broking Limited or his/its Associates have managed or co managed in the previous 12 months any private or public offering of securities for the company (ies) covered in this report. No The Research Analyst or Ashika Stock Broking Limited or his/its Associates have received any compensation or other benefits from the company (ies) covered in this report or any third party in connection with the Research Report. No The Research Analyst has served as an officer, director or employee of the company (ies) covered in the research report. No The Research Analyst or Ashika Stock Broking Limited has been engaged in Market making activity of the company (ies) covered in the research report. No * Ashika Stock Broking Limited is acting as a Sub-Syndicate Member for this IPO Disclaimer This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Ashika Stock Broking Ltd. is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. Ashika Stock Broking Ltd. or any of its affiliates or employees shall not be in anyway responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Ashika Stock Broking Ltd., or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. 5