IPO Note Issue Opens: 28 Apr 16 Issue Closes: 02 May 16 Price Band: Rs207 210 Issue details Face value (Rs) 10 Fresh issue (up to) Rs358cr Offer for Sale (up to) 2.49cr Equity Shares Issue type 100% Book building Industry Financials Share reservation (%) QIB 50 Non institutional 15 Retail 35 Company management K. R. Non executive Ramamoorthy Chairman and Independent Mr. Samit Ghosh Director Managing Director and CEO Issue manager Kotak Mahindra Capital Co. Ltd., Axis Capital BRLM Ltd., ICICI Securities Ltd., IIFL Holdings Ltd. Karvy Computershare Registrar Private Limited Listing BSE, NSE For further details, write to us at: research@indiainfoline.com April 22, 2016 Note: India Infoline Limited is a syndicate member in the issue; accordingly, this note is prepared based on the Red Herring Prospectus and is for informative purpose only. This document summarizes a few key points related to the issue and should not be treated as a comprehensive summary. Investors are requested to refer the Draft Red Herring Prospectus/ Red Herring Prospectus for further details regarding the issue, the issuer company and the risk factors before taking any investment decision. Please note that investments in securities are subject to risks including loss of principal amount and past performance is not indicative of future performance. Nothing herein constitutes an offer of securities for sale in any jurisdiction where it is unlawful to do so. Business Overview Ujjivan is one of the leading MFIs in the country with a deep pan India presence. As of December 31, 2015, the Gross AUM of Ujjivan was Rs 4,589cr spread across 24 states and union territories and 209 districts. The company served over 2.77 million active customers through 470 branches and 7,862 employees. The business is primarily based on the joint liability group lending model to economically active women. The company also offers individual loans and the share of it has been increasing with the management focused on converting group lending customers to individual lending customers. Ujjivan is amongst the 10 companies in India to receive inprinciple approval from the RBI to set up a small finance bank (SFB) on October 7, 2015. Underpenetration of micro credit to drive robust growth for MFIs As per CRISIL Research (Microfinance, November 2015), AUMs of non Andhra Pradesh MFIs is expected to rise at 30 34% CAGR, while total AUMs of all MFIs (including those in AP) will rise at 29 31% over FY15 18. The growth in loan portfolio will be driven by non AP states, where micro credit penetration is low. Commercial Banks are finding it more comfortable to lend indirectly to borrowers through MFIs who are specialized institutions. Transitioning into a SFB Ujjivan is well positioned for the transition from microfinance operations to banking operations given its resources, operational strength and capabilities. In order to satisfy the criteria for corporate structure, ownership and control prescribed under the SFB Guidelines, Ujjivan would float a wholly owned subsidiary and transfer the existing business to the subsidiary, which will, in turn, be the proposed SFB. Key strengths of Ujjivan 1) Leading MFI with a deep pan India presence; 2) Strong track record of financial performance; 3) Experienced leadership and strong corporate governance; 4) Robust technology driven operating model 5) Robust risk management framework 6) Focus on employee welfare. Financial Highlights Y/e 31 Mar FY13 FY14 FY15 9M FY16 NII (Rs cr) 125 186 281 358 PAT (Rs cr) 33 58 76 122 RoA* (%) 2.9 3.4 2.5 3.7 RoE* (%) 11.8 16.9 13.7 20.4 * On an annualized basis for 9M FY16
About the Company, (Ujjivan) started operations as an NBFC in 2005 with a mission to provide full range of financial services to the economically active poor who are not adequately served by financial institutions. The business is primarily based on the joint liability group lending model for providing collateral free, small ticket size loans to economically active women. The company also offers individual loans to Micro & Small Enterprises (MSE). Depending upon the end use, the products can be further sub divided into agricultural, education, home improvement, home purchase, livestock loans, etc. The entire assets under management (AUM) falls under the category of priority sector lending as prescribed by the RBI. Ujjivan follows an integrated approach to lending, which combines a high customer touch point typical of microfinance, with the technology infrastructure and back end support functions similar to that of a retail bank. This has enabled the company to manage increasing business volumes and optimize overall efficiencies. Product Portfolio Group Individual Housing MSE Business loan Family loan Top up loan Emergency loan Education loan Livestock loan Higher Education loan Agriculture loan Home improvement loan Home loan Self Construction Home loan Under Construction Purchase Home loan Ready purchase Business loan Bazaar loan Secured business loan Group Loan Products Type of loan Ticket size range (Rs.) Tenure (months) Interest Rate (%) 6,000 15,000 12 22 Business Loan 15,000 30,000 12 or 24 22 >30,000 24 22 Family Loan 6,000 35,000 12 or 24 22 Agriculture Loan 6,000 50,000 12 or 24 22 Emergency Loan 2,000 5,000 6 22 Education Loan 5,000 15,000 12 22 Top up Loan 3,000 6,000 9 22 Vishwas Loan 5,000 15,000 12 22 Page 2 of 14
Individual lending products Type of loan Ticket size range (Rs.) Tenure (months) Interest Rate (%) Agriculture Loan 31,000 80,000 4 12 24 Higher Education Loan 41,000 3,00,000 6 60 24 Home improvement Loan (unsecured) 51,000 1,50,000 12 36 24 Home improvement Loan (secured) 2,00,000 5,00,000 24 84 17.75 Secured Home Loan 2,00,000 10,00,000 24 120 15.75 Individual business Loan 41,000 1,50,000 6 24 24 Individual Bazaar Loan 21,000 1,50,000 6 24 24 Livestock Loan 41,000 1,00,000 9 24 24 Open Market Livestock Loan 41,000 65,000 6 24 24 Pragati Loan 51,000 1,50,000 24 36 23 Secured Business Loan 2,00,000 10,00,000 24 84 20 Operation management is decentralized with four regional offices at Bengaluru, New Delhi, Kolkata and Pune. The two tiered management hierarchy consists of a national leadership team providing overall direction to the business and four regional leadership teams responsible for taking onground operational decisions. The company served over 2.77 million active customers through 470 branches and 7,862 employees. Further, as of September 30, 2015, it had ~11.15% market share of the NBFC MFI business in the country making Ujjivan, the third largest player in the country. Being a customer centric organization, the customer retention ratio stood high at 88% as of December 31, 2015. The company has a dedicated service quality department addressing customer grievances and their feedback. Operating Structure In addition to loan products, the company also provides non credit offerings comprising of life insurance products, in partnership with insurance providers such as Bajaj Allianz Life Insurance Company Limited, Kotak Mahindra Old Mutual Life Insurance Limited and HDFC Standard Life Insurance Company Limited. Page 3 of 14
Product Mix for 9M FY16 State wise AUM distribution (as of Dec 31, 2015) 12.4 Karnataka 15.3 (%) West Bengal 15.1 Maharashtra 13.1 Group lending (%) Tamil Nadu 12.4 Uttar Pradesh 5.3 Individual lending (%) Haryana 5.0 Gujarat 4.8 Rajasthan 3.7 Jharkhand 3.3 87.6 Assam 2.8 Others 19.3 Total AUM: Rs4,589cr 0.0 5.0 10.0 15.0 20.0 25.0 Strong traction in disbursements driving robust AUM growth 6,000 (Rs cr) Gross AUM Disbursements 5,000 4,000 3,000 2,000 1,000 0 Post FY13, operations have scaled up Steep increase in borrowers and AUM/branch 600 (no) Branches Employees (RHS) (no) 9000 3.6 (mn) No of borrowers AUM/branch (RHS) (Rs cr) 12.0 500 7500 3.0 10.0 400 6000 2.4 8.0 300 4500 1.8 6.0 200 3000 1.2 4.0 100 1500 0.6 2.0 0 0 (0.0) 0.0 Page 4 of 14
Loan turnaround time has reduced significantly Brisk growth in NII 20.0 16.0 (days) Group loan Individual loan 420 (Rs cr) NII NIM (RHS) (%) 18.0 17.3 350 16.0 12.0 8.0 4.0 7.9 4.5 8.1 280 210 140 70 14.0 12.0 10.0 0.0 FY13 9M FY16 0 8.0 Cost productivity (Opex/Avg. AUM) has improved 20.0 (%) 17.5 16.0 13.8 Asset quality has been sound GNPA (%) NNPA (%) 1.0 (%) 0.8 12.0 8.0 10.8 8.8 8.5 7.6 0.6 0.4 4.0 0.2 0.0 PAT has risen at rapid pace driving recovery in RoA and RoE 150 120 (Rs cr) 122 4.2 3.6 (%) RoA RoE (RHS) (%) 21.0 18.0 90 60 58 76 3.0 2.4 1.8 15.0 12.0 9.0 30 0 12 0 33 1.2 0.6 0.0 6.0 3.0 0.0 Page 5 of 14
As of Dec 31, 2015, Gross AUM of Rs. 4,589cr was well distributed across north, south, east and west regions As of Dec 31, 2015, Ujjivan had 470 branches across 24 states and union territories Key Strengths of Ujjivan Leading MFI with a deep pan India presence Ujjivan is the third largest NBFC MFI in India in terms of loans disbursed as of September 30, 2015, with Gross AUM aggregating over Rs. 4,088cr (Source: MFIN Micrometer Report, September 2015). As of December 31, 2015, Gross AUM stood at Rs. 4,589cr which is well distributed across the north, south, east and west regions as Rs. 9,87cr, Rs. 1,424cr, Rs. 1,344cr and Rs. 834cr respectively. In addition to geographical diversification, company s AUM is also well diversified in terms of type of location. While the initial focus was on the urban and semi urban poor, Ujjivan has gradually catered to an increasing number of rural customers and as of December 31, 2015, the contribution of the latter was 29% in the AUM. As of September 30, 2015, the company was the largest MFI in India in terms of geographical spread. (Source: Bharat Microfinance Report 2015 and the MFIN Micrometer Report, September 2015). As of December 31, 2015, Ujjivan had 470 branches across 24 states and union territories and 209 districts in India. Served over 2.77mn active customers as of Dec 31, 2015 The deep penetration of distribution network to remote unserved and underserved regions of India has enabled the company to develop the expertise to understand and differentiate customers on the basis of their specific requirements. Ujjivan served over 2.77mn active customers as of December 31, 2015. As a result of a customer centric approach, the customer retention rates have improved to 88%. North East West South Not Present Page 6 of 14
Paperless processing of documents at branches has resulted in low turnaround time Average number of borrowers per field staff (for Group Loan products) has increased significantly Effective credit risk management is reflected in robust repayment rates, stable portfolio at risk and low GNPA and NNPA Mr. Samit Ghosh, CEO & MD, has over 30 years of experience in banking industry Technology driven operating model The digitized front end, consisting of android phones for group loans and tablets for individual loans enables the company to analyze the customer information, financial position and credit bureau details of a potential customer in real time. The paperless processing of applications and documents at branches has enabled efficient document management resulting in low turnaround time. Further, an automated backend, supported by a robust core banking system and document management system, has improved efficiencies and minimized turnaround time. Over the years, the use of technology has improved work place engagement and governance, increased the accessibility of products to the customers and enabled Ujjivan to rapidly scale up operations in a secure and efficient manner. As a result of the efficiencies introduced by the technology infrastructure, the average number of borrowers per field staff (for Group Loan products) has increased from 428 in FY12 to 688 as of December 31, 2015. The decentralized management structure enables the company to effectively manage turnaround time which has reduced significantly from 7.94 days in FY13 to 4.49 days as of December 31, 2015 for Group Loan products, and from 17.26 days in FY13 to 8.06 days as of December 31, 2015 for Individual Loan products. Robust risk management framework Ujjivan has a strong credit function, which is independent of the business and a key controller of the overall portfolio quality. The company has implemented credit management models such as decentralized loan sanctioning and stringent credit history checks which have enabled it to maintain a stable portfolio quality. The effective credit risk management is reflected in the portfolio quality indicators such as robust repayment rates, stable portfolio at risk (PAR) and low rates of GNPA and NNPA. Ujjivan s portfolio quality has remained consistent in spite of the increase in the size of operations and diversification into new products, customer segments and regions. An active portfolio management ensured that no single state contributed more than 20% of the Gross AUM. Professional management, experienced leadership and strong corporate governance Ujjivan is a professionally managed company with the senior management team having a diversified track record in the financial services industry and an average experience of ~20 years. The Chief Executive Officer and Managing Director, Mr. Samit Ghosh, has over 30 years of experience in banking industry. He has been a part of the management teams at Citibank, Standard Chartered Bank, HDFC Bank and Bank Muscat. 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. Company s COOs, Ms. Carol Furtado, Mr. Abhiroop Chatterjee, Ms. Jolly Zachariah and Mr. Manish Raj who are in charge of regional operations and key enablers of the decentralized management structure, and Mr. Aryendra Kumar, Head, Housing Finance, have an average experience of 17 years in the financial services industry. Page 7 of 14
Eight MFIs received SFB license On October 7, 2015, RBI granted in principle approval to 10 entities to set up Small Finance Banks which included eight MFIs, one local area bank and one NBFC. The fact that eighty percent of the institutions receiving green signal for SFBs are MFIs outlines the significance of microfinance for the Indian banking landscape. The eight MFIs cumulatively accounted for about 26% of assets managed by the industry as of 2014 15. As they exit the industry, after metamorphosing into SFBs along with Bandhan (which converted into a universal bank and accounted for 20% of March 2015 AUM), the industry size will halve. Market share of MFI players as of March 2015 Suryoday, 1 Source: MFIN, CRISIL Research MFI Industry AUM projection 120,000 (Rs cr) 100,000 80,000 60,000 MFIs gaining market share from Banks 100% (%) Banks MFI 80% 43 36 39 43 60% 49 40,000 40% 20,000 0 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16E 2016 17E 2017 18E 20% 0% 64 57 61 57 51 2010 11 2011 12 2012 13 2013 14 2014 15 Page 8 of 14
Ujjivan would float a wholly owned subsidiary, which will be the proposed SFB, and transfer the existing business to it In the First stage, company will implement regulatory structure, redesign products, implement advanced technology, and train human resources In the Second stage, company will focus on consolidation to operationalize primary and secondary channels for banking In the Third stage, company plans to ramp up geographic expansion and pursue new customer segments and product. Proposed Holding and Corporate Structure The Small Finance Bank Transition Process On October 7, 2015, Ujjivan received in principle approval from the RBI ( SFB In Principle Approval ) to set up an SFB within 18 months from the date of receipt of the approval. In order to satisfy the criteria for corporate structure, ownership and control prescribed under the SFB Guidelines, Ujjivan would float a wholly owned subsidiary and transfer the existing business to the subsidiary, which will, in turn, be the proposed SFB. The management proposes to handle the transition to an SFB through a three phase strategy comprising of the preparation, transformation and growth stages.. The transformation phase is proposed to be followed in the first two years of banking operations, followed by the phase of growth. Stage 1 Prepare The first stage in the transition journey would comprise of rolling out readiness initiatives to set up an SFB. While maintaining the existing infrastructure of delivery channels, Ujjivan s would implement the regulatory structure, redesign products, implement advanced technology, and train human resources. Ujjivan has already initiated the preparation stage by putting in place a SFB transition committee comprising of Board members and key managerial personnel, and engaged third party consultants to formulate a detailed implementation plan. Stage 2 Transform In this stage, the company does not intend to add new branches and instead, would focus on consolidation to operationalize primary and secondary channels for banking. Further, it would be adding to the existing product delivery channels and introduce additional product lines including savings, deposits and fee based services. Stage 3 Grow In the growth phase, which is anticipated to start three years from the start of operations of the proposed SFB, the company plans to ramp up geographic expansion through the addition of new branches, and pursue new customer segments and products. In addition to this, Ujjivan will focus on growth in open market customers., * Without considering the dilutive impact of outstanding employee stock options, ^ Assuming full subscription in the Offer Page 9 of 14
Ujjivan would float a wholly owned subsidiary, which will be the proposed SFB, and transfer the existing business to it Leveraging capabilities as an MFI to successfully transition into the proposed SFB Ujjivan s experience of working with the unserved and underserved population segments will enable it to develop relevant products and channels to serve this market well. Further, company s extensive branch network across India, centralized processing units across four regions, modern technology and human resources will be key building blocks in its transformation into an SFB. To focus on unserved and underserved segments and capitalize on the lack of viable savings and product options Company would be developing a wide range of simple savings, credit and fee based products Company intends to increase the penetration of individual loan products by designing needspecific products Increased focus on the unserved and underserved segment There is a large unserved and underserved segment of the population, generally referred to as the missing middle, which is not adequately served by standard MFIs or commercial banks on account of their informal income profile or low savings profile. This segment essentially consists of MSEs, low income salaried workers, and tenant and marginal farmers. Ujjivan intends to increase focus on this segment and capitalize on the lack of viable savings and product options, inadequate customer services offered by informal, unorganized avenues of credit, and the resultant financial exclusion of this population segment. The company would be developing a wide range of simple savings, credit and fee based products for facilities such as cash management and overdraft specifically targeted towards the missing middle. Diversifying product offerings The SFB regime will enable Ujjivan to develop and offer a comprehensive suite of products including saving accounts, current accounts, fixed deposits, overdraft facilities and recurring deposits; and basic fee based products. The company proposes to offer simple and flexible liability products to its customers. To make these products accessible, it will focus on delivery channels such as a three tier branch structure, business correspondents, ATMs, mobile and internet, etc. While initially these delivery channels will be assisted, the management plans to gradually convert them into self service channels. Leveraging existing customer base Ujjivan intends to increase the ticket size while relying on the established credit assessment procedures and risk management framework to ensure a high quality portfolio. Ujjivan intends to capitalize on this trend by increasing the penetration of individual loan products, and by innovating and designing need specific products and processes. In addition to the transition from Group Loan products to individual loan products, the management also intends to increase the proportion of secured products, thereby further enhancing quality of the credit portfolio. Page 10 of 14
Subsequent to the transformation into the SFB, the company proposes to raise a part of its funding through retail customers deposits. Building a strong liability franchise Historically, Ujjivan has relied on a combination of wholesale funding from banks and DFIs, equity infusions, issue of debt instruments such as commercial paper, non convertible debentures and securitization of loan portfolio to fund its business and operations. Subsequent to the transformation into the SFB regime, the company proposes to raise a part of its funding through retail customers deposits. Currently, a large part of its target population segment is offered savings and other deposit products only by various unorganized players. Management believes that with simple, flexible products which are accessible through assisted and self serviced channels, Ujjivan can position as a reliable alternative to the informal players. The shift will enable the company to access diversified, short term and lowcost capital. Subsequently, a majority of its funding requirements would be met through CASA deposits and recurring and fixed deposits by building a sticky deposit base (remittances, cash management services) and attracting new customers whose primary avenues of savings and capital building currently include the unorganized sector and other high risk savings schemes. Page 11 of 14
Post conversion, Ujjivan would come under regulatory oversight of the RBI Key advantages of conversion into SFB Better regulatory oversight and broader product mix While the microfinance industry is currently not regulated by a formal body, the MFIs will benefit post conversion as they come under regulatory oversight of the RBI. This will eliminate the possibility of adverse interventions by state governments as with the Andhra Pradesh ordinance. The SFBs will also benefit from a competitive advantage over other MFIs as the SFBs will be able to offer a wider range of products on assets as well as liability side thus increasing the stickiness of the customer. This will also help the SFBs scale up their business faster and reduce the concentration risk. Efficient use of technology, better accessibility, marginally higher rates, strong brand, etc. could help attract deposit customers Ability to raise low cost deposits The higher the proportion of low cost deposits the bank can raise the lower will be its overall cost of funds. Factors like efficient use of technology, better accessibility, marginally higher interest rates, strong brand etc. could help attract customers. Also, SFBs initially might primarily target term deposits, which are at higher rates compared to demand deposits (current and savings deposits). However, the competition in this segment is expected to increase with payment banks too entering the fray. Thus the benefit if at all, is expected to accrue only over the long term. (Source: CRISIL Research: Microfinance, November 2015) How are MFIs different than Commercial Banks? NBFC MFIs provide financial services pre dominantly to low income borrowers, with small loan amounts and for short tenures. The financial services are provided on an unsecured basis, mainly for income generating activities with repayment schedules which are more frequent than those normally stipulated by commercial banks. While NBFCs lend and make investments and hence their activities are akin to those of banks, as opposed to commercial banks, (a) NBFCs cannot accept demand deposits; (b) NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; and (c) the deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs. On the other hand, certain characteristics specific to NBFC MFIs which are not prevalent amongst commercial banks, inter alia, are (a) focus on vulnerable sections of the population, who lack individual bargaining power and have inadequate financial literacy; (b) deeper reach in remote geographical regions as a result of adopting an information approach compared to banks, which still operate through traditional branches; (c) using more of the local population as field workers which gives them better access to borrowers as opposed to banks which largely use traditional staff; and (d) simpler and less time consuming procedures. (Source: RBI FAQs on NBFCs, updated as on March 11, 2016 and the Report of the Sub Committee of the Central Board of Directors of the Reserve Bank of India to Study Issues and Concerns in the MFI Sector, January 19, 2011). Page 12 of 14
Financials Income statement Y/e 31 Mar (Rs Cr) FY13 FY14 FY15 9MFY16 Revenue from Ops 223 348 599 713 Other Income 11 10 13 16 Total Revenue 234 358 612 730 Employee benefit exp (66) (81) (133) (143) Provision/writeoff for receivables under fin (7) (8) (21) (17) Finance costs (82) (140) (271) (306) Depr and amor. exp (3) (3) (7) (6) Admin and other exp (29) (36) (65) (71) Total expenses (186) (269) (497) (542) Profit before tax 48 89 115 188 Tax expense (15) (30) (39) (65) Net profit 33 58 76 122 Balance sheet Y/e 31 Mar (Rs Cr) FY13 FY14 FY15 9MFY16 Equity Capital 66 66 86 86 Reserves 252 307 650 773 Shareholder's funds 318 373 736 859 Long term borrowings 383 565 1,283 1,507 Long term provisions 1 2 6 10 Total Non current liabilities 385 567 1,289 1,518 Short Term Borrowings 4 2 5 62 Trade payables 5 5 12 15 Other current liabilities 631 1,108 1,892 2,246 Short term provisions 14 23 43 55 Total Current liabilities 654 1,139 1,951 2,377 Total Equities and Liabilities 1,357 2,079 3,976 4,753 Key Ratios Y/e 31 Mar FY13 FY14 FY15 9M FY16 Profitability Ratios (%) NIM* 13.8 13.6 11.6 12.3 Return on Avg Assets * 2.9 3.4 2.5 3.7 Return on Avg Equity* 11.8 16.9 13.7 20.4 Per share ratios (Rs) EPS* 5.3 8.9 11.2 14.2 BVPS 45.4 53.4 81.8 93.9 DPS 0.3 0.5 0.5 Other key ratios (%) Yield* 22.7 23.7 22.8 22.7 Cost of Funds* 10.1 10.5 11.3 11.8 Spread 12.6 13.2 11.5 10.9 Opex/Average AUM* 10.8 8.8 8.5 7.6 GNPA 0.1 0.1 0.1 0.2 NNPA 0.1 0.0 0.0 0.0 CAR 27.3 22.7 24.2 19.6 Tier I 27.0 21.8 21.7 17.8 Cost/Income 78.2 65.1 73.5 61.8 AUM/branch (Rs cr) 3.7 4.6 7.6 9.7 AUM/employee (Rs cr) 0.3 0.3 0.5 0.6 * Annualized for 9M FY16 Fixed Assets Tangible Assets 8 10 14 16 Intangible Assets 3 3 4 6 Non current investments 0 0 0 0 Deferred tax assets (Net) 6 7 15 22 Long term loans and advances 3 5 7 14 Other non current assets 188 238 599 997 Total Non current assets 209 263 639 1,055 Receivables under financing activity 947 1,388 2,630 3,555 Cash and bank balances 179 394 645 56 Short term loans and advances 6 11 21 34 Other current assets 16 23 42 53 Total Current assets 1,148 1,816 3,338 3,698 Total Assets 1,357 2,079 3,976 4,753 Page 13 of 14
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