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Ujjivan Small Finance Bank IPO: Here's all you need to know

BusinessToday.In     December 2, 2019

The initial public offer (IPO) of Ujjivan Small Finance Bank received an overwhelming response from investors and was subscribed 1.54 times on its first day.

The IPO of the microfinance lender received bids for 19.13 crore shares compared to the issue size of 12.39 crore shares. Of 19.13 crore bids received for the issue, 13.26 crore bids were received at the cut off price.

Ujjivan Small Finance Bank's proposed IPO comprises a fresh issue of equity shares aggregating up to Rs 750 crore. A portion of the issue, aggregating up to Rs 75 crore, has been made available for shareholders of Ujjivan Financial Services at a discount of Rs 2 per share to the final issue price.

While 75% of the net issue has been kept for Qualified Institutional Buyers (QIB), 15% of the net issue for has been allocated to the Non-Institutional Investors (NII) and remaining 10% to Retail Individual Investors (RII). The lender has already sold 7.14 crore shares for Rs 250 crore in a pre-IPO placement.

Investors have to apply for a minimum lot size of 400 shares and in multiples thereafter, while investors in the retail category can apply for a maximum of 13 lots. 

Further, at the IPO price band of Rs 36-37, the issue is available at a Price/Book Value of 2.2x (post issue) at the upper end of the price band.

As per the objectives submitted by the bank in its Red Herring Prospectus (RHP), the bank will utilise the net proceeds from the issue towards Tier-I capital base requirements. Besides meeting the RBI Tier - 1 capital requirements, issue expenses and receiving benefit from listing on the stock market are the other objectives listed by the lender.

About the bank

Catering to unserved and underserved segments in India, Ujjivan Small Finance Bank serves over 49 lakh customers across 24 states and union territories, through 552 banking outlets and 441 ATMs. 

The bank has Samit Kumar Ghosh as its Managing Director (M.D.) and Chief Executive Officer (CEO), while Nitin Chugh is proposed MD and CEO of Bank from today i.e. December 1, 2019.

Ujjivan Financial Services (UFSL) is the promoter of Ujjivan Small Finance Bank. UFSL received in-principle approval by the apex bank RBI to establish a (Small Finance Bank) SFB on October 7, 2015, following which it incorporated Ujjivan Small Finance Bank Limited as a wholly-owned subsidiary. Ujjivan Small Finance Bank began its operations on February 1, 2017.

Financials

In terms of performance, the bank reported a profit after tax of Rs 199 crore in FY19, with net interest margin of 10.9%. It reported Rs 187 crore PAT in H1FY20.

The small finance bank has a diversified portfolio with advances at Rs 12,864 crore. The bank has increased its deposit base from Rs 206 crore in FY17 to deposit base of Rs 10,130 crore in H1FY20, which comprises 74.5% of its funding profile.

Asset quality has remained steady with GNPA ratio at 0.85% and NNPA ratio at 0.33%, as of September 30, 2019. Consequently, the bank's cost of funds has reduced from 9.01% in FY17 to 8.43% in H1FY20.

The CASA ratio as of September 30, 2019, was at 11.87% (1.57% in FY17).

Key Risks

As per ICICI Direct's IPO review, the financial performance of the bank significantly depends on micro banking business and its whereabouts as 79.2% of gross advances (97.5% in FY17) are towards the micro banking business with GNPA at 0.71% as of September 30, 2019.

The bank is focusing on raising its deposit base, especially from retail clients, said ICICI Direct in its report and added: "Ability to raise the retail deposit base and especially low-cost deposit would impact its profitability and financial performance".

Reliance Securities pointed out weaker liability profile compared to peers, with low CASA ratio and high concentration in deposits as a major setback and added high share of MFI (Microfinance) loans at 79%, coupled with rising stress in the relatively un-seasoned non-MFI book as other key risks for investing in the IPO.

Brokerage View

A host of brokerages namely ICICI Securities, IndiaNivesh, Angel Broking,  LKP Securities and Choice Equity Broking have given 'Subscribe' rating to the lender's IPO. Moreover, GEPL Capital, Reliance Securities, Hem Securities, Geojit Financial Services recommended "Subscribe" on the issue for listing gain as well as for long term investment perspective.

"Ujjivan is a play on the MFI growth story. So far, it has effectively managed to grow assets with decent asset quality profile. However, going forward trajectory of business model will change with the buildup of non-MFI loans and ramp of retail liabilities which shall be an uphill task for the new management in the wake of tough competition in the market space. Also, the bank will have to reduce down the promoter stake further to 40% over the next 2 years from levels of 84% post IPO as per RBI guidelines which will be a hangover in the medium term. In this backdrop, in our view, the bank is not likely to trade at higher multiples," quoted Anusha Raheja, BFSI Research Analyst at LKP Securities.

"Bank's gross NPA was the lowest among the small finance banks at 0.85% of gross advances and the provision coverage ratio (PCR) was high at 72% in FY19," Geojit Financial Services said in their research note.

Angel Broking in its report suggested that the bank has attractive valuations, considering similar businesses that trade at higher valuations. It said: "Moreover, experienced management, pan-India presence and pristine asset quality provide comfort."

"USFB's healthy growth prospects and increased share of fee-based revenue streams should continue to aid its return ratios, even as rising share of non-MFI loans impacts its NIM. Its high share of MFI loans has been a positive for its asset quality in the current environment where we have seen rise in stress most other segments," said Reliance Securities in its report. It added: "Recent appointment of Nitin Chugh (ex-HDFCB Digital Banking Head) should aid the Bank's liability and non-MFI asset profile, in our view."

(By Rupa Burman Roy)

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