Thursday, 28 April 2016

10 things you should know about Ujjivan Financial Services and its public offer before investing : 28 April 2016

Below are 10 things you should know about Ujjivan Financial Services and its public offer before investing:



1) Business and Background: Ujjivan Financial Services (UFSL) commenced operation in 2005 as an NBFC with a mission of providing a full range of financial services to the economically active poor who are inadequately served by financial institutions. Its business is primarily based on the joint group lending model for providing collateral free, small ticket size loans to economically active individuals belonging to the weaker section of the society. The company also provides individual loans to Micro & Small Enterprises ("MSEs"). UFSL received in-principal approval to set up Small Finance Bank on October 7, 2015, from the RBI.

2) About the issue: The public issue of Ujjivan Financial Services comprises fresh issuance of shares worth Rs 358.16 crore and an offer for sale of up to 24,968,332 shares by the existing shareholders. The IPO is priced at a band of Rs 207-210 a share of Rs 10 each.

3) Objectives of the issue: Net proceeds from the offer will be utilised to augment the capital base of the company to meet future capital requirements.

4) Should you invest: Choice Broking in a research report said, "At higher price band of Rs 210, UFSL's stock is available at P/BV(x) of 2.8 of its 9MFY16 book value of equity per share (post issue), which is available at 32 per cent discount to its peers such as Equitas Holding, SKS Microfinance. Thus, we assign 'Subscribe' rating to this issue."
                          According to Prabhudas Lilladher, the company has started to offer individual loans to Micro & Small Enterprises and has delivered 51 per cent and 59 per cent CAGR in AUMs and net earnings over past four years. UFSL has received in-principle approval from the RBI to set up a small finance bank which the brokerage house believes will add scalability to the business. At the upper band of Rs 210, UFSL will trade at 1.6x on projected book value of Rs 130 (post-issue) which is fairly priced. Prabhudas Lilladher has recommended investors to 'Subscribe' to the issue.

5) Key positive: According to Reliance Securities, the small finance bank (SFB) licence is a long-term positive for the company. It is followed by the strong presence in high growth, under-penetrated microfinance, Micro & Small Enterprises finance, and affordable home loan segments. The differential business model will help in to provide stable margin in the long term.

6) Key Risks: Post conversion into the small bank the company will have to comply with CRR, SLR, and higher priority sector lending requirements, which may negatively impact its operating performance in the next 18-24 months, according to Reliance Securities. Further, the key to the successful transition will be the build up of CASA base, which will be challenging for any new entrant.

7) Strong Distribution Network: With deeper pan-India presence, Ujjivan's branch network spans across 470 branches with 7,862 employees spread across 24 states and union territories and 209 districts serving over 2.77 mn active customers (as at the end of December 2015).

8) Superior Asset Quality: According to KR Choksey Shares & Securities, Ujjivan's superior asset quality can be largely attributed to the effective credit risk management characterised by robust repayment rates, stable portfolio at risk (PAR) and low rates of GNPA and NNPA. The gross NPA (as a percentage of Net AUM) have only witnessed declining trends; gross NPAs in FY13, FY14, and FY15 and the 9M-ended December 31, 2015, stood at 0.08 per cent, 0.07 per cent, 0.07 per cent and 0.15%, respectively. KR Choksey has 'Subscribe' rating on Ujjivan IPO.

9) Management track record: Ujjivan's senior management has a diversified track record in the financial services industry, with approximately average 20 years of experience in the industry. The CEO and MD, Samit Ghosh, has over 30 years of experience in the banking industry and was part of the bank, management team involved in setting up retail operations of Citibank, Standard Chartered HDFC Bank, and the Bank Muscat in India. The company's national leadership team, comprising of four COOs and functional heads, similarly has considerable experience in the financial services industry. This impeccable experience of the Management team in the banking and consumer banking space should greatly benefit the proposed SFB operations.

10) Financials:

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