Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Ujjivan Small Finance Bank: Is The IPO Worth A Shot?


Ujjivan Small Finance Bank IPO is opened for bidding. Ujjivan Small Finance Bank a subsidiary of Ujjivan Finance Holdings and it is relatively new in terms of its operations. The Bank got its banking license in 2016 and started its operation in 2017. The current issue IPO issue is for Rs 750 Crs. Issue price is at Rs 35 to 37 in lots of 400 shares. The issue will close  on 4th Dec 2019 (today).

Why is Ujjivan Small Finance Bank doing IPO?

RBI rules state that a small finance bank should be listed within three years of getting the license. That should have meant Jan 2020 Attempts by the promoter, Ujjivan Holdings, to unwind itself and list the subsidiary directly didn’t work, so they had to do this IPO.

(We spoke of it – Premium: Why Equitas and Ujjivan get a lousy valuation)

Ujjivan Small Finance Bank was planning to raise Rs 1150 Crs initially. It did a pre-IPO placement at RS 35 per share and raised Rs 299 Cr. Thus the current IPO issue stands at Rs 750 Crs.

In most cases a IPO is done to give a partial exit to promoters/investors. In Ujjivan’s case its for augmenting Tier 1 capital. Tier 1 capital is what determines a bank’s growth. The total loans it gives is limited to a multiple of Tier 1 Capital. A Capital Adequacy Ratio (CAR) determines how much a bank should have as Tier 1 Capital (mostly equity) as a percentage of loans it gives.

The RBI stipulated Tier 1 capital is at 7.5% (Total CAR at 15%). Meaning for every Rs 100 loan given out, Rs 8 has to be banks own money (it should cannot be depositors money). So effectively if a bank wants to grow it needs to have a good base Tier 1 capital.

In current case the Rs 750 Cr raised plus 299 cr. already raised can give you a buffer to give out loans of another Rs 11,500 Crs (assumption at 10% tier 1 capital). That is nearly double the current advance book size of Rs 12,780 Crs.

Ujjivan Small Finance bank has grown its loan book at CAGR of 36.59% in last 2.5 years. Going by current growth rate of advance the new capital may be enough to sustain growth for next two years.

Pan India Presence

Most of the smaller private banks in India are delimited by their geographical presence. For instance CUB is predominantly in South India and AU small finance bank is limited majorly Rajasthan, Gujarat, Maharashtra and Gujarat. In case of Ujjivan Small Finance Bank it has got a pan India presence, with almost equal distribution across geographies.

Out of the 552 outlets Ujjivan Small Finance bank has 131 / 167 / 173 and 81 are in North, South, East and West regions respectively and no single state more than 18% of its overall loan portfolio. As of Sep 30, 2019 Ujjivan Small Finance Bank has presence in 24 states and 232 districts in India. This kind of diversification across India helps to cater different set business segments, varying from agriculture, personal loans, vehicle finance, MSE loans, Housing Finance etc.

According to the RBI guideline Small Finance Banks need to have 25% of their branches in rural segment with a population of less than 10,000 persons. Effectively meaning for every three branches opened in metro, urban and semi urban areas, one branch needs to be opened in rural area. In line with that Ujjivan Small Finance Bank has 141 banking outlets in rural areas, which is nearly 25.54%.

High Margins, Might Correct

A PAN india presence will help to increase its depositors base bringing in further low cost capital. With lower cost of funding Ujjivan might start offering loans at competitive rates. As of June 2019, Cost of Funds are at 8.68% and average yield on assets at 18.63% .

NPAs Are Controlled

Ujjivan Small finance bank has a Gross NPA of 0.85% and Net NPA of 0.33%.

In recent times most of the NPA slippages are in corporate nature which have minimal effect on Ujjivan. We don’t expect NPAs to spike up in recent times unless some major event happens (demonetisation, loan waivers etc). The higher advance growth might mask any slippages in NPA at least for next couple of years.

Growth From Priority Sector Rather Than Corporate Segment

RBI guideline for small finance bank stipulate them to have 75% of their loans towards priority sectors (like small housing finance, agricultural finance etc) at least for five years. As of June 2019 75.02% of their loans (adjusted net bank credits aka ANBC) were towards  priority sector loans. These are mostly retail loans.

Retail loans always help in diversification and give a higher interest margins. That’s the reason Ujjivan Small Finance banks has a high net interest margin of 10%+.

So further growth strategy should involve deeper penetration into rural areas and spreading the consumer base in segments like affordable housing etc.

Promoter Dilution Has To Happen

Kotak Bank promoters have locked horns with RBI over promoter stake dilution. Pre IPO promoters are having a stake of 94.40%, post IPO it will come down to 83.32%. Promoters here mean Ujjivan Finance Limited.

According to the RBI guidelines promoters need to reduce their stake to 40% in next five years, and to 30% in next 10 years and to 15% in next 15 years. Promoters can reduce their shareholding either by selling their stake or diluting themselves.

SFB RBI promoter guideline

We don’t think promoter will go for selling their stakes atleast in near term. The ideal situation will be raising more equity and diluting stakeholders. This will help in two ways viz. diluting promoter equity and raising more money to fund its future growth. Thus we can expect further rounds of equity capital infusion going ahead.

Is The Current Valuation Good Enough?

Ujjivan Small Finance Bank post IPO at current IPO price will have a market capitalisation of Rs 6,100 Cr roughly. Considering it has generated Rs 187 Cr net profit in last six months, at a flatline basis we can assume the FY20 net profits at Rs 360 Crs. This will effectively give a P/E of 17. This is again not too expensive.

Read our post on why Ujjivan Finance gets lower valuation compared to Ujjivan Bank here

If we consider the current book value of Rs 13.84 per share, at Rs 37 the effective P/B will be at 2.6. Considering it a small finance bank , which has high growth rate in coming years, the above valuations P/B ad P/E are decent. A private bank with decent growth rate gets a P/B of 3+ and P/E of greater than 20 +. So at current prices Ujjivan Small Finance Bank can see a P/E rerating and also earnings growth.

Ujjivan Bank’s lower  valuations backed by string fundamentals provides a good opportunity. We recommend subscribe for IPO. As of yesterday 5 pm the IPO is oversubscribed by 23 times by retail investors. As the IPO is oversubscribed applying to one lot makes more sense. In case you are Ujjivan Finance shareholder, you can get the allotment at Rs 2/share lower.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial