Subsidiary of Ujjivan Financial Services, Ujjivan Small Finance Banks’s initial public offering is now open for subscription, with the issue closing on 4th December. In FY 2019-20 this is the 12th company launching mainboard IPO. In this blog, I will cover the important aspects of this IPO that will help you make a call, read on!

Issue Details and Lot Size

The book running lead managers ( BRLM) for this issue are Kotak Mahindra Capital Company, JM Financial, and IIFL securities. The equity shares are offered to be listed on BSE and NSE. 

The IPO has already seen strong demand since morning with the bank eyeing a corpus of 750 Crore to be raised through the issue. The set price band is Rs 36-37 per share. The corpus will be utilized in expanding their Tier 1 capital base and meeting the expenditure for the same. 

Issue Open2nd Dec-4th Dec
Issue PriceRs 36-37
Number of shares 20.83 Crores
Number of shares pre-IPO144 Cr
Number of shares post IPO171.5 Cr
Reservations if any Qualified Institutional Buyers : 75%

High Networth Individuals : 15%

Retail Investors : 10% 

Promoter UFSL

Investors can apply for a minimum of 400 shares and in multiples henceforth. For the retail segment, the minimum application at the upper price band ( 1 Lot) stands at Rs 14,800. Maximum lots that retail investors can apply for is 13. The upper price band for 13 lot is Rs 1,92,400, which is the maximum application amount. Retail investors can avail maximum subscription price upto Rs 2 Lakh. By means of its pre-ipo placement of 71,428,570 shares, the bank has managed to raise Rs 250 crores already. Additionally,  for eligible shareholders, Rs 75 Crore worth of shares are reserved that will be given at a discount of Rs 2 per share. 

Company Details 

Let us first understand the parent company, UFSL. UFSL began its operations as an NBFC in 2005 to provide financial services to low-income groups in unbanked areas. UFSL received in-principal permission from RBI to establish a Small financial Bank on November 11, 2016, post which Ujjivan Small Finance Bank Limited was incorporated as a wholly-owned subsidiary.

The bank commenced its operations on February 1, 2017, after UFSL transferred it’s lending and financing business to the bank. By obtaining the small finance banking license from RBI, Ujjivan Small Finance Bank was bound by a few mandatory conditions.

As per this license, they were mandated to have at least 25 % of their bank branches in the rural or unbanked area and 50% of the loan sanctioned had to be less than Rs 25 Lakhs. Meaning, despite being a for-profit bank, they had to be socially conscious.

The bank currently caters to over 49 Lakh customers from 24 states and union territories and as per the CRISIL report, had the most diversified portfolio. The lender recorded profits of Rs 199 crore, with an interest margin of 10.9%. As of September 30, 2019, its loan book shows Rs 12,864 Cr and the deposit base is Rs 10,130 Cr.

Currently, the bank offers savings account, current accounts and deposit accounts of various kinds. The bank also offers ATM cum debit cards, Aadhaar enrollment facility, third party insurance products distribution, etc.

As of September 30, 2019, it catered to 4.94 million customers, through its 552 banking outlets, out of which 141 were in unbanked areas. They also operated four asset centers. As of September 2019, Ujjivan small finance bank is recorded to have a network of 441 ATMs with 18 ACRs included as well as two round the clock phone banking units based out of Pune and Bangalore, along with a mobile banking app. 

Challenges Faced And Business Model 

Like all for-profit microfinance banks, there are issues associated with loan defaults. Since the rural poor don’t have credit cards, estimating their creditworthiness is a challenge . To mitigate this the bank resorts to lending to groups as opposed to personal loans. This ensures some accountability in loan repayment. However, the loans are still unsecured, meaning they don’t have collateral and hence, if the bank has the challenge to raise capital when the lending group defaults. 

However, the bank has devised strategies to safeguard their interests in the following ways :-

Small Ticket Size Loans: The bank issues loans of ticket size typically in the range of Rs 2000 to Rs 6000 ranging up to two years in tenure. While they also offer vehicle and housing loans, about 82% of their loans fall under the microloan category. Small ticket sizes ensure that the bank is able to recover the damage due to defaults.

High-Interest Rates In Lieu Of No Collateral: Since the loans offered are without collateral, they offer high interest rates in the range of 20-24 % to cushion themselves against losses. These are still reasonable compared with informal loans which charge exorbitant interest.

Loans To Women Entrepreneurs: Honoring the social cause at its core as well as protecting their own interests being a for-profit, Ujjivan offers most of its loans to women entrepreneurs. Historically, women borrowers have shown more integrity and sincerity in loan repayments and can be considered a safe

As UFSL transformed into Ujjivan Small Finance Bank, they were able to accept deposits as well. More earning prospects from deposits led to a decrease in the interest rate at which Ujjivan Small Finance Bank borrowed. However, the shift into being a deposit-taking institute meant opening up more branches in unbanked areas, spending on personnel and operations which were big investments, that would take a while to pay off. In this regard, Ujjivan is doing well for itself with a decreasing cost to income ratio of 64% in June 2019 , as opposed to 95% in 2017. The sheer amount of unbanked population that is left to cater to, brings in more opportunities for the small bank.

Strengths 

USFB possesses the following strengths that differentiate it from peers. The bank is poised to increase its retail user base leveraging these strengths.

-Sound understanding of how to cater to the financially underserved demographic in India coupled with high consumer centricity

-Large outreach with presence in 24 states and union territories. 

-Tech-driven operations and availability of digital banking facilities. 

-Has a robust risk management framework in place

-Is backed by an efficient and experienced leadership focussed on the welfare of internal and external stakeholders. 

-Consistently strong financial performance. 

Strategies 

USFB plans to employ the following strategies to differentiate itself and

  • Will leverage data analysis and technology to expand operations and improve process efficiency
  • Poised to increase customer base and improve liability franchise
  • Aims to encourage and foster responsible behavior amongst the unbanked populations.
  • Looking to open multiple sources of revenue.

 Here are some growth figures

Gross Advances12,863.64 Crore as of September 30,2019 ( Grown from Rs 3383.98 Cr in March 31st 2017 to Rs 11,048.59 Cr as of March 31,2019)
DepositsRs 10, 129 . 85 Crore as of September 30, 2019 ( Grown from Rs 206. 4 Cr in March 31, 2017 to Rs 7379.44 Crore as of March 31, 2019 )
Net NPAs to Net Advances0.33 Percent
Gross NPAs to Gross Advances0.85 percent
RatingsA+; stable by CARE Ratings

certificate of deposits have been rated A1+ by CRISIL.

 

 

Source: Company RHP, CRISIL

Conclusion 

If you are looking to buy this IPO, don’t forget to take a look at Ujjivan Small Finance bank’s financial statements as well as peer comparison. You can take a look at the same from the company’s RHP ( Red herring prospectus) that is freely available on the internet. However,  the bank has a limited operating history as a small finance bank and is still growing in operation, so the past performance may not be indicative of future growth prospects. Please exercise due diligence while investing in an ipo and take a call only when you are fully satisfied with the company’s strong fundamentals and growth potential. 

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww