SP Tulsian analysis of UFSL:
New issue (IPO) Analysis:
An Attractive Debut
Ujjivan Financial Services is entering the primary market on Thursday 28th April 2016, to raise Rs. 358 crore via a fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of upto 249.68 lakh equity shares, both in the price band of Rs. 207 to Rs. 210 per share. The total fund raising aggregates to Rs. 883 crore, at the upper end of the price band, of which, OFS portion is Rs. 525 crore. Representing 35.5% of the post issue paid-up capital at the upper end, issue closes on Monday 2nd May.
Bengaluru based Ujjivan Financial is a microfinance company serving over 27.7 lakh customers, through its 470 branches pan India, enjoying a market share of 11.15% of India’s NBFC-MFI business. Having received an in-principle approval from RBI to set up a small finance bank (SFB), foreign shareholding in the company is to be brought down to 49% or less, by April 6, 2017, and hence existing foreign investors are pruning their holding to ~44%, from current 77.10%, via this IPO.
For FY15, Ujjivan recorded a stupendous 57% YoY growth in net interest income (NII), at Rs. 328 crore vis-Ã -vis Rs. 208 crore in FY14, with net assets under management (AUM) almost doubling to Rs. 3,219 crore as of 31-3-15, from Rs. 1,617 crore, a year ago. All this, with asset quality remaining steady - Net NPA of just Rs. 60 lakh, representing 0.02% of Net Advances. Company ended FY15 with PAT of Rs. 76 crore, against Rs. 58 crores YoY, up 31%, leading to an EPS of Rs. 11.24, against Rs. 8.91.
Coming on to the just concluded fiscal, NII of Rs. 408 crore posted during first 9M of FY16, has already surpassed FY15’s Rs. 328 crore, by 24%, that too in just 9 months’ time. PAT of Rs. 122 crore is a smart 60% rise, again in just 9 months, although asset quality has softened a tad bit, with Net NPA of Rs. 1.79 crores, representing 0.04% of Net Advances, as of 31-12-2015. However, this is not a concern at all, the number being so minute! Company has improved its NIM to 12.31%, RoA to 3.74% and RoE to 20.4%, which are all very robust parameters, besides bringing down cost-to-income ratio to 62% from 73%+, recorded in the previous fiscal.
Having Net AUM of Rs. 4,540 crore, as at 31-12-15, Ujjivan is being valued at 1.75x on pre-issue book value of approximately Rs. 120 (as on 31-3-16), at the upper price band of Rs. 210, while it works out to 1.58x post IPO, which is quite attractive, considering the present comparable peer Equitas Holding, which has received excellent response from institutional investors on its listing last week, currently ruling at a multiple of over 2x. SKS Microfinance, with over 1,300 branches and Gross Loan Portfolio of Rs. 6,177 crore (as on 31-12-15 ex AP & Telangana), is currently ruling at price to book of 5.7x.
Ujjivan is likely to close FY16 with an EPS of about Rs. 16.50, on equity base of Rs.101.20 crore, leading to a PE multiple of less than 13 times, on historic basis. This is cheaper than Equitas Holdings on earning multiple as well, the latter’s PE being close to 22.5x. Equitas is currently a holding company, and this should not make much of a difference, as Ujjivan will also eventually become a holding company, when its existing business will be transferred to SFB upon commencement of SFB operations.
It may be noted that since RBI has issued 10 licenses for SFB and in due course of time, all of them will get listed, which will taper off valuations of the existing listed peers. However, having posted NII and PAT CAGR of over 50% and Net AUM CAGR of whopping 69% over the past 3 fiscals, with handsome NIMs and return ratios (RoE and RoA), fundamentals of the company remain very strong. Moreover, due to the valuation gap vis-Ã -vis peers, the issue has left a lot of money on the table for prospective investors.
Microfinance industry has started seeing healthy loan volume upticks and players like SKS Micro and Equitas Holdings are leapfrogging with rising profitability. Good monsoon forecast for this season can only make MFI players show higher growth for the next couple of years as well.
To conclude, Ujjivan IPO is attractively valued and investment is advised for listing gains, as also, with a MT view, due to its robust operating performance, professional management, good corporate governance and favourable industry dynamics. Go for it!
Zerodha (Trading & Demat Account)
RHP
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