Ujjivan SFB IPO review (May apply)

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Review By Dilip Davda on November 27, 2019

•    USFB is the second-largest SFB in India.
•    It has shown growth in its business for the last three fiscals.
•    Issue pricing appears reasonable against listed peers.
•    Pre-IPO placement worth Rs. 299.19 cr. done at Rs. 35 per share in Nov. 19.
•    UFSL shareholder quota offered at a discount of Rs. 2 per share against IPO pricing of Rs. 37(upper band).

ABOUT COMPANY:
Ujjivan Small Finance Bank (USFB) is a mass-market focused SFB in India, catering to unserved and underserved segments and committed to building financial inclusion in the country. It's Promoter, UFSL (Ujjivan Financial Services Ltd.) commenced operations as an NBFC in 2005 with the mission to provide a full range of financial services to the 'economically active poor' who were not adequately served by financial institutions. UFSL's erstwhile business was primarily based on the joint liability group-lending model for providing collateral-free, small ticket-size loans to economically active poor women. UFSL also offered individual loans to Micro and Small Enterprises ('MSEs') and adopted an integrated approach to lending, which combined a customer touchpoint similar to microfinance, with the technology infrastructure and related back-end support functions similar to that of a retail bank. On October 7, 2015, UFSL received RBI In-Principle Approval to establish an SFB (Small Finance Bank), following which it incorporated Ujjivan Small Finance Bank Limited as a wholly-owned subsidiary. UFSL, after obtaining RBI Final Approval on November 11, 2016, to establish and carry on business as an SFB, transferred its business undertaking comprising of its lending and financing business to USFB, which commenced its operations from February 1, 2017. The bank is included in the second schedule to the Reserve Bank of India Act, 1934 as a scheduled bank on July 3, 2017. In the short period that it has been operational as an SFB, it is among the leading SFBs in India in terms of deposits, advances, branch count and geographical spread, as of March 31, 2019.

As of September 30, 2019, USFB served 4.94 million customers and operated from 552 Banking Outlets that included 141 Banking Outlets in Unbanked Rural Centres ('URCs') (of which seven were business correspondent centres) and additionally operated four Asset Centres. In Fiscal 2019 alone, we operationalized 287 Banking Outlets. As of September 30, 2019, it had a network of 441 ATMs (including 18 ACRs), two 24/7 phone banking units based in Bengaluru and Pune that service customers in 11 languages, and a mobile banking application that is accessible in five languages as well as internet banking facility for individual and corporate customers.
 
USFB's portfolio of products and services includes various asset and liability products and services. Its asset products comprise: (i) loans to micro banking customers that include group loans and individual loans, (ii) agriculture and allied loans, (iii) MSE loans, (iv) affordable housing loans, (v) financial institutions group loans, (vi) personal loans, and (vii) vehicle loans. On the liability side, it offers savings accounts, current accounts and a variety of deposit accounts.  USFB also provides non-credit offerings comprising ATM-cum-debit cards, Aadhaar enrolment services; distribute third-party insurance products and point of sales ('POS') terminals.

ISSUE DETAILS/CAPITAL HISTORY:
As RBI stipulated 31.01.2020 as the cutoff date for the listing of USFB's equity, it is coming with the maiden issue.  For augmenting Bank's Tier - 1 capital base to meet its future capital requirements and general corpus fund needs, USFB is coming out with an IPO of approx. 202702703 equity shares of Rs. 10 each (based on the upper price band) via book building route to mobilize Rs. 750 cr. It has fixed a price band of Rs. 36 - Rs.37 per share. The issue opens for subscription on 02.12.19 and will close on 04.02.19. Minimum application is to be made for 400 shares and in multiples thereon, thereafter.  USFB has reserved 10% of the issue i.e. Rs. 75 cr. worth shares for the eligible shareholders of the promoter group company UFSL who were holding those shares as on 22.11.19. It is offering a discount of Rs. 2 per share to its parent company public shareholders (i.e. issuing shares at Rs. 35 per share). From the residual issue size of Rs. 675 cr. it has allocated 75% for QIBs, 15% for HNIs and 10% for Retail investors. The issue constitutes 11.73% of the post issue paid-up capital of USFB.

The original issue size was planned for Rs. 1150 cr. but as USFB has already mobilized Rs. 299.19 cr. while issuing 85483667 shares at Rs. 35 in November 2019 (as pre-IPO placements), the net issue size stands Rs. 750 cr. (including UFSL shareholders quota). Initial equity was issued at par. The average cost of acquisition of shares by the promoters is Rs. 10 per share. Post issue its current paid-up equity capital of Rs. 1525.52 cr. will stand enhanced to Rs. 1728.22 cr.

BRLM's to this issue are Kotak Mahindra Capital Co. Ltd., IIFL Securities Ltd., and JM Financial Ltd., while Karvy Fintech Pvt.  Ltd. is the registrar to the issue.  

FINANCIAL PERFORMANCE:
USFB has grown sustainably. It's Gross Advances (including securitization/ IBPC) have grown from Rs. 6383.98 cr. as of March 31, 2017, to Rs. 11048.59 cr. as of March 31, 2019, and were Rs. 12863.65 cr. as of September 30, 2019. Its deposits have increased from Rs. 206.41 cr. as of March 31, 2017, to Rs. 737.94 cr. as of March 31, 2019, and were Rs. 1012.98 cr. as of September 30, 2019. As of September 30, 2019, USFB's percentage of gross NPAs to gross advances was 0.85% while the percentage of net NPAs to Net Advances was 0.33%. Its profit after tax as restated for Fiscal 2018 and 2019 was Rs. 6.86 cr. and Rs. 199.22 cr., respectively while for the six months ended September 30, 2019, its profit after tax as restated was Rs. 187.11 cr. Further, its long term bank facilities have been rated CARE A+; Stable by CARE Ratings Limited and certificate of deposits have been rated CRISIL A1+ by CRISIL Limited.

For the last three fiscals, USFV has posted an average EPS of Rs. 0.62 and an average RoNW of 4.88%. The issue is priced at a P/BV of 2.67 based on its NAV of Rs. 13.84 as of 30.09.19. Based on FY19 earnings the issue is at a P/E of around 32.17, but if we annualize FY20 H1 earnings and attribute it on fully diluted equity post issue then asking price is at a P/E of around 17 against the industry average of 29.64. Thus issue appears reasonably priced.

COMPARISION WITH LISTED PEERS:
As per offer documents, USFB has shown AU SFB, Equitas Holdings, Bandhan Bank, CreditAccess, RBL and DCB as its listed peers that are currently trading at a P/Es of around 42.18, 383.2,32.26,30.06,19.95 and 15.32 respectively (as on 27.11.19). However, they are strictly not comparable.

MERCHANT BANKER'S TRACK RECORDS:
Three BRLMs associated with the issue have handled 34 public issues in the past three years out of which 10 closed below the issue price on listing date. 

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