Ujjivan Small Finance Bank IPO opens today. Should you subscribe to it?

Ujjivan Small Finance Bank will launch its initial public offer (IPO) today at a price band of Rs 36 to Rs 37 per share. The small finance bank has fixed the bid lot at 400 shares and equivalent multiples thereafter, and aims to garner approximately Rs 750 crore via the three-day issue (till December 4).

Nearly 20.27 crore shares will be offered for subscription, which will be distributed among QIB (75 per cent of the net issue; 60 per cent of QIB to Anchor Investors), non-institutional investors (15 per cent), and retail investors (10 per cent). The issue includes a reservation of Rs 75 crore worth of shares for subscription by eligible shareholders of Ujjivan Financial Services who will get shares at a discount of Rs 2 per share.

Established in 2017, the Ujjivan Financial Services-controlled USFB offers small finance to underserved and unserved segments in India. At the end of September 2019, the bank had a net interest income of Rs 740.4 crore, with a net profit at Rs 187.1 crore. The Return on Equity (RoE) stood at 19.6 per cent, while Return on Asset (RoA) came in at 2.5 per cent.

Should you subscribe? Here's what analysts say:

ICICI DIRECT

Analysts at the brokerage opine that the SFB has maintained its asset quality along with sustainable business growth. As of September 30, 2019, gross non-performing asset (GNPA) was at Rs 109 crore i.e. 0.85 per cent while net NPA ratio was at Rs 43 crore or 0.33 per cent. The portfolio at risk has reduced from Rs 304 crore in FY18 to Rs 211 crore in H1FY20 while the provision coverage ratio was at 71.9 per cent in FY19.

“USFB had a steady ride in terms of advances growth along with maintaining asset quality. There was continued focus on garnering retail liability along with building CASA base. We have a SUBSCRIBE recommendation on the stock. Further, at the IPO price band of | 36-37, the stock is available at a P/BV of ~2.2x (post issue) at the upper band on H1FY20 basis,” the IPO note said.

MOTILAL OSWAL FINANCIAL SERVICES

Analysts at the brokerage have given a ‘subscribe’ rating to the stock given the improving financials, good asset quality and healthy return ratios.

“The bank has a total gross loan book of nearly Rs 129 billion as on Q2FY20 with micro-financing forming 79.2 per cent of the total advances. The bank is deliberately planning to grow microfinance segment at 20-25 per cent vis-à-vis 30-35 per cent earlier, in order to de-risk its portfolio. It has also started focusing on the retail loan segment and thus built a decent Affordable Housing and MSE loans portfolio, constituting 9.4 per cent and 6.5 per cent of advances respectively. This has led to share of secured loans rise to 19.4 per cent in the portfolio but led to moderation in net interest margins (NIMs),” it said in its note.

EMKAY GLOBAL FINANCIAL SERVICES

The brokerage firm observes that during the recent inspection by the Reserve bank of India (RBI) for FY18, it made some key observations on the bank’s business and operations as enumerated below, of which some are basic in nature and some are reasonably serious like a lack of fraud management system, lack of appropriate rating methodology, among others.

“Although the bank claims to have taken corrective action, these lapses indicate that the new management will have to ramp up operational/compliance standards to the next level to avoid regulatory ire,” the IPO note said.

The brokerage values the bank at 1.5x Sep’21E ABV, while the IPO at the higher price band of Rs37 values the bank at a slight premium valuation of 1.7x Sep’21E ABV.

“At the IPO price, USFB’s valuation will imply a discount of 27 per cent for Ujjivan Holdco. We already have coverage on the Ujjivan Fin (Holdco) with a Sell rating/UW stance in EAP and a TP of Rs250 given our concerns around its weak liability profile/asset diversification, and that the bank is still exposed to managerial/business transitional risks” it added.

HDFC SECURITIES

According to the brokerage firm, the small finance bank enjoys pan-India presence and has “deep understanding of its audience” which gives it edge over its peers in the industry.

“Its diversified operations also allow to de-risk its business by mitigating political and state-specific risks… Its operations are well-diversified and in fiscal 2019, no single state constituted more than 18 per cent of its overall loan portfolio. As a result, it has been able to reduce its concentration risk and diversify its loan portfolio… The bank offers its customers differentiated and customized products that include micro loans, agriculture and allied loans, MSE loans, financial institutions group loans, personal loans, housing finance and vehicle finance,” it wrote in its IPO note.

ANGEL BROKING

The brokerage has a ‘subscribe’ rating to the stock on the back of healthy financial position.

“Within 3 years of operation, USFB has been able to improve funding mix towards deposit and CASA ratio of 12 per cent. In FY2017, out of total borrowing, only 3 per cent was sourced through term deposit and reached to 76 per cent in Q2FY20. Bank has been maintaining one of the highest provision coverage ratios (67 per cent), which is a positive,” it says.

The brokerage, however, points out at risks emanating from any natural, social, political or regulatory disruption.

GEOJIT FINANCIALS

The analysts at Geojit bank of the SFB’s experience as an erstwhile microfinance institution, coupled with the ability to address mass market customers, which will further aid USFB to be among the leading SFBs in India.

“At the upper price band of Rs 37, USFB is available at P/BV of 2.5x FY19, which is at a significant discount to its peers and we have a ‘SUBSCRIBE’ rating with a long-term perspective,” it said.