Ujjivan Finance Bank IPO: Strong fundamentals make Ujjivan Bank IPO a good bet

ET Intelligence Group: Ujjivan Small Finance Bank (USFB) plans to raise Rs 750 crore through an initial public offering (IPO) of fresh equity shares to augment its tier I capital. Apart from having a strong presence in the country’s microfinance sector, the bank has started focusing on the retail loan segment. Given its high asset quality, diversified loan book across regions, strong management team, and reasonable valuation, investors may consider the IPO.

BUSINESS
After receiving the small finance bank licence from the RBI in 2015, USFB commenced operations in February 2017. With 552 banking offices, 441 ATMs, 16,776 employees, it caters to 49 lakh customers across 24 states and union territories. Of the total loan book of Rs 12,864 crore as of September 2019, 79 per cent belonged to micro banking or small-ticket loans typically given to microfinance borrowers. The proportion has reduced from 97.5 per cent in March 2017 due to rising business from other segments including affordable housing and micro and small enterprises.

The bank has been consciously growing the micro banking segment at a moderate annual rate of 23 per cent between FY17 and FY19 compared with 40-45 per cent growth for some of the other microfinance companies. The strategy is helping to curb exposure to risky assets. To diversify the loan book further, it has recently started financing two- and threewheeler purchases.

Metros and urban areas constitute two-thirds of the bank’s advances while 20 per cent is distributed in semi-urban areas. This leaves the bank’s exposure to rural areas to just over 5 per cent thereby shielding it from vagaries of monsoon and bouts of loan waivers.

FINANCIALS
The loan book has doubled between March 2017 and September 2019 while deposits improved to Rs 10,130 crore from Rs 210 crore during the period. The share of current and savings account (CASA) deposits, which are a low cost funding option, improved to 11.9 per cent from 1.6 per cent by similar comparison. The gross non-performing assets (GNPA) were 0.9 per cent of the advances in September 2019. Total income was Rs 1,430 crore and net profit was Rs 187 crore in the six months to September 2019.

USFB’s cost-income ratio at 67 per cent is higher than 56.6 per cent for the larger peer AU Small Finance Bank (AUSFB). As USFB’s CASA share improves and the recent investments in new territories and new loan segments become profitable, the management expects the ratio to reduce.

VALUATION
The IPO is valued at a price-book (P/B) multiple of 2.5 considering the issue proceeds and Rs 250 crore of equity that USFB raised two weeks ago. This compares with AUSFB’s P/B of around seven. USFB has managed asset quality better with higher provisioning and it also has higher return ratios. This makes the IPO suitable for long-term investors seeking exposure to the small banking segment.