After strong debut by Equities, another microfinance firm Ujjivan Financial Services Limited (UFSL or Ujjivan) is coming out with an IPO. Ujjivan has also received a small finance bank licence, and has to bring down its foreign investor holding to below 49% before starting operations in line with RBI stipulations. It is both a mix of fresh issue and sale by existing shareholders. Ujjivan offers loans for small and micro businesses, education, house renovation and for emergency purposes. Ujjivan provides collateral free, small ticket-size loans to economically active women.
IPO Size : Ujjivan is raising approx Rs 883 crore. Out of this 358 crore are through issue of fresh shares . Existing shareholders are offering 2.5 crore shares to raise Rs 525 crore. Earlier the company had raised Rs 265 crore from anchor investors at the upper price band of Rs 210.
Issue Price : Rs. 207 – 210
Issue Date : Thursday, April 28, 2016 – Monday, May 2, 2016
Lead Managers : Kotak Mahindra Capital, Axis Capital, ICICI Securities and IIFL Holdings
About the Company
Business : Ujjivan is a micro finance company based at Bangaluru and was founded in 2005 with the mission of providing a full range of financial services to the economically active poor who are not adequately served by financial institutions. Ujjivan offers loans for small and micro businesses, education, house renovation and other emergency purposes. It’s business is primarily based on the joint liability group lending model for providing collateral free, small ticket-size loans to economically active women. Ujjivan operates in 24 states through 470 branches. Ujjivan has also received in principle approval from RBI to set up a small finance bank and the company expects to start its banking operations from April 1, 2017.
Promoters & Venture Funds : Samit Ghosh, is founder and managing director of Ujjivan Financial Service. . As of 31 March 2015, foreign investors owned 88.69% in Ujjivan. At present they own hold about 77% in the company. Hose selling their shares thru IPO include international Finance Corp., impact investment funds Elevar, India Financial Inclusion Fund, Dutch development finance institution FMO, Sarva Capital, Women’s World Banking Capital Partners, Wolfensohn Capital Partners and Mauritius Unitus Corp.
Ujjivan raised fresh capital to the tune of Rs.292 crore in a pre-IPO round in Feb 2016 and firms such as HDFC Standard Life Insurance Co. Ltd, Shriram Life Insurance Co. Ltd, Bajaj Allianz General Insurance Co. Ltd, Kotak Mahindra Old Mutual Life Insurance Co. Ltd and mutual fund Sundaram Asset Management Co. Ltd invested in this round with HDFC Standard Life investing of Rs.75 crore. Shares were allocated to investors at Rs.205 apiece, resulting in a price-to-book value multiple of 2.1 times at that point of time.
Financials : Income has grown at 40% CAGR. Its income and net profit for the first nine months of FY16 were Rs 729.6 crore ( 611 cr for FY15) and Rs 122.3 crore(78 cr for FY15) It EPS on an equity of 86.2 cr stood at 14.2 . Its net interest margins have been in the range of 11.3% and 13.8% over the past few years and return on assets in the range of 2.5- 3.6%. OPM has been improving from 54.3 % in FY2013 to 67.7% for 9m FY16.
Its ROE has increased to 19.1% in the first nine months of FY16. The debt to equity in the period was 4.3% and its gross NPA was 0.15% which is very low. The NIMs and return ratios may come under pressure when it converts to a SFB. On a post issue basis, the IPO is priced at approx 1.8 times the FY16 estimated book value which is reasonable.
Market, Prospects & Comparison: UFSL(Ujjivan) is the third largest NBFC in microfinance sector in the country in terms of loans disbursed as of period ending September 30, 2015 and for the period ending Dec 31, 2015 its AUM (Assets under management) stood at Rs. 4,589 crore
Plus Points : This is second issue after Equitas in recent times from a well established company in MFI sector. The other listed company SKS microfinance has been doing well and recently listed Equitas made a strong debut and has sustained interest of investors.
- Margins may be affected as it makes transition to a small Bank.
- Regulatory framework for SLB may impose restrict its growth & flexibility.
Overall Assessment :
- UFSL(Ujjivan) is the third largest NBFC in microfinance sector in the country in terms of loans disbursed as of period ending September 30, 2015.
- Its AUM (Assets under management) are well diversified in all four regions of the country i.e. east, west, north , south
- has been a pioneering company & worked closely with RBI to develop ‘Diksha’, a financial literacy program
- Appears to have a professional and experienced management, and good corporate governance
- Ujjivan has been a steady performer with good financials. Operating Profit Margins has been improving from 54.3 % in FY2013 to 67.7% for 9m FY16.
- Ujjivan enjoys a higher average return on equity was 19.1 per cent, which is approx 13 per cent in the case of Equitas. Ujjivan derives a larger part of its disbursals (88 %) from the group lending which is a core MFI activity which has a higher return. For Equitas the group lending activity contributions stands below 55%.
- Market leader SKS microfinance (though not a license holder for SFB Small Finance Bank) has shown good performance & has issuedoptimistic guidance for the coming year.
- As per MD Samit Ghosh , a renowned & respected figure in the industry, Return on equity for Ujjivan is likely to fall for 2 years post IPO & shall recover there on. The flexibility shown by the company & margins could come under pressure due to policy framework as its makes a transition to a SFB.
- The Govt regulations regarding 49% stake ceiling for FIIs may have s created an early opportunity for retail investors.
- The company made a pre IPO round raising approx 300 crore in Feb 2016 at a price of Rs. 205/- which saw good response from insurance companies & mutual funds & HDFC standard Life invested Rs. 75 crore.
- On a post issue basis, the IPO is priced at approx 1.8 times the FY16 estimated book value which is reasonable.
- Overall appears to be a decent IPO.
Disclosure :- I am not a research analyst . Please take advise from your financial advisor before investing