Ujjivan Small Finance Bank Ltd

Price Band | 36-37 SUBSCRIBE

November 29, 2019
Ujjivan Small Finance Bank (USFB) is a mass market focused small finance
bank (SFB) in India, catering to the unserved & underserved segment. USFB
promoter, Ujjivan Financial Services Ltd, commenced operations in 2005
and later converted into a small finance bank in February 2017, post
obtaining a license from RBI. Ujjivan SFB offers all banking products on

IPO Review
assets as well as liabilities with focus on lending to micro banking segment.
Particulars
As of September 30, 2019, SFBs’ operations are spread across 24 state and Issue Details
union territories with 552 banking outlets and 441 ATMs. Ujjivan SFB has a Issue Opens 2-Dec-19
diversified portfolio with advances at | 12864 crore, deposit of | 10130 crore.
Issue Closes 4-Dec-19
The bank is serving a huge client base of 49.4 lakh. Asset quality remained
Issue Size | 750 crore
steady with GNPA ratio at 0.85% & NNPA ratio at 0.33%. In terms of
Fresh Issue | 750 crore
performance, PAT was at | 199 crore in FY19 and | 187 crore in H1FY20.
Price Band (|) 36-37
Aggressive growth with shift towards non-MFI segment No of shares on offer (Crore) 20.3
QIB (%) 75
Ujjivan SFB, led by the promoter business, started with a substantial Non-Institutional (%) 15
proportion of MFI loans. However, there has been a continuous focus on Retail (%) 10
increasing share of non-MFI segment via introduction of new products
Minimum lot size ( no of shares) 400
including affordable loans, MSE loans, auto loans. Share of MFI has declined *A discount of ₹ 2 per Equity Share is being
from 97.5% in FY17 to 79.2% in H1FY20. Such a shift into non-MFI book offered to Eligible UFSL Shareholders
provides the required product diversification, which will entail growth as
well enable asset quality management. The MFI loan book growth has been
Shareholding Pattern (%)
healthy with ~22% CAGR over FY17-H1FY20 while in the non-MFI book

ICICI Securities – Retail Equity Research

Pre-Issue Post-Issue
MSE & housing grew at 194% & 173% CAGR in FY17-H1FY20, respectively.
Promoter & Promoter group 94.4 83.3
Strengthen liability franchise, retail base Public/Other 5.6 16.7

In a bid to strengthen its liability base and reduce cost of funds, the bank has Objects of issue
been focusing on garnering deposits, especially retail deposits. Ujjivan SFB Object of issue Amount
has increased its deposit base from | 206 crore in FY17 to | 10130 crore in
H1FY20, comprising ~74.5% of its funding profile. Proportion of retail a) To utilize proceeds to
deposit was at ~41.9% in H1FY20 with CASA at 11.87%. Consequently, its augment capital base b) receive
benefits of listing of equity | 750 crore
cost of funds has reduced from 9.01% in FY17 to 8.43% in H1FY20.
shares on stock exchanges c)
General Corporate Purposes
Key risk and concerns
 Higher dependence on MFI business acts as concentration risk
 Ability to shore up retail & CASA deposit to impact profitability Research Analyst
 Introduction of new products pose risk of NPA Kajal Gandhi
kajal.gandhi@icicisecurities.com
Priced at P/BV of 2.2x (post issue) H1FY20 on upper band
Vishal Narnolia
USFB had a steady ride in terms of advances growth along with maintaining vishal.narnolia@icicisecurities.com
asset quality. There was continued focus on garnering retail liability along
Harsh Shah
with building CASA base. We have a SUBSCRIBE recommendation on the shah.harsh@icicisecurities.com
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.

Key Financial Summary

| crore FY17 FY18 FY19 1HFY20
Net Interest Income 108 861 1106 740
PPP 5 320 309 303
PAT 0 7 199 187
BV 10.0 10.0 11.2 12.8
ABV 10.0 9.7 11.1 12.5
P/E (x) NA 740.0 30.8 30.6
P/BV (x) 3.7 3.7 3.3 2.9
P/ABV 3.7 3.8 3.3 3.0
RoA (%) 0.0 0.1 1.9 2.6
RoE (%) 0.0 0.5 12.3 10.2
 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Company background
Ujjivan Small Finance Bank (Ujjivan SFB) is a mass market focused SFB in
India, catering to unserved & underserved segments with commitment to
build financial inclusion in the country. The promoter of Ujjivan SFB – Ujjivan
Financial Services (UFSL) commenced operations in 2005 and later
converted into a small finance bank in February 2017, post obtaining license
from RBI. Currently, Ujjivan SFB offers all banking products on assets as well
as liabilities with focus on lending to micro banking products including
group and individual loans.
As of September 30, 2019, the bank’s operations are spread across 24 state
and union territories with 552 banking outlets and 441 ATMs. The small
finance bank has a diversified portfolio with advances at | 12864 crore,
deposit base of | 10130 crore. In terms of client base, Ujjivan SFB is serving
a huge base of 49.4 lakh customers. Asset quality has remained steady with
GNPA ratio at 0.85% and NNPA ratio at 0.33%. In terms of performance, PAT
was at | 199 crore in FY19 and | 187 crore in H1FY20.
Exhibit 1: Key Financials
| crore FY17 FY18 FY19 H1FY20
Advances 1,447 7,336 10,552 12,780
Advances Growth (%) 407.1 43.8 21.1
Networth (| crore) 1440.1 1446.9 1619.6 1840.1
Net Interest Income 107.7 861.0 1106.4 740.4
Other Income 6.9 111.5 206.0 175.2
Total Revenue 115 972 1312 916
Cost to Income Ratio (%) 95.3 67.1 76.5 66.9
Credit Cost (%) 0.3 4.2 0.4 0.3
Profit after tax 0 7 199 187
Capital Adequacy Ratio (%) 21.1 23.0 19.0 23.8

Tier 1 (%) 20.4 22.3 18.4 23.1

Gross NPA (| crore) 16 276 98 109

Gross NPA (%) 0.3 3.7 0.9 0.9

Net NPA (| crore) 2 51 28 43
Net NPA (%) 0.0 0.7 0.3 0.3
Return on Asset (%) 0.0 0.1 1.9 2.6
Return on Equity (%) 0.0 0.5 12.3 10.2
Source: RHP, ICICI Direct Research,

ICICI Securities | Retail Research 2

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Investment Rationale
Aggressive growth with shift towards non MFI segment
Ujjivan SFB promoter – Ujjivan Financial Services – has been engaged in the
microfinance business. Hence, the bank started with a substantial proportion
of MFI loans. However, there has been continuous focus on increasing the
share of non-MFI segment through introduction of new products including
affordable loans, MSE loans and auto loans. Consequently, the share of the
MFI book has declined from 97.5% in FY17 to 79.2% in H1FY20. Such a shift
to the non-MFI book provides the bank with the required product
diversification, which is expected to drive growth and enable management
of asset quality. The MFI loan book growth has been healthy with ~22%
CAGR over FY17-H1FY20 while the company’s continuous pursuit to
increase non-MFI book has been evident from CAGR of 194% & 173% in
MSE & housing, respectively, on a lower base in FY17-H1FY20.

Exhibit 2: MFI business concentration still higher Exhibit 3: Affordable housing, MSE to drive future growth
FY17 FY18 FY19 H1FY20 100%
Micro Banking 6224 6998 9355 10191
80%
MSE 56 224 591 835
60%
Housing 99 323 830 1212 98 93 85
Financial Institution 0 0 225 521 40% 79

Personal Loans 0 0 11 51 20%

Others 5 16 37 54 0%
Source: Company, ICICI Direct Research, RHP FY17 FY18 FY19 H1FY20

Micro Banking MSE Housing

Financial Institution Personal Loans Others

Source: Company, ICICI Direct Research, RHP

Strengthening liability franchise, retail base

In a bid to strengthen its liability base and reduce the cost of fund, the bank
has been focusing on garnering deposit, especially retail deposits. In
accordance with this strategy, the small finance bank has increased its
deposit base from | 206 crore in FY17 to | 10130 crore in H1FY20, which
comprises ~74.5% of the funding profile. Among deposits, the proportion
of retail deposit has increased from 3.15% of deposits in FYFY17 to ~41.9%
in H1FY20. Consequently, the bank’s cost of funds has reduced from 9.01%
in FY17 to 8.43% in H1FY20. The CASA ratio as of September 30, 2019 was
at 11.87% (1.57% in FY17).

ICICI Securities | Retail Research 3

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Exhibit 4: Focus on gearing up CASA ratio Exhibit 5: Gradual reduction in reliance on borrowing
100% 7500
6291
80% 6000
4166
60% 4500 3853
96 89 88.0 3470
98
40% 3000

20% 1500
2.0 3.0 10.0 10.0
0% 1.0 1.0 2.0 0
FY17 FY18 FY19 H1FY20 FY17 FY18 FY19 H1FY20

CA SA Term deposit Borrowings

Source: Company, ICICI Direct Research, RHP Source: Company, ICICI Direct Research, RHP

Professional & experienced management

Ujjivan SFB is a professionally managed institution with a senior
management team having a diversified track record in the financial services
industry. The board consists of directors with a diverse mix of experience in
various sectors including the financial services industry and technology.
Nitin Chugh, who will be taking over as MD & CEO with effect from
December 1, 2019, following the retirement of Samit Kumar Ghosh, has
experience working with HDFC Bank, Standard Chartered Bank, HCL Hewlett
Packard and Modi Xerox. Overall, experienced independent directors,
constituting majority of the board, ensures transparency and accountability
of operations.

Continued focus on asset quality

Ujjivan SFB has maintained its asset quality along with sustainable business
growth. As of September 30, 2019, GNPA was at | 109 crore i.e. 0.85% while
NNPA ratio was at | 43 crore or 0.33%. The portfolio at risk has reduced
from | 304 crore in FY18 to | 211 crore in H1FY20 while the provision
coverage ratio was at 71.9% in FY19.
Exhibit 6: Improved asset quality
4 3.65
3.5
3
2.5
(%) 2
1.5
0.92 0.85
1 0.69
0.28 0.26 0.33
0.5 0.03
0
FY17 FY18 FY19 H1FY20

GNPA (%) NNPA (%)

Source: Company, ICICI Direct Research, RHP

ICICI Securities | Retail Research 4

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Key risks and concerns

Higher dependence on MFI business acts as concentration risk
As of September 30, 2019, ~79.2% of gross advances (97.5% in FY17) are
towards the micro banking business with GNPA at 0.71%. Therefore, the
financial performance significantly depends on micro banking business and
its whereabouts. In turn, this depends on various factors, including the
ability of borrowers to repay. Further, adverse economic, natural and
political circumstances will affect the financial performance and asset quality
of the business.

Ability to shore up retail & CASA deposit to impact profitability

As of September 30, 2019, retail deposits constitute ~41.9% of deposits with
CASA ratio at ~11.87%. The bank is focusing on raising its deposit base,
especially from retail clients. Ability to raise the retail deposit base and
especially low cost deposit would impact its profitability and financial
performance.

Introduction of new products pose risk of NPA

Ujjivan SFB has introduced several new products and services, such as
personal loans, vehicle, agriculture loans, MSE loans and affordable housing
loans. With limited experience in offering new products, capturing growth
opportunities along with managing its cost structure remains a key risk. In
addition, asset quality experience in new product offering would remain a
risk. Therefore, inability to effectively manage any of these issues could
materially and adversely affect business and impact the future financial
performance and/or cash flows.

ICICI Securities | Retail Research 5

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Financial Summary
Exhibit 7: Profit & Loss Statement
| crore FY17 FY18 FY19 H1FY20
Interest Income 217 1468 1832 1260
Interest Expense 109 607 725 519
Net Interst Income 108 861 1106 740
Other Income 7 111 206 175
Total Income 115 972 1312 916
Operating Expense 109 653 1003 613
Employee Cost 46 360 519 337
Other Operating expense 63 292 485 276
Operating Profit 5 320 309 303
Provisions 4 311 41 44
Profit Before Tax 1 9 268 259
Tax 1 2 69 72
PAT 0.03 7 199 187
EPS 0.0 0.05 1.2 1.2
Source: ICICI Direct Research; RHP

Exhibit 8: Balance Sheet

| crore FY17 FY18 FY19 H1FY20
Liability & Equity
Equity Share Capital 1440 1440 1440 1440
Prefrence Share 200 200 200 200
Reserves 0.04 7 180 400
Borrowing 6291 3853 4166 3470
Other fiancial liability 298 201 377 468
Deposit 206 3773 7379 10130

Total Liability & Equity 8436 9473 13742 16108

Asset
Cash & Bank Balance 763 495 1094 709
Advances 1447 7336 10552 12780
Investment 5861 1232 1527 2018
Fixed Asset 140 198 284 296
Other Asset 226 211 284 304
Total Asset 8436 9473 13742 16108
Source: ICICI Direct Research; RHP

ICICI Securities | Retail Research 6

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

Exhibit 9: Key Ratios

FY17 FY18 FY19 H1FY20
Valuations
No of equity shares 144.0 144.0 144.0 144.0
Weighted Avg no of shares 34.5 144.0 144.0 144.0
EPS (|) 0.00 0.05 1.20 1.21
BV (|) 10.0 10.0 11.2 12.8
ABV (|) 10.0 9.7 11.1 12.5
P/E (x) NA 740.0 30.8 30.6
P/BV (x) 3.7 3.7 3.3 2.9
P/ABV (x) 3.7 3.8 3.3 3.0
Yields & Margins (%)
Net interest Margin 8.4 10.3 10.9 10.6
Yield on Loans 18.7 19.7 18.7 19.9
Cost of Fund 10.0 9.0 8.3 8.4
Quality & Efficiency (%)
Cost to Income ratio 95.3 67.1 76.5 66.9
GNPA 0.28 3.65 0.92 0.85
NNPA 0.03 0.69 0.26 0.33
ROA 0.00 0.08 1.88 2.56
ROE 0.00 0.47 12.30 10.17
Source: ICICI Direct Research, RHP

ICICI Securities | Retail Research 7

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to
companies that are coming out with their initial public offerings and then categorises them as Subscribe, Subscribe
for the long term and Avoid.

Subscribe: Apply for the IPO

Avoid: Do not apply for the IPO
Subscribe only for long term: Apply for the IPO only from a long term investment perspective

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities | Retail Research 8

 IPO Review | Ujjivan Small Finance Bank Ltd ICICI Direct Research

ANALYST CERTIFICATION
I/We, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above
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ICICI Securities | Retail Research 9