Know Your IPO

HERE IS WHY

Ujjivan has approximately 11.15% market share by AUM (Assets under Management)

Individual lending currently 12% of the revenue has huge potential on the back of Mortgage Finance

On the financial front, revenue and profit has increased at CAGR of more than 40% over last 5 year

Structurally more aligned to envelope Small Finance Bank (SFB) structure.

Ujjivan Financial services has approximately 11.15% market share by AUM (Rs.4589 crore as of Dec 2015) and has reach in 209 districts across India. The company has been growing its individual lending portfolio at the CAGR rate of approx. 173%. Currently, individual loan portfolio constitutes 12% of the assets under management (AUM) vs 4% in FY13; and the largest share of the pie comes from Group lending. As an SFB, the company would be required to continue to fish out opportunities in group lending that can be converted to Individual lending. Within individual lending, we see lot of scope for company to expand in the housing finance section. Mortgage finance is projected to be a Rs. 40 trillion market by 2022 and the penetration is expected to increase to 14% of GDP vs. 9%. Currently, for Ujjivan, 15% of Group Lending customers use Group Loans (ticket size up to Rs. 50,000) for housing or related activities.

Going by financials, Ujjivan increased the total income at the CAGR of 40.6% to Rs 611.9 crore in FY15; while net profit has increased by CAGR of 59.5% to Rs 75.7 crore. The net interest margin was 11.6% in FY15. The company due to the use of technology has been able to reduce the cost to income ratio to 61.79% in 9MFY16 from 78.15% in FY13. The P/B currently is 2.23x and post issue will be in the levels of 1.7x to 1.5x. We believe the company with its strong management will be able to increase revenues and hence pricing is in commensurate with the growth potential. The NPA’s for the company, with increase in portfolio size, have increased to the current peer level average of 0.15% from 0.08% in FY13, but still are contained. Also, we see that the exposure to Andhra Pradesh is minimum, the geography where the MFIs have always faced higher NPAs. Company has good penetration across India and has the correct regional mix.

Going by organisational structure, the company is already operating in a hub and spoke manner by having two-tiered management hierarchy comprising of a National Leadership Team (“NLT”) providing overall direction to the business; and four Regional Leadership Teams (“RLT”) responsible for taking on-ground operational decisions. We believe having sound management practices will be crucial so that growth can be accommodated in a structured manner. The management has strong experience to ride on the growth and the risk management systems, which are well placed, will definitely help it to deliver better operational performance.

With industry with is growing at the rate of 30-34% CAGR and with Ujjivan having the leading market share, we believe the scope for growth is high. To top it, government initiatives like Mudra bank will support Ujjivan in getting finance for funding its lending portfolio. Also, transformation for Ujjivan to SFB should be easier. SFBs are required to maintain a minimum of 25% of their branches at all times in unbanked rural centres. The company already has 37% branches in the central, east and north east regions of India, where a majority of the under-banked districts are located. Looking at the strong growth potential and strong management, we believe subscribers can not only cash on the listing gains but also from long term returns.