Ujjivan Financial Services Ltd. April 30, 2018 PCG... · Favourable Factors like a shortage in...

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Ujjivan Financial Services Ltd.

PICK OF THE WEEK

April 30, 2018

(Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) FY17 FY18E FY19E FY20E

NII 1,958 1,981 -1% 1,646 19% 7,131 7,942 10,149 12,361

PPOP 754 1,211 -38% 702 7% 3,969 2,769 3,960 5,225

PAT 293 439 -33% -120 NM 2,077 -134 2,014 2,565

ROAE (%) 18.3 -0.2 10.9 12.4

ROAA (%) 2.92 -0.15 1.9 1.96

P/ABV (x) 2.8 2.8 2.5 2.2

P/E (x) 17.9 N.A. 24.3 19.0

Recommendation

Buy Between Rs. 408-380

Target

Rs. 458-508

Time Horizon

4 Quarters

Industry

Banking & Fin.

CMP

Rs. 405

Incorporated in 2004, listed on 2016, Ujjivan Financial Services (UFS) has emerged as India’s third-largest

microfinance institution in terms of AUM after Bharat Financial and Equitas. In February 2017, it got licence for

Small Finance Banks competing with other 72 Players. Company has presence across 24 States through 445

Branches. It has Assets Under Management (AUM) of Rs 7100 Cr and serves around 37 lakh Customers. Apart

from Micro Finance Company now offers products like Housing Finance, SME Finance and also retail individual

loans.

Ujjivan is currently trading at P/ABV of 2.5x of FY19E and 2.2x of FY20E which we believe has room for significant

upside potential. We recommend Ujjivan Financial Services as a BUY in the range of Rs. 408 to 380 for successive

Target of Rs. 458 (P/ABV 2.5x FY20E) and 508 (P/ABV 2.8x FY20E).

Investment Rationale:

Huge Industry Opportunities

Out of Demonetization Blues

Change of Borrowing Mix for Superior Margin

Strong Business Growth in New Segments

Conversion of Branch into Bank Branch

Financial Summary:

FUNDAMENTAL ANALYST –

Nisha Shankhala

[email protected]

HDFC Scrip Code UJJFIN

BSE Code 539874

NSE Code UJJIVAN

Bloomberg UJJIVAN

CMP as on 27 Apr18 405

Equity Capital (Rs Cr) 120.9

Face Value (Rs) 10

Equity O/S (Cr) 12.09

Market Cap (Rs Cr) 4,898

Book Value (Rs) 145

Avg. 52 Week Vol 1877447

52 Week High 423

52 Week Low 285

Shareholding Pattern (%)

Promoters -

Institutions 56.4

Non Institutions 43.6

PCG Risk

Rating* Yellow

* Refer Rating explanation

mailto:[email protected]

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PICK OF THE WEEK

April 30, 2018

Business Background:

Incorporated in 2004 and listed on bourses in May 2016, Ujjivan Financial Services (UFS) has emerged

as India’s third-largest microfinance institution in terms of AUM after Bharat Financial and Equitas. In

February 2017, it got licence for Small Finance Banks competing with other 72 Players.

Company has presence across 24 States through 445 Branches. It has Assets Under Management (AUM)

of Rs 7100 Cr and serves around 37 lakh Customers.

To meet RBI requisite of “Promoter should at least hold 40% in Bank”, Company has set Ujjivan SFB, a full‐fledged bank branch network by opting for the “Holding Company Structure” and transferred entire operational business undertaking comprising of the assets and liabilities to “Ujjivan Small Finance Bank” through one‐time sale. Post formation of Ujjivan SFB, Ujjivan Financial Services Ltd., the Holding Company stands registered with the RBI as a NBFC‐Core Investment Company, providing support and funding as a holding company.

KEY HIGHLIGHTS

Incorporated in 2004, Ujjivan

Financial Services has emerged as

India’s 3rd largest microfinance

institution. In February 2017, it

got licence for Small Finance

Banks.

Company has presence across 24

States through 445 Branches. It

has AUM of Rs 7100 Cr and serves

around 37 lakh Customers.

Indian MFI provides huge scope

to grow their portfolio by covering

areas that are least penetrated

and where unorganised players

predominate.

Ujjivan is now out of

demonetization blues and

Management has guided for asset

quality improvement from

hereon.

The company is already

witnessing a strong rebound in

disbursement which is above the

pre‐demonetisation levels now.

Conversion of Branch into Bank

Branch will speed up and cost

ratio to improve going ahead.

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PICK OF THE WEEK

April 30, 2018

Investment Rationale:

Industry Opportunities

The gross loan portfolio of MFIs have posted 51% CAGR during FY13-17. Still, there is huge scope for MFIs to grow their portfolio by covering

areas that are least penetrated and where unorganised players predominate. CRISIL Research expects the MFI loan portfolio growth to be at

around 16-18% annually in the next two years and this growth will be support by growth in both client base and Average ticket size.

Company’s Non-MFI segments like MSE and Housing Finance also have immense opportunities.

Favourable Factors like a shortage in housing infra, Government’s Push for affordable housing, urbanization, rising income and a higher

standard of living shows growth prospectus for housing finance companies. Credit growth cycle of the country has also started growing upward

and that shows MSE’s Loan demand is picking up.

Out of Demonetization Blues

Demonetization was a Nightmare for Indian Micro Finance Companies because majority of the transaction were happing through cash and

Ujjivan with 95% of Micro Finance Loan book did go through bed time. Drastic drop in collection efficiency, degrowth in disbursement and

higher provision leads to loss for the company.

Post Demonetization Company has increased cashless disbursement and collection through Jan-Dhan accounts strategy. Now Majority of the

provisioning has been done, collection efficiency has reached at above 99.7% and disbursement growth has pick up.

Management has guided for asset quality improvement from hereon. The company is already witnessing a strong rebound in disbursement

which is above the pre‐demonetisation levels now.

Change of Borrowing Mix to spur superior margin

Ujjivan used to depend on Banks and Capital market for the borrowing before it got licence for small banking. But now, after getting licence,

the loan mix can stand diversified. High cost borrowing can be replaced with refinancing from various apex lending institutions including RBI,

MUDRA and NABARD going forward. And also keeping SFB status in mind it can mobilize deposits from Retail and Institutions.

The bank as a strategy is replacing high cost borrowing with institutional. During the quarter, it repaid Rs 4.6bn of high cost loans. In Q3

FY18 Bulk deposits increased by Rs 9.6bn QoQ to resulting in deposits contributing 34.6% of total borrowings.

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PICK OF THE WEEK

April 30, 2018

As of Q3FY18, bank has only 11% of retail deposit in the mix. To improve this status the bank has put up distinct product offerings/services

in place which stand favourable for the niche customer segment. Notable ones, like no minimum balance and zero minimum deposit charges

in the savings account, competitive FD/RDs rates at 8.0‐8.5%, ATMs with biometrics, extensive use of technology, loan disbursals through

only Ujjivan SFB bank etc. All these effort will lead to low cost borrowing which in turn will help in maintaining superior margin.

Strong Business Growth in New Segments

Ujjivan is gradually diversifying its loan book. The share of Non-MFI has improved to 5.5% from 4.3% in 2QFY18, with contributions from

Housing and MSE products.

Since the starting of diversification in Q3FY17 the loan book of Non-MFI has increased at an excellent pace. MSE’s Loan book has grown from

Rs. 14.5 cr to now Rs. 163.3 Cr and Hosing Finance Loan book has grew Rs. 72.4 cr to Rs. 228 cr.

Management has guided that it will maintain Focus on Micro Lending While Expanding Further into SME and Housing Finance. It has given

AUM growth guidance of around 19-20%, with the share of MSE and Housing increasing from the current levels.

Conversion of Branch into Bank Branch

Ujjivan Small Finance Bank (SFB) had commenced operations in Feb-17. Currently, it has 121 bank branches. Of the total 445 asset branches,

188 will be converted into SFB branches (offering both assets and liabilities) in FY18. Remaining 67 bank branches would be rolled out in

4QFY18.

Main Focus will be on Converting Branches into SFB Branches

Source: Company, HDFC sec Research

299 301 350

423 469 457 457 457 457

15

188

280

400

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Branches Bank Branch

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PICK OF THE WEEK

April 30, 2018

View & Valuation:

Indian MFI provides huge scope to grow their portfolio by covering areas that are least penetrated and where unorganized players

predominate.

Ujjivan is now out of demonetization blues and Management has guided for asset quality improvement from hereon.

The company is already witnessing a strong rebound in disbursement which is above the pre‐demonetization levels now.

Conversion of Branch into Bank Branch will speed up and cost ratio to improve going ahead.

Other Non MFI business like MSE loans and Housing Finance are growing at an excellent pace.

Ujjivan is well capitalized to embark upon this tremendous growth opportunities.

Ujjivan is currently trading at P/ABV of 2.5x of FY19E and 2.2x of FY20E which we believe has room for significant upside potential. We

recommend Ujjivan Financial Services as a BUY in the range of Rs. 408 to 380 for successive Target of Rs. 458 (P/ABV 2.5x FY20E) and 508

(P/ABV 2.8x FY20E).

Risk & Concerns:

Political intervention risk: As the customer segment comprises the lower income strata, political intervention is a key risk.

Low key personnel stake: At present, no shareholder is classified under the promoter group.

Maintaining Asset Quality: Being in Micro Finance business maintain Asset Quality is always a key. After recent Demonetization

disruption company has now managed to stabilize asset quality. Adequate provisioning has been done and collection efficiency has

reached 99%.

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PICK OF THE WEEK

April 30, 2018

NII to witness 25% CAGR in FY18E-20E


0

20

40

60

80

100

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY16 FY17 FY18E FY19E FY20E

NII (Rs. mn) Growth%

Ujjivan will again turn PAT positive from FY19E


(500)

-

500

1,000

1,500

2,000

2,500


AUM Growth Likely to Improve Gradually


0

10

20

30

40

50

60

70

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

FY16 FY17 FY18 FY19 FY20

AUM (Rs. mn) Growth%

AUM Mix of Ujjivan Financial


Microfinance Group Loans85%

MSE2%

Housing3%

Micro Individual

Loan10%

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PICK OF THE WEEK

April 30, 2018

Return Ratios


-5

0

5

10

15

20


RoAA (%) ROAE (%)

Change of Borrowing Mix will improve margin


11.1 10.5 8.8 9.1 8.9

20.1 18.4

15.9 15.6 15.4

11.4 10.1 9.3 8.8 8.5

FY16 FY17 FY18 FY19 FY20

NIM (%) Yield on Funds (%) Cost of Funds (%)

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PICK OF THE WEEK

April 30, 2018

Income Statement

(Rs mn) FY16 FY17 FY18E FY19E FY20E

Interest Earned 9,453 12,558 14,336 17,458 21,332

Interest Expended 4,235 5,427 6,395 7,309 8,971

Net Interest Income 5,218 7,131 7,942 10,149 12,361

Other Income 823 1,418 1,393 1,557 1,785

Total Income 6,041 8,549 9,335 11,706 14,145

Total Operating Exp 3,068 4,581 6,566 7,747 8,921

PPOP 2,973 3,969 2,769 3,960 5,225

Provisions & Contingencies 253 751 2,921 880 1,303

PBT 2,720 3,217 (153) 3,079 3,922

Provision for Tax 948 1,141 (18) 1,065 1,357

PAT 1,772 2,077 (134) 2,014 2,565


Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E

SOURCES OF FUNDS

Share capital 1,012 1,194 1,206 1,206 1,206

Reserves and surplus 10,966 16,359 16,246 18,193 20,624

Shareholders' funds 11,978 17,553 17,452 19,399 21,829

Total Borrowings 43,380 62,914 47,000 54,400 60,160

Deposit + CASA - 1,064 26,575 39,040 56,640

Other Liabilities, provisions 1,915 3,255 3,774 4,793 6,039

Total 57,273 84,786 94,800 117,631 144,668

APPLICATION OF FUNDS

Advances 50,644 58,712 68,611 87,136 109,792

Investments 1 14,468 16,221 19,666 24,583

Cash including with RBI 4,913 7,601 6,990 7,475 8,176

Fixed assets 242 1,398 1,630 1,585 1,548

Other Assets 1,473 2,616 1,348 1,768 569

Total assets 57,273 84,794 94,800 117,631 144,668

AUM 53,886 63,795 76,235 96,818 121,991


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PICK OF THE WEEK

April 30, 2018

Key Ratios


VALUATION RATIOS

EPS 17.5 22.6 (0.3) 16.7 21.3

BVPS 118.4 147.0 144.7 160.9 181.0

RoAA (%) (on total assets) 3.65 2.92 (0.15) 1.90 1.96

ROAE (%) 18.3 18.3 (0.2) 10.9 12.4

P/E (x) 23.1 17.9 N.A. 24.3 19.0

P/ABV (x) 3.4 2.8 2.8 2.5 2.2

Dividend Yield (%) 0.1 0.1 0.1 0.1 0.3

PROFITABILITY

Yield on Funds (%) 20.1 18.4 15.9 15.6 15.3

Cost of Funds (%) 11.4 10.1 9.3 8.8 8.5

Spread (%) 8.7 8.3 6.6 6.9 6.8

Core Spreads (%) 10.3 11.7 11.1 11.1 10.7

NIM (%) 11.1 10.5 8.8 9.1 8.9

OPERATING EFFICIENCY

Cost/Avg. AUM Ratio (%) 7.1 7.4 9.2 9.0 8.2

Cost-Income Ratio (%) 50.8 53.6 70.3 66.2 63.1

BALANCE SHEET STRUCTURE RATIOS

AUM Growth (%) 64.6 18.4 19.5 27.0 26.0

Loan Growth (%) 57.3 15.9 16.9 27.0 26.0

Borrowing Growth (%) 39.0 45.0 (25.3) 15.7 10.6

Equity/Assets (%) 20.9 20.7 18.4 16.5 15.1

Equity/Loans (%) 23.7 29.9 25.4 22.3 19.9

CAR (%) 18.2 18.2 18.5 16.7 15.4


FY16 FY17 FY18E FY19E FY20E ASSET QUALITY

Gross NPLs (Rsm) 78 164 1,527 1,518 1,349

Net NPLs (Rsm) 20 18 288 283 175

Gross NPLs (%) 0.2 0.3 2.2 1.7 1.2

Net NPLs (%) 0.0 0.0 0.4 0.3 0.2

Coverage Ratio (%) 73.8 89.3 80.8 81.1 86.9

Provision/Avg. AUM (%) 0.6 1.3 4.2 1.0 1.2


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PICK OF THE WEEK

April 30, 2018

Rating Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15%

& IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 20% OR

MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS






FRUCTFIES PRICE CAN RISE BY 35% OR

MORE

RED HIGH RISK - HIGH RETURN STOCKS







OR MORE

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PICK OF THE WEEK

April 30, 2018

250

270

290

310

330

350

370

390

410

430

Close Price

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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PICK OF THE WEEK

April 30, 2018

Disclosure: I, Nisha Sankhala, MBA, 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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. Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or her relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

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