It was Black Friday for stocks of Equitas Holdings and Ujjivan Financial Services, which hit an all-time low (since their listing in 2016) before closing the day with a loss of 23.3 per cent and 17.6 per cent, respectively, on the BSE.
Friday’s fall follows the Reserve Bank of India (RBI) reiterating that the two companies will need to list their small finance banks (SFB) in three years from the start of operations. Analysts say that the RBI maintaining its tough stand on listing the SFB business came as a surprise, given that the holding company structure was created to address a key requirement of the SFB guideline of having a promoter. Experts say RBI’s stickiness to the rulebook explains Friday’s stock price erosion.
Investors are worried as there is little clarity now on how the current shareholders of the listed holding companies will be allotted shares in the SFB, or whether the holding company structure could be collapsed (or merged) with the SFB after the five-year lock-in period of the holding companies, by when promoters will have to bring down their holding to 40 per cent levels. These are important considerations as dual listing of the holding company and SFB could be value depletive for investors. “Dividends to the holding company shareholders would be subject to dividend distribution tax, which is a permanent loss of value for SFB shareholders,” say analysts at Kotak Institutional Equities.
Meanwhile, the Street also has its reservations over the listing of SFBs and these largely stem from neither Ujjivan nor Equitas so far being able to convincingly demonstrate expansion into an SFB. Between the two, however, Equitas has covered some ground, albeit at a cost.
For instance, Equitas has diversified its book, reducing its dependence on the microfinance (MFI) business from over 50 per cent two years ago to 27 per cent in the June 2018 quarter (Q1). Small business lending, vehicle and property loans have become key lending areas for the financier, but at the cost of profitability and asset quality. However, net interest margin (NIM) has shrunk from 12 per cent two years ago to 7.2 per cent in Q1FY19 and gross non-performing assets (NPA) ratio is up from 1.4 per cent to 2.8 per cent in this period, though it has sharply recovered from the demonetisation-hit quarters.
Ujjivan, though, continues to draw 83 per cent of asset support from its MFI business, which is aiding NIM at 11.6 per cent. However, from near-negligible loan loss, the gross NPA ratio now stands at 2.7 per cent. Ujjivan’s sub-five per cent CASA ratio also prompts analysts to question if the lender has done justice to its SFB license. “The need to diversify will force Ujjivan to go slow in its most profitable segment — microfinance. Also, the liquidity in the system isn’t exactly benign and garnering deposits may not be as simple as opening branches,” Digant Haria of Antique Stock Broking warns.
Therefore, analysts caution that replicating the initial success of 2016 (in terms of stock returns) when Equitas and Ujjivan listed could be tough in 2019 and 2020 when their SFBs go to market. “From now till the run-up to IPO will be critical for shaping their non-microfinance business. If they demonstrate their ability to expand this well, their (SFB) IPO could receive good participation,” says Rohan Mandora of Equirus Capital.
In this backdrop, till clarity emerges on regulatory fronts and the two companies diversify their loan books in a healthy way, it may not be rewarding for the shareholders.