Ujjivan IPO opens tomorrow; Dalal Street gung-ho on the issue, finds it attractive

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NEW DELHI: After Equitas Holdings, another microfinance company with small finance bank license, Ujjivan Financial Services, is ready to hit the market with its initial public offering (IPO) on Thursday.

Up to 35 per cent of the Rs 880 crore issue (at upper end of the price band) is reserved for retail investors.

Many brokerages have recommended ‘subscribe’ rating to the issue, saying theIPO valuation looks reasonable and the company has the potential to deliver strong growth and return on assets even after its conversion into a small finance bank.

Here’s all you need to know about the issue:

The issue will comprise 4,20,23,618 equity shares with a face value of Rs 10 each. This includes fresh issue of 1,70,55,286 equity shares and an OFS of 2,49,68,332 equity shares (amounting to Rs 358 crore). Bidding will be made in a lot of 70 equity shares and in multiples thereof.

Qualified intuitional buyers (QIBs) will be allowed to bid for not more than 50 per cent of the issue size. High networth individuals can bid for up to 15 per cent of the issue size.

The public offering will conclude on May 2.

The company has no presence in Andhra Pradesh and Telangana.

Rating agency CRISIL expects the asset under management (AUM) of non-Andhra Pradesh MFIs to compound by 30-34 per cent annually against 29-31 per cent rise in MFIs, including those in AP over FY15-18.

Brokerages pointed out that Karnataka, West Bengal, Maharashtra and Tamil Nadu contribute over half of the company’s total AUM.

“During 2011 and 2015, Ujjivan has been able to clock 35 per cent CAGR in net interest income (NII) and the NIM (net interest margins) came down from 17 per cent in 2011 to more stable levels of 12-13 per cent off late. The management has shown operational improvement with a decline in operational costs as a percentage of AUM from 17.5 per cent in 2011 to 8.5 per cent in FY15. This resulted in strong PAT growth from Rs 12 crore in 2011 to Rs 76 crore in 2015,” Ashika Stock Broking said in a note.

Given the fundamentals and price band, many brokerages have issued ‘subscribe’ rating on the issue.

Antique Stock broking in a note said the IPO valuations at 1.6 times post money book are reasonable, especially considering the fact that it can deliver strong growth and RoAs in excess of 2 per cent, even after conversion to a small bank.

GEPL Capital, another brokerage, has recommended a buy rating on the issue, saying: “The company has managed operational risks by implementing best practices such as a risk and control self-assessment programme to monitor high-risk areas across all departments and key risk indicator programmes for monitoring critical industry-specific risks such as high staff turnover and cash handling.”

Mehta Equities believes Ujjivan is well-placed to tap the untapped opportunities as it has a sound management team with extensive experience in the banking and financial services space.

“Valuations per se are comforting us when compared with other listing players,” it said.

Ashika Stock Broking said at the upper end of the price band at Rs 210, the issue is priced at a PB of 1.6 times post issue BV and appears to be attractive compared with listed players such as Equitas Holdings (2.44 times), SKS Microfinance (6.2 times 9MFY16) and Cholamandalam Investment and Finance (3.17 times 9MFY16).

The MFI has over 2.77 million active customers through 470 branches and 7,862 employees in 24 states and 209 districts through the country, making the company the largest MFI in terms of geographical spread. Of its 469 branches, 27 per cent are in east India, 19 per cent in North India and 10 per cent in Central India. The company has 38 per cent semi-urban base, 34 per cent urban and 28 per cent rural base.

“We advise long-term investors to subscribe to the issue for listing gains,” said Dalal & Broacha Stock Broking.

“Going forward, Ujjivan’s reach and experience in the MFI segment can be important factors in building a diversified book in the underserved small ticket size borrowers segment not actively targeted by most banks. Being SFB it will be regulated by RBI directly thereby reducing Political risks,” the brokering house said.

Among the concerns, experts point out that the transition to a small bank will raise regulatory costs such as maintenance of CRR, SLR and other provisioning norms starting March 2017 and also operating costs such as manpower, branch setup and technology upgradation), which will hurt ROEs and ROAs under pressure for the next two-three years. Net interest margin (NIMs) can decline from the current level of 11 per cent to 8 per cent over time, Antique Broking said.