Ujjivan may see a strong growth of 45-50% in FY17: Antique Stock

About Rs 160-161 would be right for Equitas Holdings, he said.

SKS Microfinance is trading at a premium to both Equitas and Ujjivan. SKS stands out from the microfinance pack, because of its diversified businesses, he said.Below is the verbatim transcript of Digant Haria’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: It was a superb net interest income (NII) growth, 70 percent higher and profits as well doing exceptionally well. Is this the kind of run rate we can expect from Ujjivan Financial Services?A: The FY16 performance was based on it as a pure play microfinance company. Going next year, it will be more of a small bank because they convert into a small bank at the end of this FY17. So numbers may not be so strong because they have decided to invest around Rs 300 crore in their technology infrastructure to convert themselves into a bank. FY17, we should again see a strong growth close to 45-50 percent.However, FY18-19 onwards even the growth should taper down because it transitions itself into a bank. When anyone does that, there is a lot of regulatory and compliance issues also which the company has to deal with. So, these numbers may continue for another three-four quarters and then we should see a slight -- not subdued but still a little lower base.Sonia: When the initial public offering (IPO) was launched, the stock was trading at a price to book value of around 1.6 times. At that time it was much cheaper than the likes of Equitas Holdings or even SKS Microfinance but now things are lot different after the big run up that we have seen. Now how are the valuations stacked up versus its peers?A: After this run-up, I was on your channel at that day of launch and at that time the listing was not so great. We were of the opinion that Equitas and Ujjivan both are strong companies in their own might and they should trade at around similar valuations. That gap is bridged today. So as per our calculations the stock trades at 2 times on FY17 price to book, so that is post money price to book.Valuation now is coming into a reasonable territory and these stocks, both these small banks Ujjivan and Equitas should trade between 2 and 2.5 times of price to book. So, that is our opinion on the stock. The kind of growth profile they have the kind of opportunities they have, so despite the challenges which they will face as a small banks 2 to 2.50 is the reasonable range which we at Antique Stock Broking look at for this stock.Latha: What will that mean in terms of a price?A: Two times for Ujjivan is right now and if I say 2.5 times the best case for Ujjivan is around Rs 350-360. So, that is where we see the near-term upside for that stock.Latha: That is still a 25 percent gain. How would Equitas compare now? Will it also have more legs to run?A: Equitas has already enjoyed a little bit of premium compared to Ujjivan just because of it having a better banking structure because it is already diversified in terms of products. It has commercial vehicles and housing finance and micro, small and medium enterprises (MSME) business. So, to that extent Equitas has already enjoyed premium. So, I don’t see why Equitas should just run off.Equitas still trades at 2.4 times price to book on FY17 and Ujjivan trades at 2 times. So, there is still a good 15 percent gap in terms of price to book valuations between Equitas and Ujjivan.Ujjivan still has a little more leg to go and may be Equitas may not have it because I think 2.5 so we think Rs 160-170 is somewhat of a fair range for the next 12 months for Equitas.Sonia: It has already hit Rs 160, as you speak the stock Equitas is up 5.5 percent and at about Rs 155. Both these stocks are still much cheaper than SKS Microfinance, which is at about 4.5 times so your view on that?A: There is a very subtle difference between SKS Microfinance and Equitas and Ujjivan. SKS has two-three distinctions to itself like being the lowest cost lender, being the most cost efficient lender. So, SKS does return on equity (ROE) of around 25 percent. Theoretically, the book value of SKS is growing by 25 percent.For Ujjivan and Equitas it is just going to grow by say 10-12 percent for the next two to three years. If you look on and say FY19 or an FY20 basis SKS, Equitas and Ujjivan all of them trade under 2 times. So, SKS has a much better earnings trajectory, much better operating profile, so I would think SKS definitely stands out among the entire microfinance small bank pack.So, SKS should definitely enjoy some premium. I would not equate these two guys to SKS. So, SKS would always trade at a higher multiple compared to these guys.However, for these guys I think 2.5 is a reasonable kind of valuations, which we will look at considering the return on asset (ROA) profile they will have after converting to a bank.