Ujjivan Small Finance Bank IPO opens today: Should you subscribe?

They cited the bank's steady growth in advances and improvement in asset quality performance with higher provisioning and continued focus on increasing retail base.

"USFB had a steady ride in terms of advances growth along with maintaining asset quality. There was a continued focus on garnering retail liability along with building CASA base. We have a subscribe recommendation on the stock. Further, at the IPO price band of Rs 36-37, the stock is available at a P/BV of around 2.2x (post issue) at the upper band on the first half of FY20 basis," said ICICI Direct.

At the end of September 2019, Ujjivan SFB has a diversified portfolio with advances at Rs 12,864 crore (compared to Rs 6,384 crore in 2017), deposit of Rs 10,130 crore. Apart from having a strong presence in the country’s microfinance sector; the bank has started focusing on the retail loan segment.

USFB is involved in (i) loans to micro banking customers, (ii) agriculture & allied loans, (iii) MSE loans, (iv) Affordable housing loans, (v) financial institutions group loans, (vi) Personal loans, and (vii) vehicle loans.

Geojit Securities said the ability of SFBs to take deposits gave them an edge of having a lower cost of funds compared to that of NBFCs and MFIs. The loan book of SFBs is expected to grow by 23-25 percent CAGR over FY19-21 and deposit base is expected to increase by around 70 percent in the same period, according to the brokerage.

The experience of UFSL as an erstwhile microfinance institution, coupled with the ability to address mass-market customers will further aid USFB to be among the leading SFBs in India, it said, adding at the upper price band of Rs 37, USFB is available at P/BV of 2.5x FY19, which is at a significant discount to its peers and it has a subscribe' rating with a long-term perspective.

The CASA to total deposit ratio for the bank is also improving at 11.87 percent for September 2019. To attract retail customers and increase CASA deposits, new products and marketing campaigns are expected to come up, said Rudra Shares and Stock Brokers which recommended to subscribe the issue for long-term as well as listing gains, considering asset quality, growth in advances & deposits, expansions plans and corporate governance.

The management has started to expand ATM and ACR network. Moreover, to increase advances & deposits, the focus is on converting existing asset centres to banking outlets and selectively operationalises additional banking outlets.

The bank is serving a huge client base of 49.4 lakh. It is the 3rd largest SFB in AUM terms commencing operations in February 2017.

Asset quality remained steady with lowest gross non-performing assets (NPA) ratio among small finance banks at 0.85 percent and net NPA ratio at 0.33 percent. In terms of performance, PAT was at Rs 199 crore in FY19 and Rs 187 crore in the first half of FY20.

Mehta Equities believes Ujjivan SFB provides good scope of growth as well as a favourable investment opportunity for investors as it accounts for 15 percent of the industry AUM as of FY19.

At Rs 37, Ujjivan SFB commands a market cap of Rs 6,394 crore and on valuation parse it trades at 2.5x P/BV multiples considering the issue proceeds and Rs 250 crore of equity that Ujjivan raised two weeks ago which seems optimistically priced when compared to listed small bank peers which are trading around 7 times the book, the brokerage said.

Hence it believes USFB has well-managed asset quality with higher provisioning resulting in higher return ratios comforting investors to invest at the offer price. Considering all rationales it recommended investors to 'subscribe' to the IPO offer and feels investors can expect healthy returns on investment on a short to medium-term basis.

Hem Securities also said that the bank’s pan India presence along with strong asset quality & second-highest provision coverage ratio among the small finance banks in India, as of March 31, 2019, depicts strength in the fundamentals of the bank. Hence it recommended subscribe the issue for listing gain as well as long-term investment.

USFB is a mass-market focused small finance bank (SFB) in India, catering to the unserved & underserved segment. USFB promoter, Ujjivan Financial Services Ltd, commenced operations in 2005 and later converted into a small finance bank in February 2017, post obtaining a license from RBI. Ujjivan SFB offers all banking products on assets as well as liabilities with focus on lending to micro banking segment.

It has wide presence across 24 states and union territories in India. USFB follows the integrated lending approach where it considers technology infrastructure and back-end support functioning before lending. As of September-end 2019, SFB's operations are spread across 24 state and union territories with 552 banking outlets and 441 ATMs.

The company's strength lies in its diversified pan-India presence and investment in technology to drive operations, Chola Securities said, adding investors can consider investment for short to medium term, as the bank’s presence geographically is well diversified and the company can scale down cost-efficiently through the use of technology.

Apart from above-mentioned reasons, experienced management, attractive valuations also prompted brokerages to give subscribe rating to the issue.

"At the upper end of the price band, USFB is valued at 2.8x its Q2FY2020 book value (Pre-IPO) and on post dilution basis at 2.3x of BV, which we believe is attractive considering similar businesses are trading at higher valuations," Angel Broking said.

"Moreover, experienced management, Pan-India presence, and pristine asset quality provides comfort. We recommend a subscribe to the issue," the brokerage added.

The bank proposed to be listed on BSE and NSE, to meet the RBI guidelines.

This would be 12th company launching mainboard IPO in the current financial year 2019-20.

The Rs 750-crore issue includes a reservation of Rs 75 crore worth of shares for subscription by eligible shareholders of Ujjivan Financial Services. They will get shares at a discount of Rs 2 per share.

Kotak Mahindra Capital Company, IIFL Securities and JM Financial are the book running lead managers to the issue.

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