Ujjivan Small Finance Bank IPO oversubscribed by 4.9 times, retail response remains strong

Ujjivan Small Finance Bank reserved Rs 75 crore worth of shares portion for shareholders of its parent company Ujjivan Financial Services which subscribed 1.87 times.

The IPO consists of fresh issue of Rs 750 crore. The public issue will close for subscription on December 4.

Here are 10 things to know before subscribing to the issue

Ujjivan is a mass market focused SFB in India, catering to unserved and underserved segments, and is committed to building financial inclusion in the country.

"At the upper end of the price band of Rs 37, the issue is valued at a P/BV of 2.9x (post issue: 2.25x) is at a premium, but it is a robust play in small finance bank segment," said Ajcon Global which advised subscribing to the issue.

The brokerage believes the premium is justified owing to the following factors: a) deep understanding of mass market serving unserved and underserved segments, b) customer centric organization with multiple delivery channels, c) pan – India presence, d) technology-driven operating model with advanced digital platform, e) robust risk-management framework, f) strong record of financial performance, g) CAR ratio of 18.8 percent which is above regulatory requirements, g) expanding CASA in overall deposits, h) controlled credit cost with declining NPAs and PCR of 65.1 percent and i) decent return on equity of 10.2 percent.

Should you subscribe to Ujjivan Small Finance Bank?

USFB is doing an IPO to meet the RBI regulation which requires the SFB to list within a period of three years. Currently, the holding promoter company UFSL is listed which will have 83.3 percent stake in USFB post IPO.
As per RBI guidelines, the promoter is required to reduce its shareholding in SFB to 40 percent within a period of five years from the date of commencement (February 1, 2017 for USFB) of business operations.

"This could act as an overhang on the stock. However, once the IPO process is completed, USFB will consult the RBI on the reverse merger process which if approved, will act as a positive trigger. These events outcome are likely to have significant bearing on stock price in the medium term," Aditya Birla Capital said.

The bank has been delivering strong growth in recent times with steady shift in the business model from micro-banking to a diversified SFB. Deposits have been growing at a strong pace, led by retail deposits and CASA.

"With this capital raise, the company will be more-than-adequately capitalised for growth. Besides, the company earns healthy return ratios with RoA of around 2.5 percent and return on equity of around 19 percent. At a higher price band of Rs 37, the stock is attractively priced at 2.2x P/ABV post-considering the fresh capital infusion. This leaves enough room for stock appreciation," said Aditya Birla Capital which recommended investors to subscribe to the issue for listing gains.