Nirmal Bank said Ujjivan Small Finance Bank was being offered at trailing P/ABV of 2.1x on post diluted basis leaving good scope for appreciation and thus it recommended subscribing to the issue.
The Rs 750-crore IPO of Ujjivan Small Finance Bank, the subsidiary of listed microfinance lender Ujjivan Financial Services, has subscribed 165.68 times on the final day of bidding December 4.
The strong response from all categories of investors continued as the issue received bids for 2,053.8 crore shares against the offer size of 12.39 crore shares, the exchange data showed.
The issue has seen highest subscription since January 2018 and received bids for around Rs 76,000 crore worth of shares.
This is the sixth public issue where the retail demand remained strong in double digits. The portion set aside for retail investors, which is generally 10 percent of the total issue size, has subscribed 49.09 times.
The reserved category of qualified institutional buyers saw the subscription of 110.72 times and that of non-institutional investors 473 times.
The shares worth Rs 75 crore are also reserved for shareholders of Ujjivan Financial Services in the Ujjivan Small Finance Bank IPO, and that portion, too, has oversubscribed by 4.14 times.
The shareholders of Ujjivan Financial Services will get shares at a discount of Rs 2 per share to the final issue price.
At the upper end of the price band of Rs 36-37, the IPO is priced at 2.1 times post issue FY20 book value and 17.1 times post issue FY20 EPS (annualized), said Anand Rathi which remained optimistic on Ujjivan SFB, considering several positive factors such as continued growth in advances, improving asset quality, sound capital position and diversified geographic footprint.
As such, the brokerage recommended subscribing to this IPO.
The IPO of Ujjivan SFB comes primarily as an effort by the management to meet with the listing norms of the Reserve Bank of India (RBI) that calls for listing a small finance bank within three years of the launch of operations.
Also, the RBI norms require the promoter UFSL to reduce its stake in Ujjivan SFB to 40 percent within a period of five years (i.e. by January 2022) from the date of commencement of business operations and, thereafter, further reduce its stake to 30 percent and 26 percent within a period of 10 years (i.e. by January 2027) and 12 years (i.e. by January 2029) respectively. Notably, after the IPO, the promoter's stake will reduce to about 84 percent from its current 94.4 percent.
"Ujjivan is a play on the MFI growth story. So far, it has effectively managed to grow assets with decent asset quality profile. However, going forward trajectory of business model will change with buildup of non-MFI loans and ramp of retail liabilities which shall be an uphill task for the new management in the wake of tough competition in the market space," Anusha Raheja, BFSI Research Analyst at LKP Securities told Moneycontrol.
"Also, the bank will have to reduce down the promoter stake further to 40 percent over the next 2 years as per RBI guidelines which will be a hangover in the medium term. In this backdrop, in our view, the bank is not likely to trade at higher multiples," she said, adding that the back of the envelope calculation suggests the bank was trading at 1.6x FY22e.
Given reasonable valuations, she recommended subscribing to the issue.
Nirmal Bank said Ujjivan Small Finance Bank was being offered at trailing P/ABV of 2.1x on post diluted basis leaving good scope for appreciation, and, thus, it recommended subscribing to the issue.
According to the brokerage, the recent acceleration in AUM growth is likely to sustain with USFB now focusing on new secured product offerings like MSE and affordable housing over MFI, which have relatively lower yields but also lower cross-cycle credit costs.
The replacement of high-cost debt with low-cost retail deposits, combined with a moderation in cost/income, is likely to negate the impact of decline in yields as the portfolio mix shifts towards secured products, Nirmal Bank said, adding credit costs are expected to remain stable and well below 100 bps.
The brokerage expects the first half of FY20 return on asset/return on equity of 2.5 percent/19.6 percent to sustain going ahead.
With presence across 24 states and union territories, Ujjivan SFB offers a diverse range of products including loans to micro banking customers (group loans and individual loans), agriculture and allied loans, micro & small enterprise (MSE) loans, affordable housing loans, financial institutions group loans, personal loans, and vehicle loans. As of September 2019, company served 4.94 million customers and operated 552 banking outlets and had a network of 441 ATMs.
Reflecting solid growth, the company's gross advances grew from Rs 6,383.9 crore in FY17 to Rs 12,863.6 crore as of September 2019.
Driven by decent loan growth, the net interest income increased 28.5 percent YoY to Rs 1,106.4 crore in FY19 while the net interest margin improved to 10.93 percent from 10.31 percent in the previous year.On November 29, Ujjivan Small Finance Bank raised Rs 303.75 crore from 18 anchor investors including the Government of Singapore, the Monetary Authority of Singapore, CX Partners Fund, Aberdeen, HDFC Life Insurance Company, Bajaj Allianz Life Insurance Company, Sundaram Mutual Fund, Goldman Sachs India, ICICI Prudential etc.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.