Ujjivan is the third largest micro finance company based on AUM and the largest
in terms of geographical reach in India with 470 branches across 24 states. It is
one of the 10 NBFC which were granted the in principle approval for setting up
Small Finance Bank.
Transition to Small Finance Bank to be smooth and offer scalability: The
proposed small finance bank will have access to low cost funds, ie below the
current 11.8% rate via deposits. However, there will be initial expenses while
transitioning to be a SFB as new processes will have to be implemented along
with maintenance of CRR and SLR. Meeting 75% Priority Sector Lending (PSL)
target will not be a challenge for Ujjivan as its entire portfolio qualifies for PSL
and hence the migration from NBFC to SFB should be smooth. With leverage of
only 5.3x, we believe there is enough scalability without further dilutions.
Huge scope in the Micro Finance business, reflected in the strong AUM CAGR:
Ujjivan’s AUM has reported a CAGR of 59% over FY2013-9MFY2016 to
Rs4,589cr. There is a huge untapped opportunity in this segment as microfinance
is targeted to the lower income segment which often lacks access to formal
financing sources. With a loan portfolio of ~Rs43,300cr the Micro Finance industry
is expected to report 30% CAGR over next 3-4 years and Ujjivan with a pan India
presence will be able to encash on the opportunity.
Geographically diversified AUM with historically low NPAs: Ujjivan is present
across 24 states and has successfully diversified its AUM and no single states
contributes >20% of its AUM which reduces the concentration risk . Top 4 states
Karnataka, West Bengal, Maharashtra and Tamil Nadu accounts for 56% of the
AUM; this makes a key differentiating point for Ujjivan, as other MFIs are largely
focused on the southern states of India. Though largely the company lends in joint
lending system to women, it also offers individual loans which accounted for
~10% of the AUM. Individual loans could see strong growth going ahead.
Improving Cost/ Income Ratio: The company has been able to reduce its Cost
structure over the past few years and C/I ratio has come down to ~52% in
9mFY16 vs 60% in FY15.However,as the company migrates to a small finance
bank the cost structure might spike up again. However we believe new avenues of
lending should help in maintaining the ratio the long run.
Outlook Valuation: At the upper band of the offer price Rs210 the issue is priced at
1.8x its diluted BV of `118 (pre-dilution 2.1x). The company has decent ROE and
ROA of 19.9% and 3.6%. Though post conversion to a SFB the return ratios might
be compressed, while we expect the same to scale up subsequently. We believe
the issue is attractively priced looking at the growth options the company offers in
the long run. We recommend SUBSCRIBE to the issue.

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