Ujjivan Small Finance Bank IPO: Here’s All You Need To Know

Ujjivan Small Finance Bank launched its three-day initial public offering today as its parent looks to comply with the Reserve Bank of India's licensing and listing norms.

The small finance bank, according to its red herring prospectus, aims to raise nearly Rs 750 crore by issuing 20.27-20.83 crore new shares at a price band of Rs 36-37 apiece. The bank—which is the lending arm of Ujjivan Financial Services Ltd.—has already sold 7.14 crore shares for Rs 250 crore in a pre-IPO placement.

The lender's market valuation, according to BloombergQuint's calculations, after the IPO would be around Rs 6,242-6,394 crore.

“The promoter shareholding will come down to 85 percent post the issue,” Samit Ghosh, managing director and chief executive officer of Ujjivan Small Finance Bank, had told BloombergQuint in an interview last week.

WATCH | Samit Ghosh on the Ujjivan Small Finance Bank IPO

The bank has to pare its promoter shareholding to 40 percent within five years of operations—by February 2022—to comply with RBI norms. Ghosh said they would take this up with the central bank. “We want to consider a reverse merger route; if it (RBI) doesn't approve the reverse merger, we have the option of going for an offer for sale.”

Kotak Mahindra Bank, IIFL Securities and JM Financial are the bankers to the Ujjivan Small Finance Bank IPO.

About Ujjivan Small Finance Bank

The mass-market small finance bank caters to unserved and underserved segments, and is present in 24 states and union territories, with 552 banking outlets and 441 automated teller machines.

Its assets comprise lending to micro-banking customers, including group loans and individual loans, agriculture and allied loans, micro and small enterprise loans, affordable housing loans and personal loans, among others. On the liability side, it offers savings accounts, current accounts and a variety of deposit accounts.

The bank started as a microfinance lender but has diversified by entering the non-microfinance business.

Ujjivan Small Finance Bank has also focused on building up its liability franchise, which helped it reduce its cost of funds from 9.01 percent in 2016-17 to 8.43 percent in the first half of 2019-20. Among deposits, the proportion of its retail deposit segment has increased from 3.15 percent in FY17 to 41.9 percent in H1FY20. The CASA (current and savings account) ratio as on Sept. 30 was at 11.87 percent compared with 1.57 percent in FY17.

Key Risks, Concerns

According to brokerages Geojit Financial Services, ICICI Direct and IndiaNivesh, the following are the key risks and concerns for Ujjivan Small Finance Bank:

• Higher dependence on microfinance business acts as concentration risk.
• Ability to shore up retail and CASA deposit to impact profitability.
• Introduction of new products pose risk of turning non-performing assets.
• Bank has disclosed in its red herring prospectus some of the red flags raised by RBI regarding risk management as well as product offerings. Such operational risks if not redressed could attract regulatory sanctions on business.
• Competition from other small finance banks, non-bank lenders and co-operative banks.

Should You Subscribe?

With the IPO, Ujjivan Financial Services is transitioning from a microfinance company to a small finance bank, IndiaNivesh said in a note, while recommending a ‘Subscribe' rating to the issue. The brokerage said the lender's strategy is to further diversify its offerings within retail and MSE (medium and small enterprise) segments, which it has identified as key areas of growth. The bank will have to deliver significantly better return on assets for the stock to generate upside, it said.

GEPL Capital said that at a price-to-book ratio of 2.66x as of September, Ujjivan Small Finance Bank IPO is reasonably priced and provides a good opportunity for long-term rewards on investments.

ICICI Direct, while recommending a ‘Subscribe' rating to the issue, said the bank has seen a steady rise in terms of advances while maintaining asset quality. At the IPO price band of Rs 36-37, the stock is available at a price-to-book value of around 2.2x (post issue) at the upper band on H1FY20 basis, it said.