About the Company

Ujjivan Small Finance Bank Limited is a mass-market focused bank in India, catering to financially unserved and underserved segments and committed to building financial inclusion in the country.  Their Promoter, Ujjivan Financial Services Limited (UFSL) commenced operations as an NBFC in 2005 with the mission to provide a full range of financial services to the ‘economically active poor’ who were not adequately served by financial institutions.  On 7, October 2015, UFSL received RBI In-Principle Approval to set up a Small Finance Bank(SFB), following which it incorporated Ujjivan Small Finance Bank Limited as a wholly-owned subsidiary. UFSL, subsequent to obtaining RBI Final Approval on November 11, 2016, to establish and carry on business as an SFB, transferred its business undertaking comprising of its lending and financing business to the Bank, which commenced its operations from 1, February 2017. Ujjivan Small Finance Bank has a diversified portfolio with branches spread across 24 states and union and a customer base of 4.9 million as of September 30, 2019.

Q4 FY20 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 809.7 602.2 34.46% 781.3 3.63% 3025.8 2037.6 48.50%
PBT 93.7 72.2 29.78% 113.5 -17.44% 466.2 268.4 73.70%
PAT 73.2 63.8 14.73% 89.7 -18.39% 349.9 199.2 75.65%

Detailed Results

    1. The company had a stellar quarter with more than a 35% growth in YoY revenues. FY20 revenues were up 48.5% YoY showcasing a good year for the bank.
    2. The profits for the company rose 15% YoY while PBT growth was also 30% YoY in Q4. These figures were subdued because of the increased provision made of Rs 96.88 Cr in Q4.
    3. The company made disbursements of Rs 3254 Cr in the current quarter vs Rs 3728 Cr last year.
    4. The gross loan portfolio has risen to Rs 14153 Cr registering a YoY growth of 28%.
    5. Secured loans now constitute 22% of all loans as compared to 14% a year ago.
    6. GNPA in Q4 was at 1% while NNPA was at 0.2%. An additional write-off of Rs 19.2 Cr was taken in Q4. COVID-19 provisioning was at Rs 70 Cr.
    7. Deposits were up 46% YoY to reach Rs 10780 Cr covering 76% of total loans vs 67% a year ago.
    8. Retail deposits are now at 44% of total deposits vs 37% a year ago. CASA has improved to 14% vs 11% a year ago. CASA was up 86% YoY.
    9. Net Interest Income rose 46% YoY.
    10. Net interest margin declined slightly to 11.2% in Q4FY20 vs 10.8% a year ago.
    11. Cost to income ratio was reduced to 65% from 78% a year ago.
    12. ROA and ROE for the company rose to 1.6% (vs 2% a year ago) and 9.3% (vs 14.2% a year ago) in Q4.
    13. ROA and ROE for the company rose to 2.2% (vs 1.7% a year ago) and 13.9% (vs 11.5% a year ago) in FY20.
    14. The company maintained an LCR of 261%. CRAR improved to 28.8% vs 18.9% a year ago.
    15. The number of customers rose to 52.5 lakh from 46.1 lakh a year ago.
    16. The top 3 states Tamil Nadu, Karnataka, and West Bengal account for 44.9% of total advances.
    17. Group loans constitute 65.8% of all advances and have grown 10.3% YoY.
    18. The average ticket size in group loans is at Rs 35440.
    19. The company PCR for Q4 was at 80%.
    20. The average cost of funds has gone down to 7.9%.
    21. Book value per share was at Rs 17.3 per share.

Investor Conference Call Highlights

  1. The bank has offered moratorium to almost 70% of its customers.
  2. Around 60% of the bank’s branches are fully operational at present.
  3. The bank has gotten a reaffirmed credit rating of A1+.
  4. Around 50% or more of the customer set for the company is engaged in essential services like groceries, dairy, etc.
  5. The management has stated that there isn’t any issue arising from the exodus of migrant labour as most of the bank’s customers are women borrowers. The bank has a policy to only lend to people who have stayed at the same residence for at least 5 years which does not allow any floating population in the customer set.
  6. Around 91% of the bank’s customers are in allied Agri or dairy business which has not seen any drop in demand due to COVID-19.
  7. The bank has been able to take some funds at low cost from SIDBI under the Atmanirbhar package from the Indian Government and the management expects the overall cost of funds to go down due to this.
  8. The management expects demand for credit to remain steady especially in rural regions mainly on the back of expectations of normal monsoons.
  9. The management sees a good opportunity to reduce customer acquisition costs using digital techniques.
  10. The basis for arriving at Rs 70 Cr of COVID-19 provisioning was that it represents 2.5% of the bank’s portfolio.
  11. The management has stated that around 90% of the overall portfolio is under moratorium with 99% in micro banking, 70% in MSE & housing, and 60% in personal loans.
  12. The management maintained that the bank did not see any premature withdrawal of deposits due to the Yes bank moratorium event.
  13. The total CASA for the bank is at Rs 1459 Cr with savings at Rs 1230 Cr and current at Rs 229 Cr. Around 44% of deposits are retail and the rest are wholesale.
  14. The concentration of top 10 customers is at 17-18% of the portfolio at the bank level.
  15. From the survey done on the bank’s customer set, the bank found out that only 4% of customers said that it will take 3-6 months for them to recover from the COVID-19 impact. The rest 96% did indeed report some reduction in income but their work seems secure at the moment.
  16. In the FIG book, less than 40% of value has been under moratorium as reported by the management.
  17. Around 40-44% of the total book falls in the red zone while 16% falls in the green zone. The rest of the book falls in the orange zone.
  18. The management believes that a large portion of the business will continue to come from repeat businesses and a large portion of repeat business can be done in a contactless manner which can lead to cost savings.
  19. The management has stated that the company has an adequate amount of workforce currently and thus it didn’t see any need add to current headcount since December. The efficiencies going forward are expected to come from implementing new technologies and contactless lending.
  20. The bank has put on hold its plan for branch expansion and is expected to revisit it after Q2 this year.
  21. The management has stated that there will definitely be a need for top-up and other kinds of emergency loans and the bank will definitely be ready with it. Collections are largely expected to improve as compared to April but to what extent exactly remains debatable until everything opens up.
  22. The bank is not seeing any adverse change in customer behaviour due to the moratorium. The management believes that there aren’t any wilful defaulters here in the customer set that the bank has. In the MSE & housing loan space, the bank has LTV of 40% and thus it has more than adequate collateral to cover defaults and even provide emergency loans to customers in this division.
  23. As things open up, the management has stated that the bank shall focus on repayment and extending credit to good customers.
  24. The management has stated that misc income is what the banks get for banking operations and cards and AMC income. Most of these are through digital transactions and thus as digital transactions for the bank is rising so is misc income.

Analyst’s View

Ujjivan Small Finance Bank has been one of the top players in the SFB industry. It is the biggest and most diversified company in this sector in terms of geographical reach. The company has done well to deliver a good performance in Q4 after its bumper listing. But despite all the good performance, the bank is staring at an impending dip in performance due to the disruption caused by COVID-19 in the upcoming quarter. The bank is doing well in keeping track of its customer base and keeping in touch with them and collecting relevant survey data to identify how the customer is being affected by COVID-19. It is a good sign that the bank is now looking to focus on transforming its operations to a more contactless mechanism using digital techniques and concentrating on repeat business from customers with a good operational and repayment history. It remains to be seen what is the exact extent that the MFI sector has been damaged by COVID-19 and what issues will this industry face going forward. Nonetheless, given the bank’s industry position, its wide geographical reach, and its rising digital transactions, Ujjivan Small Finance Bank is a pivotal Small Finance Bank stock to watch for, particularly given its current valuation of under 2 times book value.


 

 

 

Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 781.31 510.87 52.94% 729.36 7.12% 2216.17 1435.34 54.40%
PBT 144.01 72.86 97.65% 141.39 1.85% 446.64 224.44 99.00%
PAT 89.66 45.31 97.88% 92.63 -3.21% 276.77 135.44 104.35%

Detailed Results

    1. The company had a stellar quarter with more than 53% growth in YoY revenues.
    2. The profits for the company rose in line with revenues to grow more than 98% YoY while PBT growth was also 98% YoY in Q3.
    3. The company made disbursements of Rs 3403 Cr in the current quarter which was up 18% YoY.
    4. The gross loan portfolio has risen to Rs 13617 Cr registering a YoY growth of 46%.
    5. Secured loans now constitute 21% of all loans as compared to 16% a year ago.
    6. GNPA in Q3 was at 0.9% while NNPA was at 0.3%. An additional write-off of Rs 12 Cr was taken in Q3.
    7. Deposits rose 98% YoY to reach Rs 10656 Cr covering 78% of total loans vs 58% a year ago.
    8. Retail deposits are now at 43% of total deposits vs 36% a year ago. CASA was improved to 12% vs 10% a year ago.
    9. Net Interest Income rose 52% YoY.
    10. Net interest margin declined slightly to 10.9% in Q3FY20 vs 11% a year ago.
    11. Cost to income ratio was reduced to 71.3% from 77.8% a year ago.
    12. ROA and ROE for the company rose to 2.1% (vs 1.7% a year ago) and 14% (vs 10.4% a year ago).
    13. The top 3 states Tamil Nadu, Karnataka, and West Bengal account for 45.5% of total advances.
    14. Group loans constitute 67.6% of all advances and have grown 25.2% YoY.
    15. The average ticket size in group loans is at Rs 35086.
    16. The company PCR for Q2 was at 60%.
    17. The average cost of funds has gone down to 8.1%.
    18. The company maintained a CRAR of 27.5% in Q2.

Investor Conference Call Highlights

  1. The management has admitted that it had seen signs of overheating in the microfinance sector in north Assam and thus the company had slowed down its activities and were only servicing existing customers in the region in the quarter.
  2. The non-microfinance book is now 22% of total advances mainly driven by affordable housing loans.
  3. The company added digital savings and digital fixed deposits in the quarter and has received a good response in these products.
  4. In the vehicle loan business, the company wants to focus on the mass market and most in 2-3 wheelers with special focus on electric 3 wheelers.
  5. The management has guided that the company is targeting 75-80% of advances to be funded by deposits and to bring CASA up to 25% from current levels of 12% in the next 2-3 years.
  6. The company also hopes to bring the cost to income ratio down to 70% by the end of FY20.
  7. The company is running a pilot for the abovementioned electric 3 wheeler loans and the company sees good demand for this product.
  8. The collection efficiency in Assam has been 99% in the quarter.
  9. The company will stay focused on building small and granular CASA and reduce account concentration despite doing so will cause the CASA build-up to slow.
  10. The company is running many initiatives and scaling up of businesses. For example, the company is looking to leverage digital capabilities to reduce customer onboarding costs, etc.
  11. The management has mentioned that it does not see any signs of the overheating contagion spreading to neighbouring states from Assam.
  12. The management has mentioned that the company will aim to calibrate its growth slowly and not expand aggressively from now on as the company has done in the past 2 years.
  13. The rough plan for the future is for the company to use digital transaction data of its individual customers and recommend other products (cross-selling) based on their transactional behaviour. But this is a long term plan and the company needs a lot bigger transactional behavior database to be able to optimize this service mechanism.
  14. The company is actively trying and expanding into those segment clusters only that the management feels to be currently unaffected by market trends and avoid segments that have been hit hard like the auto sector.
  15. The company is maintaining a cautious stance in Karnataka and maintain a tighter control on acquiring new customers and keep an eye on signs of overheating.

Analyst’s View

Ujjivan Small Finance Bank has been one of the top players in the SFB industry. It is the biggest company in this sector in terms of geographical reach. The company has done well to deliver a good performance in Q3 after its bumper listing. Despite all the growth momentum on its side, the management remains cautious and have been proactive in handling signs of industry overheating like the one that happened recently in Assam. The management has also indicated that the company will now be pursuing a more moderate pace of growth and expansion as compared to the recent past. It remains to be seen whether the company will be able to maintain the same growth momentum despite slowing down its expansion plans in the near future. Nonetheless, given the company’s geographical reach and stellar performance in the past, Ujjivan SFB remains one of the top choices for investors interested in the themes of microfinance and micro-banking. Valuation is stretched for sure at more than 5 times FY19 book value. An investor looking to invest must carefully weigh the growth opportunity vis-a-vis the risks attached to the sector.

 

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