Ujjivan Financial Services Limited.

25-Apr-16
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Ridhi Mehta
ridhimehta@rathi.com

Issue Details

Company Description

Issue Details
Issue Size (Value in crs.)
Fresh Issue (No. of Shares in crs.)

Ujjivan Financial Services Limited (Ujjivan) originally incorporated in

December 2004 commenced their operations as an NBFC in 2005 with the
mission of providing a full range of financial services to the economically
active poor who are not adequately served by financial institutions.

Rs. 875.01 882.50

1.70-1.73

Offer for Sale (No. of Shares in crs.)

Bid/Issue opens on
Bid/Issue closes on
Face Value
Price Band
Minimum Lot

2.50
28th April, 2016
02nd May, 2016
Rs. 10
Rs. 207-210
70 equity shares

The companys business is primarily based on the joint liability group-lending

model for providing collateral free, small ticket size loans to economically
active women. The company also offers individual loans to Micro & Small
Enterprises (MSEs). Companys products can be classified under two broad
categories, namely, Group Loans and Individual Loans. Depending upon the
end use, these products can be further sub-divided into Agricultural,
Education, Home Improvement, Home Purchase and Livestock Loans.

Objects of the Issue

Fresh Issue: (a). To receive the benefits of listing of the Equity Shares on
the Exchanges;
(b). Utilize the Net Proceeds from the Fresh Issue towards
augmenting its capital base to meet future
Capital requirements.
(c). General corporate purposes.
OFS: company will not receive any funds from Offer for sale.

In addition to loan products, they also provide non-credit offerings

comprising of life insurance products, in partnership with insurance
providers such as Bajaj Allianz Life Insurance Co., Kotak Mahindra Life
Insurance Co. and HDFC Life Insurance Co.
As of December 31, 2015, Ujjivan has operations spread across 24 states and
union territories, and 209 districts across India, making them the largest MFI
in terms of geographical spread. As of December 31, 2015, they served over
2.77 million active customers through 470 branches and 7,786 employees and
their Gross AUM stands at Rs.40.88 billion. Further, as of September 30, 2015,
Ujjivan has approximately 11.15% of market share of the NBFC-MFI business
in India, making them one of the leading providers of microfinance in India.
Ujjivan has received in-principle approval from the RBI to set up a Small
Finance Bank (SFB).

Book Running Lead Manager

Axis Capital Limited
Kotak Mahindra Capital Company Limited
IIFL Holdings Limited
ICICI Securities Limited
Registrar to the Offer
Karvy Computershare Private Limited

Business Highlights

Leading MFI with a deep pan-India presence
Ujjivan is the third largest NBFC-MFI in India in terms of loans disbursed as of
December 31, 2015, the Gross AUM for the North, South, East and West
regions was Rs.987.19 Crores, Rs.1,423.60 Crores, Rs.1,344.43 Crores and
Rs.834.16 Crores. As of December 31, 2015, approximately 29%, 37% and
34% of their total customers comprise of rural, semi-urban and urban
customers, respectively.

Capital Structure (in Cr)

Authorised share Capital
Subscribed paid up Capital
Fresh Issue
Offer for Sale
Paid up capital after the offer

Aggregate Value
125.00
101.19
358.10
516.9-524.4
459.29

Share Holding Pattern %

Promoters & Promoter group
Public

Pre Issue Post Issue

0.00
0.00
100.00
100.00

Total

100.00

As of September 30, 2015, they were the largest MFI in India in terms of
geographical spread across states, with a pan-India presence across 24 states
and union territories in India. As of December 31, 2015, they have 470
branches across 24 states and union territories and 209 districts in India.

100.00

Financials
Particulars (Rs. In Cr)
Total revenue
Total Expenditure
EBIDT (Excl OI)
Other Income
EBIDT
Interest
Depreciation
Exceptional Item
PBT
Tax
PAT
EPS

For Private Circulation Only

9M FY16
713.2
230.5
482.7
16.4
499.1
305.6
5.9
187.6
65.4
122.2
13.3

FY15
599.3
219.2
380.1
12.6
392.7
271.4
6.7
114.6
38.7
75.9
10.6

FY14
347.9
125.8
222.1
9.8
231.9
139.9
3.1
88.9
30.4
58.5
8.4

FY13
222.5
101.0
121.5
11.4
132.9
82.1
2.5
48.3
14.8
33.5
5.0

Anand Rathi Research

Ujjivan Financial Services Limited.

25-Apr-16
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Customer centric organization

The company serves over 2.77 million active customers as of December 31, 2015. In addition to constantly assessing the customers requirements and feedback
for the introduction of new products, Ujjivan has also set up a dedicated service quality department to focus on customer retention, customer protection and
grievance redressal. As a result of the customer centric approach and welfare initiatives, the customer retention rates have improved from 73% in Financial
Year 2010 to 88% as of December 31, 2015. Ujjivan is also one of the few MFIs in India to be certified by Smart Campaign for their standards of care in
implementing their client protection principles through their operations, product offerings and treatment of clients. Ujjivan has partner with the Parinaam
Foundation for the formulation and implementation of financial literacy programs such as Diksha and Sankalp, and continue to support them in their
initiatives, which aides in raising the level of financial awareness of the customers.

Professional management, experienced leadership
Ujjivan is a professionally managed company, and their senior management team has a diversified track record in the financial services industry, with average
experience of approximately 20 years in the industry. The Chief Executive Officer and Managing Director, Samit Ghosh, has over 30 years of experience in
banking industry. He has been a part of the management teams at Citibank, Standard Chartered Bank, HDFC Bank and Bank Muscat. In the past, he has also
served as president of MFIN, as well as the chairman of AKMI. He is currently on the board of WWB. The company Board consists of Directors with a diverse
mix of experience in various sectors, in particular, the financial services industry.

Robust risk management framework
The company has an established risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks.
This framework has driven actively by the Board through its Audit, Risk Management and ALCO committees and supported by an experienced senior
management team. The company has a strong credit function, which is independent of their business and a key controller of the overall portfolio quality. They
have implemented credit management models such as decentralized loan sanctioning and stringent credit history checks, which enabled them to maintain a
stable portfolio quality. Their effective credit risk management reflected in their portfolio quality indicators such as robust repayment rates, stable portfolio at
risk (PAR) and low rates of GNPA and NNPA. The portfolio quality has remained consistent in spite of the increase in the size of their operations.
The company has managed operational risks by implementing best practices such as the Risk & Control Self-Assessment (RCSA) program to monitor high risk
areas across all departments and Key Risk Indicator (KRI) program for monitoring critical industry-specific risks such as high staff turnover and cash
handling. Because of the effective asset liability management policy, Ujjivan has able to consistently raise debt and equity to support their operations. As of
December 31, 2015, their CAR has maintained at 19.64%, which is above the statutory requirement of 15%.
The following table reflects the key portfolio quality indicators:

Growth Strategies:
Leveraging the capabilities as an MFI to successfully transition into the proposed SFB business
Building a strong liability franchise
Increased focus on the unserved and underserved segment
Increased automation and digitization of products and services
Diversification of product offerings
Industry Scenario
India is home to 21% of the worlds unbanked adults and about two-thirds of South Asias. Between the year 2011 and 2014, Indias account penetration
increased from 35% to 53%. However, Indias account penetration is still low at 53% when compared to other BRICS countries. According to Global Findex
Database, a mere 15% of adults reported using an account to make or receive payments.
Outlook of MFI Industry in India
Following the nationalization of banks in 1969, lending towards the lower income strata of society, in particular the rural poor, assumed greater priority for the
Indian banking sector. Targets and sub-targets for banks were further classified under the priority sector, and they have also undergone revisions at intervals.
As per the RBI, these subdivisions include:

Agriculture (direct and indirect finance): Direct finance to agriculture includes short, medium and long-term loans, given for agriculture and allied
activities. These loans are advanced either directly to individual farmers, self-help groups (SHGs) or joint liability groups (JLGs) of individual farmers or
indirectly to industry players, for taking up agriculture/allied activities.

Small-scale industries (direct and indirect finance): Direct finance to small-scale industries (SSI) includes all loans given to SSI units, engaged in
manufacturing, processing and preservation of goods and whose investment in plant and machinery (original cost), excluding land and building, does
not exceed amounts specified by the RBI. Indirect finance shall include finance lent to any person, providing inputs to or marketing the output of
artisans, village and cottage industries, handlooms and to co-operatives of producers in this sector.

Small business/service enterprises: These include small businesses, retail trade, professional and self-employed persons, small road and water
transport operators and other service enterprises, as per the definition given in Section I and other enterprises, engaged in providing or rendering
services and whose investment in equipment does not exceed the amount specified by RBI.

Source: Red Hearing Prospectus of the company

For Private Circulation Only

Anand Rathi Research

Ujjivan Financial Services Limited.

25-Apr-16
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Micro credit: This constitutes credit and other financial services and products of very small amounts, upto `50,000 per borrower, extended to the poor
populance living in rural, semi-urban and urban areas, either directly or through a group mechanism, intended to enhance their living standards. This is
the sub-segment under which NBFC-MFIs currently receive priority sector lending.

Education loans: Education loans include loans and advances granted to individuals, only for educational purposes, up to `1 million for studies in India
and `2 million for studies abroad. This would not include institutional grants.

Over 2014-15 to 2017-18, AUMs of non-Andhra Pradesh MFIs is expected to rise at a lower 30-34% CAGR, while total AUMs of all MFIs (including those in
Andhra Pradesh) will rise at lower 29-31%. Demand for microcredit continues to increase. Also, most of the micro-finance players too are now entering newer
markets to diversify their geographic risk.

Small Finance Banks

RBI granted in-principle approval to 10 entities to set up small finance banks which included eight MFIs, one local area bank and one NBFC. The fact that eighty
percent of the institutions receiving green signal for SFBs are MFIs outlines the significance of microfinance for the Indian banking landscape. The progressive
work achieved by the MFI sector has been acknowledged by the regulators and the lenders to the sector. The RBI has approved two self-regulatory
organizations (MFIN & Sa-Dhan) for microfinance sector to allow focused supervision and policy-support. Going back to the last-mile customer, small finance
banks are a step in that direction, with the desire to segment out a strategy of financial inclusion so that individual needs are met. Apart from providing an
impetus to financial inclusion, the entry of SFBs in the private sector is expected to intensify competition in the banking sector in medium term. The objectives
of setting up of small finance banks will be for furthering financial inclusion by (i) provision of savings vehicles primarily to unserved and underserved sections
of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector
entities, through high technology low cost operations.
The high share of RRBs and cooperative banks and significant proportion of semi-urban and rural lending and deposit base indicate a huge opportunity for
SFBs to capture market share in addition to increasing the penetration of these products leading to expansion of the overall market. SFBs could capitalize on
the limited ability and slower technological adoption by RRBs and majority of the cooperative banks to gain market share. However, the increased push by RBI
on scheduled commercial banks to increase financial inclusion by opening branches in unbanked areas could increase competition. The eight MFIs
cumulatively accounted for about 26% of assets managed by the industry as of 2014-15. As they exit the industry, after metamorphosing into SFBs along with
Bandhan (which converted into a universal bank and accounted for 20% of March 2015 AUM), the industry size will halve.
Peers Comparison

Name of the company (FY15)

Ujjivan Financial Service Limited
PEER Group
Shriram City Union Finance Limited
Sundaram Finance Limited
SKS Microfinance Finance Limited

Revenue (In Crs) PAT

PE

EPS

RONW

599

76.0

19.7

10.6

10.2

2,321

571.0

22.2

88.2

13.6

2,403

576.0

29.2

51.8

15.2

545

188.0

30.0

15.2

17.9

Concerns

The business model and regulatory framework governing SFBs are untested in India.

Ujjivan may not be successful in implementing SFB growth strategies

The banking sector in India is highly regulated, which may limit the operational flexibility
Recommendations
The company has been growing healthily at CAGR 64% over last two years. Given the growth opportunity in micro finance and its entry into home finance
business, the growth in the coming years is expected to be healthy. Also the gradual shift from group lending to individual lending will provide opportunity to
increase ticket size. The company will also benefit from small banking license. The valuation for FY16 earnings is ~ 15x which can further fall down to 12-13x
in the current financial year. This valuation is cheaper compared to its peers. We therefore recommend Subscribe to the IPO.

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Ujjivan Financial Services Limited.

25-Apr-16
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Source: Companys Red Hearing Prospectus.

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