Ujjivan Financial - Small Finance Bank

Both Equitas and ujjivan will outperfirm going forward due to underperformance of NBFC sector. Lot if small NBFC licences have been cancelled by RBI sue to liquidity issues, this will pull business to SFB’s, i find ujjivan in sweet spot dur to large MFI portion.
Disclosure: invested

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In this interview Ghosh says - in the first two quarters of “this” year we have had relatively moderate growth. which year is he referring to - calendar year or financial year? If it is the latter, then we will have another flatish quarter. Market will be watching the customer acquisition, loan book growth (along with asset quality and liability mix). While they have shown ability to get asset quality under control, then need to show ability to grow - Bandhan is growing much faster on a base which is 4 times the loan book of Ujjivan.

Disc - invested.

Ujjivans cost to income is around 70 % and in 5 years time they plan to bringing it to a steady state 55 % .Bandhan bank in the same industry ( although itis a full fledged bank and no longer a small finance bank ) is about 35 % . Anybody having an clue as to why there is such a huge difference ?

Latest update from the management on RBI regulations,

  1. Expect the Small Finance Banking entity to be separately listed before January 31st, 2020 - Remains to be seen if current shareholders will suffer the infamous “holding company discount.”

  2. Promoter entity (Ujjivan Financial Services) has to maintain a minimum 40% holding until January 31st, 2022.

Management comments, “The holding company will approach RBI for a merger with the bank closer to the latter date.”

Overall, if the demerger and merger go according to plan, a 2-year holding discount would just be a speed bump to a long-term investor.

Bank Listing, Promoter Shareholding & Merger RBI Regulation.pdf (451.7 KB)

Update: Equitas received a similar notification and their strategy is similar.

https://beta.bseindia.com/xml-data/corpfiling/AttachLive/69e3f10d-da80-4e15-a9f8-ed3976c55e8d.pdf

Prepare for the worst and hope for the best! Looking at Yesbank saga it looks like RBI means serious business. If there is no regulatory advantage I do not expect RBI to change regulation just for “a promoter”. Disc- Invested and looking for exit.

Thanks for the update Abhinav. Wanted to understand more about the demerger. Your answers are much appreciated.

If the SFB is to get listed separately, aren’t we talking about equity dilution here? If so, to what extent ? And what is its impact on the holding company given that it wants a reverse merger?

Could someone pls explain?

many thanks.

Hi Shreyas,

Equity dilution was anyway coming due sometime in 2020, as the management has been guiding for some time that they will require capital raising by FY20. So this listing of the SFB entity will be an opportune time to kill two birds with one stone and save some corporate expenses.

After the IPO, the holding company will have to hold at least 40% till 2022 in the SFB entity. Currently, we hold 100% of the SFB. They may not reduce their holding all the way to 40%. I think the holding will be somewhere to the tune of 75-80% after the IPO, but this is just conjecture from my side.

As for the merger around 2022, it will depend on RBI’s permission, and the merger valuations will be decided at that time. It will depend on the valuation agency whether to value the holding co. stake in the SFB at a holding discount or at face value. The SFB valuation at the time will be neutral to this transaction because higher or lower valuation of the SFB will be translated into the valuation of the holding company.

If the holding company will be merged into the SFB then the holding company shareholders will receive the shares of the SFB at the decided swap ratio and the holding company share will be extinguished. If the holding company will own 70% of the SFB at that time, the swap ratio could be around 7:10 (not applying a holding discount). Every 10% shareholding of the holding company could get 7% shareholding of the SFB.

If the SFB is merged back into the holding co. then we will back to square one. I doubt that this will happen.

Caveat Lector: We are talking about events that will happen in 2020-2022, so I retain the right to be wrong in my predicted assessment.

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I argue that listing requirement of Small Finance Bank by RBI will not have any effect on the existing shareholders of Ujjivan/Equitas Finance.

It will be achieved in such a way that any benefit/loss to existing shareholders will be neutralized. Only if management/some player try to benefit at the expense of minority shareholder they could come-up with some innovative scheme that will be detrimental to the interest of minority shareholder.

Looking at the quality of present managements this seems unlike needless to say RBI has completely lost it’s mind. They could have easily allowed present companies to be merged in SFB. Nothing is being achieved by this mindless exercise by RBI except unnecessary anxiety to small investors, paper-work and needless IPO.

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Many thanks for your reply.
Liked your point on saving corporate expenses.

I am a bit curious as to why do you feel that the merger will not happen!
In that case isn’t it advisable to own the SFB rather than the holding company?

I never said merger will not happen. Just that it will require RBI’s approval. My latter point was that it seems more probable to me that the holding co. will merge into the SFB rather than the other way around. As the whole point of this exercise is that RBI wants the bank entities to be listed. So as per RBI’s preference, the final listed entity should be the SFB not the holding company in 2023.

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Sorry if it seems like a naive question but what other line of business these holdcos have? In case of IDFC and IDFC Bank, the holding company was a full fledged NBFC doing everything from Infra financing to running an AMC. What’s the point of a holdco being listed as separate company if they don’t have any other line of business? What possibility do you see of holdco merging back into SFB once its listed? Thanks.

Hi Pkk,

It is not a naive question at all. Both Ujjivan and Equitas had to opt for the holding company structure listing because both do not have an identifiable promoter group as per their respective annual reports.

To satisfy the RBI’s regulation of 40% promoter holding, their respective PE/VC/AIF/HF investors were organized together to form a promoter group, and the holding company was listed.

As per my knowledge of Ujjivan, the current holding company has no other business other than the holding of the SFB. For Equitas, the case may be similar, but I am not sure.

As, @Gaurav_Agarwal has mentioned in his post above, in the long term it is neutral to the shareholder. For me, this is a welcome short gyration by Mr Market to add to my existing position.

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Hey both these shares not able to hold. I dont know whats the fundamental issue which brought down share prices fall over 25-30%.
In case of Equitas as promoters holding is less so they will have to find promoter in either existing holders of stake or new to make promoters holding 40%. Locking issue will have to be addressed.

can any one have clear understanding of pros and cons…and can he justify the fall in share prices…

Should`nd we buy these levels as fundamentals are intact and valuations looks good with a bank where NII rate is over 7%.
TIA
Jerry

this is not about promoter holding in listed entity. it is about promoter holding in unlisted Small Finance Bank entity. The promoter (Equitas Holding Limited) of SFB (Equitas Small Finance Bank) has 100% equity (barring any ESOPs etc).

As per the banking license terms, they have to list SFB entity seperately and do a public issue. Other option is to do reverse merger with the holding company, so that the shareholding of SFB mirrors that of holding company. However, major snag in this is that as per RBI, minimum promoter holding should be 40% till end of year 5 while the promoter shares in Equitas Holding Limited is NIL. So this means, this option may not be available.

So, there will be 2 listed entities - Holding company which holds SFB shares and has no business other that that and second, SFB company…

I think, the fall is due to holdco discount getting built in.

Holdco discount can vary from 20%-80%… Basically, since the promoters are complacent in rewarding holding company’s shareholders… these discounts are there to remain.

Take the case of IDFC & IDFC Bank. The day of demerger, IDFC shares fell and built in the holdco discounts. There were many interviews on TV of Mr Rajiv Lal (IDFC Group) that he will try to do reverse merger and will apply to RBI for same, but ultimately nothing happened and he stopped talking about merger. I feel RBI likes the holding company structure in the initial phazes of new banks.

Even HDFC has holdco discounts built in for HDFC Bank / Life / AMC etc.

P.S.: I never understand, why the promoters of Holdco companies do not do buybacks etc when it is open information that the value of investments is much greater than the value of the company itself.

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Hey varun, can`t they demerge sfb into separate Equitas Bank, before this in Equitas Holding he has to make 40% promoters (RIGHT NOW ONLY 2.5%) so that in bank while demerging promoters will hold 40% stake and on demerging all share holders will get shares in Equitas Bank too. .

I dont think it is possible to raise promoter holding to 40%… so this option may not be available. If this could be done this way… holdco discount will not be there.

If scheme of arrangement kind of structure is allowed than in place of ipo the to be listed small finance bank can have mirror shareholding structure. However if listing through ipo is only way out than holding company discount is applicable which is what stock market is currently reacting to I guess.

yes… I think there will be 2 listed entities… SFB and holding company. Holding company is currently listed and there should be is OFS or IPO for SFB company shares held by holding company… Final holdco discount will depend on how the holding company rewards its shareholders with the money collected in IPO/OFS of SFB and future plans of dividend / cash distribution.

I feel scheme of arrangement other than IPO / OFS is not possible as promoter shareholding is too low and cannot be possibly raised to 40% to meet the statutory requirement.

Sometimes indian regulator do funny things and this seem to be one of the example. Also this rule is well known to market since long still it has reacted as if this is some new info based on some false assumptions or expectations. Fact remains that current ownership is 100 perc in small finance bank by listed entities and intent of current management shall be their to not cause loss to current shareholders.

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It can`t be this way. you mean to say the big funds who invested in Equitas Holding wants stake in Holding Company. No they want stake in Bank.
and option should be demerging SFB into new company called Equitas Bank and all Holders will get miror stake in bank. But they have to re arrange stake of Equitas Holding well before so that on demerger Promoters holding remains 40%,