Man, Gautham that is a tough question to answer, Ujjivan will probably list before Equitas now, and there are no comparables to cite.
-
Bandhan is a Universal bank with majority MF book but has no limiting regulations of SFBs. It has traded between 7.5x to 4.5x in terms of P/B. Valuations have reduced after non-compliance with regulations.
-
AU SFB is similar in regulatory stead but its book is entirely different, it has traded between 4x to 9.7x and is at 6x now in terms of P/B.
-
Equitas SFB is the closest comparable in term of holding structure and loan book but not in geographic spread. It has traded between 2x to 4x in terms of P/B. Their IPO came out at a P/B on 2.29x (based on 9MFY16 BV).
-
Ujjivan came out with an IPO valuation of 2.2x P/B (based on 9MFY16 BV), while Bharat Finance and Satin Credit Care were both trading at 5x odd P/B at the time.
Perhaps the managements and merchant bankers of both Equitas & Ujjivan applied the holding company discount to the IPO in recognition of the holding structure.
It is difficult to imagine that all market participants did not know about the holding company structure, I have not looked into the shareholding data but it could be the case that the retail participants bid the holding company shares to 4x P/B without the knowledge of holding structure or in hope of favourable exemptions from RBI.
Assuming the above history in trading values, it may be that when the SFB IPO comes out, it will come at, at least 4x P/B and markets may bid them higher due to low float that will be available. Building a position in SFB will not be easy and cheap, given the interest that was seen in the IPO of the holding companies.
Ujjivan’s bid to show better C/I ratio and loan book growth in Q1FY20 and in the coming quarters before the IPO is also not of any help. The management had guided again and again in interviews and CCs that it will have 3 years to bring down C/I ratio to ~50%. Another factor to consider is that Ujjivan SFB will see a big leadership change from December and we need to be in a wait & watch mode to see how the leadership direction, values, culture and efficiency change.
If one truly believes in the long term story, then high valuations should not necessarily be a deterrent, we have ample examples of long term wealth being compounded at respectable rates even when purchase price were at expensive valuations. Whether Ujjivan and other SFBs are in that basket is a call the investor will have to take after their own due diligence.
I am sorry that I do not have an answer in the format of, do 1,2 or 3. You are a knowledgable investor yourself, and you know when to buy in bulk and when to SIP. The allocation decision between UFSL and USFB will need to be taken on the basis of relative valuations, and the regulatory environment of the time.
@shreyas1705 I missed your query from before. As you have seen that the conditions for Equitas have changed since the time you asked your question. Valuation comparison between Equitas and Ujjivan is a subject of long detail research. But is majorly dependent on NPA levels, loan book segmentation based on geographic and product, provision coverage, collection efficiency, management quality in assessing, mitigating risks.
Equitas did better in terms of NPA during the DEMON after-effects, but they received their SFB license before DEMON, though not all branches had been converted at the time to accept old currency notes, it is difficult to determine whether they did better due to SFB license advantage or better risk-adjusted loan book.
Currently, if my memory serves me right, Equitas has higher NPAs and lower PCR than both Bandhan and Ujjivan even though Equitas has a lower proportion of MF loans and a higher proportion in Vehicle and house finance. Equitas has moved to daily recognition of NPAs if I remember correctly, I am not sure what they mean by that, as per my understanding that is just the PAR>0 figure that everyone follows. Or maybe they are recognising NPAs on a day to day basis and providing for it daily instead of doing it at month-end or at quarter end.
On your other question, Ujjivan management has still not started work on bringing down the promoter holding to 40%, but given their preference for following regulations, they will have a plan ready and executed before the deadline, this is another area we need clarification on from the management in their next CC.
I am in a learning phase myself, and the situation in the microfinance industry, SFB industry, regulations, political interference, weather-related disruptions are so dynamic that currently, it is not possible for me to decide which business is superior between Equitas and Ujjivan and even Bandhan and AU for that matter.
It is difficult to even decide whether MFIs are worse off than SFBs currently because the good ones are showing similar Cost of Funds, NIMs and better ROAs and ROEs due to lower regulatory burden and operating costs. It doesn’t help that SFBs (which were the biggest MFIs) have vacated the field for old MFIs in terms of 2 lenders and 1 lac borrowing per client policy.
There have been recommendations to incorporate client wise lending data from all sources like SHGs, SFBs, Banks and non-MFI NBFCs.
We have an excellent gauge of DEMON to check how the loan books and business of different participants performed during and after the crisis. I am working on a comparative data sheet for the same, but it is a work in progress currently.
Take the case of Janalakshmi Financial Services (now Jana SFB), if you read the industry reports before the DEMON they grew their loan book at a crazy pace, 194%, post-DEMON their NPAs reached 30+% levels. Now the management has been changed and Mr. Kanwal ex-CITI was brought in with PE investments to save the company. Does one give the business a clean chit because the top management has changed or does one penalize them for past mistakes knowing that it is difficult to change company culture? Jana still hasn’t posted their FY18 AR & results on their website, while before they were, regularly.
Spandana, a recently listed MFI, went into CDR after the 2010 AP-crisis, they were one of the few who came out of CDR, others went bankrupt and BASIX pivoted to becoming an organized BC. Spandana before their IPO showed a loan book growth of 144%.
In good times, investors forget the bad past and see only the rosy future. There is no doubt that PE-backed investments want top dollar exits and managements are coerced to deliver.
I am leaving below some links to resources that one can study to understand the industry and its participant’s past if one goes through them and other company filings, you will be able to get some idea on management quality. With upcoming SFB and MFI IPOs, these are a must-read.
-
MFIN - Their MicroScape, MicroMeter and Annual Reports offer good data points.(http://mfinindia.org/free-pdf-download/)
-
Sa-Dhan - Their Bharat MicroFinance Reports have been sighted in a few research papers. I haven’t yet got around to reading them. http://www.sa-dhan.net/publications/ & Sa-Dhan Web Map
-
India Inclusive Finance - Their annual reports are a must-read to get industry insights, 2015 to current are a must-read to understand the latest developments. One can even read the ones around AP-crisis to learn more. https://inclusivefinanceindia.org/publications/inclusive-finance-india-reports.html
-
Dvara Research Blog _ Microfinance through a Data Lens.pdf (953.0 KB) & Dvara Research Blog | Search Results Microfinance
-
Ambit- Microfinance errclub Will the dream run continue.pdf (421.5 KB)
-
The Microfinance Bill - Need for a Fresh Outlook.pdf (508.3 KB)
-
http://www.ice360.in/uploads/files/PRICE_report_Indian_Citizens__Basic_Needs.pdf
-
ice360survey2014-datacodebook.pdf (828.6 KB)
-
Status of Micro Finance in india 2018-2019 -https://www.nabard.org/auth/writereaddata/tender/1207192354SMFI%202018-19.pdf
-
Only a few MFIs & only Ujjivan as SFB has a SMART Certification -https://www.smartcampaign.org/certification/certified-organizations
https://www.smartcampaign.org/certification/certified-organizations/certified-profiles-ujjivan
(Equitas did not get re-certified after 2015 as per my knowledge.) -
MF-Rating - Provides a good global outlook - https://www.mf-rating.com/publications/
-
M-CRIL - A few publications provide good resources on the history of the industry - http://www.m-cril.com & http://m-cril.com/pdf/Publications/Countrysector-studies/India/M-CRILMicrofinanceReview2014.pdf & http://www.m-cril.com/wp-content/uploads/2015/01/Much-still-to-do-Microfinance-and-the-long-journey-to-financial-inclusion-in-India.pdf
-
The MIX - https://www.themix.org/mixmarket & https://www.themix.org/mixmarket/publications
-
World Bank Data - The Little Data Book on Financial Inclusion 2018 | Data & Data Catalog
-
CGAP - https://www.cgap.org/search?keywords=microfinance&cids[]=56
-
ACCESS - http://www.accessdev.org/ & http://www.accessdev.org/wp-content/uploads/2017/07/1036-1006-FILE.pdf
-
Different Rating Systems for MFIs - Microfinance Rating Systems
-
MIMOSA Rating Index - https://mimosaindex.org/our-blog/
-
Atlast Data - Reports - Atlas Microfinance Data & Benchmark & Documents - Atlas Microfinance Data & Benchmark
-
Micro Capital - https://www.microcapital.org/
-
IFAD - India
-
Micro Finance Focus - Microfinance Crisis: Whose Risk is it anyway? | Microfinance Focus & https://www.microfinancefocus.com/
-
Micro Save - https://www.microsave.net/
-
EDA Rural Systems - Library Archive - RFILC
This is just the tip of the iceberg, I surely haven’t got them all, but one can go through the research from RBI and other institutions like IIBF, PRICE, CRIF Highmark, EQUIFAX etc. to understand the macro and micro of the industry and its need. Also, as the AMBIT report reveals, we can also follow the industry developments in Brazil, Mexico, Bangladesh, and Africa to understand what happened to institutions which converted to banks from MFIs.