Ujjivan Financial - Small Finance Bank

Stock Opportunities
602

I read that in shareholder portion subscription was ~4x and applications were less than 50k. At the discounted price of 35 and one lot of 400, that comes to 70 cr. So everyone should theoretically get one lot in shareholder portion. If 2-5% of bids are rejected on technical grounds and if the proportionate allotment means that those applying with 1 or few shares of UFSL are rejected the shareholders could get more allotment on lottery basis. I am not sure if the excess after one lot allotment from shareholder portion will be distributed to shareholders on lottery basis or will spillover to retail section. There was something on this in RHP. Cant recall accurately.

Sad part is that they kept such small portion for retail and shareholders. Maybe that is what regulations allow. Given the 100x subscription to IPO from speculators for listing gains we could open at around 70-75 or higher on listing day.

You are right, the RHP also doesn’t shed any light on the meaning of proportionate allotment.

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603

Just curious, why are people so much disappointed on smaller IPO allotment? I get it that a chance to make 100% but possibly on one lot or two or say even on 3-4 lot in case larger portion was reserved for existing shareholders. But if one is sure on long term basis of Ujjivan bank then buy as much as you can of already listed entity and enjoy higher overall gains. If bank list at 70+, then Ujjivan should be at 400+. Is me missing something here?

604

Hrishi, you are right about the proportional move in the holding company but the coast is not clear for the hold co. as reverse merger surity is not there. Plus the hold co. Is not an operating entity so there is nothing else to value it on.

USFB has its own business operation vagaries that shareholders must monitor, then the microfinance sector and other segments that the bank lends to must be watched. Since this is a new segment in the banking sector it is in fancy in the market, no one knows when valuations if at all will come down, and add to all this the shareholder has to deal with holding co. Discount whose quantum will depend on the mood of the market.

So yeah, both are certainly not equal and it will be another variable to monitor and deal with. Therefore, the main bank is preferred specially at the valuations they came at. The valuations they came at is also a disappointment, given the response, we could have managed with lesser dilution at higher valuations. But this is hindsight, maybe the management was worried about getting the ipo through before the deadline and did not want to take chances with higher valuations.

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605

Very well said and I agree with all the points.

My only argument is, If one is convinced on USFB story, on IPO date one can make the transition from UFSL to USFB . Till IPO one can make same quantum of money though optically % wise it will be much lesser. (90% on X or 15% of 6X same quantum of money. For good IPOs one always need to subscribe for 6X-10X to get meaningful allotment. Tax and other issues aside)

On Ujjivan, With HDFC Bank’s Nitin Chugh as MD and successful IPO; two major overhang are addressed. One left is to reducing ownership %. Given two are done well out of three items, i hope third should not create big problem.
For Environment, micro finance, NPA, liquidity and every other issue related to company, my view is I am no expert in financial domain or micro finance, etc. So it comes down to either I believe on management to deliver over long time or I don’t. If one don’t believe on management, he/she is believing on market (momentum, market fancy) to deliver returns which are not stable, IMHO. I liked the story and management delivering mostly on what they said till now.

Disc: Among top 5 holding in portfolio. Holding from IPO days. Most difficult for me to understand and hold on to for last 3 years with no returns. So please take my comments with ton of salt. I have been wrong for 3 years.

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606

Looking at the grey market premium. ujjivan small finance bank may get a market cap of over 11000 crore. even after applying 50% holding company discount, ujjivan financial services should trade at 5500 crore market cap. Do you see value in holding ujjivan financial services

607

I think that a lesser discount should be applied for UFSL as there is a good chance for the reverse merger to take place. Companies like Mahascooter trade at 50 -60 % discount where there is no scope of value unlocking.
In UFSL given the intent by the promoters to go for reverse merger. I wouldn’t be worried of holco discount in the short run.
I need some more clarity on reverse merger taxation? If someone on this forum could share their knowledge regarding deemed dividend it would be helpful.

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608

Basis of allocation

609

Congratulations to every existing shareholder. U are allocated min 1 lot. If u applied for full application, u would have got 600+ shares.
Refer column 3 and 12 of allocation basis. Every application is a successful one. Enjoy

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610

As per regulations, the hold co has to reduce its shareholding (being the promoter) from current c. 84% to below 40% by Jan 22. In absence of reverse merger (if for some reason RBI approval does not come), the hold co can distribute c. 44% shares as gift to its existing shareholders (i.e. current shareholding 84% minus required shareholding of 40% = 44%) which will be taxed as deemed dividend at c. 20% tax rate. In addition, dividends will be taxed @ 10% in hands of shareholder. Total c. 30% will be the worst-case tax leakage. And therefore, the hold co discount should not exceed 30% at the most.

Assuming listing price @ say Rs 60 (not sure what is latest GMP reflecting), opco market cap is c. 144 * 60 = INR 8640 crs. UFSL current market cap is INR 4200 crs which is 51% discount to the opco. I feel overtime the discount should reduce to worst case 30-35% as above.

To summarize, it looks like an attractive investment opportunity:

  1. Sector itself is growing at 30-40% (hoping no surprizes here in terms of risk!) and so is Ujjivan.
  2. In addition, there is operating leverage expected to play out in Ujjivan (from a reducing cost to income ratio). FY 19 PBT was INR 200 crs, H1 FY 20 PBT has already crossed FY 19 PBT at INR 220 crs.
  3. Overall Ujjivan is attractively valued compared to other players with UFSL’s P/B at 2.1x (after hold co discount) compared to AU Small Finance P/B at 11x, Bandhan at P/B at 8x. While I understand the risk practices, perception etc at Bandhan is probably better, but does UFSL need to be at that steep a discount?
  4. UFSL looks more attractive than the opco itself on account of expected reducing discount as elaborated earlier.

Happy to hear views from other members.

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612

I had read in some reports outstanding shares post ipo will be 191 crores. hence the market cap at 60 would be 11460 crore

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613

My bad, yes in which case it is a even higher discount c. 62% discount which seems completely unreasonable.

614

This is what UFSL should trade at if the market applies a 50% hold co. discount. You can change the hold co discount assumption as you wish. I have taken total SFB shares O/S to be 179 cr. Have not accounted for 20 cr preference shares.

Research reports are estimating 173 cr as the final share o/s. This could be correct as I have assumed all IPO shares are issued at Rs. 37 while in reality shareholders got a 2 Rs. discount. Final figures should not be that different.

SFB price 35 40 45 50 55 60 65 70 75
SFB Market Cap 6299 7199 8098 8998 9898 10798 11698 12598 13497
UFSL Holding 5339 6102 6865 7628 8390 9153 9916 10679 11441
@ 50% Discount 2670 3051 3432 3814 4195 4577 4958 5339 5721
Imp. Price 216 247 278 309 340 371 402 433 464
Change in Price -37.04% -28.05% -19.05% -10.06% -1.07% 7.93% 16.92% 25.92% 34.91%

This is not a buy, sell recommendation. Markets can remain irrational for a long time. While we as shareholders or prospective buyers may assume a lower hold co. discount due to our biases, market as a whole can give UFSL a bigger hold co. discount.

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615

50% is rational and fair enough

616

We are all calculating 84% holding of UFSL in SFB. But due to regulations, stake is going to fall with time is the reality. So basic value of UFSL will reduce with time, even without holding co discount.

In 2 yrs time UFSL shud hold only 40%. Even if SFB is at 20k cr and UFSL will be valued 8k cr and then discount of 50% , it’s same as current price.

Am I right.

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618

Gautham,

To reduce the holding, they have options to do a mix of OFS/QIP and/or acquisition.

I have tried to calculate the impact of the dilution from ~84% to 40%. I am not claiming my calculations are 100% right but what you seem to be missing is the value that will be added in the balance sheet after such a dilution.

I am not 100% sure of how the accounting of this will play out but in all cases, certain no. of new shares will be issued, as capital is the raw material for this business, so we can rule out acquisition with a cash buyout. The newly issued shares for dilution will have their face value added to the share capital account and in case of QIP/OFS, the excess should go into a share premium account. In case of an acquisition with a share swap deal like Bandhan-GRUH, the newly issued shares will be transferred to the shareholders of the acquired company, and the shares of the acquired company will reflect in the SFB balance sheet as an investment.

Here is my working with a few assumptions,

  1. USFB BV sees an absolute growth of 25% in 2 years.
  2. P/B valuations remain favourable at 4x.
  3. UFSL issues ESOPs at a rate of .3% per year.
  4. QIP/OFS is done at CMP.
  5. Dilution occurs in a single transaction.

Now, in 2 years UFSL shares in USFB will reach 153.4 cr, for these to be 40% of the post-QIP/OFS capital structure the total shares O/S in USFB needs to increase by 203 cr. If these shares are priced at that times P/B of 4x and CMP of ~83, this would yield an OFS/QIP value of 16967 cr.

As per accounting, I am guessing 2030 cr will go into share capital account, and rest will go into share premium amount.

We now know the new shares O/S in USFB post the dilution and at that CMP, the market cap. should increase from 15000 cr to ~32000 cr. Now we can calculate the UFSL holding value at 40%, which comes to 12783 cr.

Post IPO FY21 FY22 OFS/QIP
SFB BV in Cr 2998 3747.5
Share OS 1799651740 1799651740 1799651740 3836718299 2037066559 New Shares Issued
UFSL Share 1525520467 1530097028 1534687319 1534687319 16967 OFS Amount in Cr
UFSL % 84.77% 85.02% 85.28% 40%
SFB BVPS 16.66 20.82
SFB P/B 4 4 4
SFB Price 66.64 83.29 83.29
SFB Market Cap in Cr 11992 14990 31957.52
UFSL Hold Val in Cr 10165.32 12783.01 12783.01
UFSL Curr. MCAP in Cr 4138.16 4138.16 4138.16
% Discount 59.29% 67.63% 67.63%

If we do some calculations for USFB’s P/B multiple’s sensitivity, we get these figures.
Sensitivity Table

P/B 4 3.5 3 2.5
QIP Amount 16968 14847 12726 10605
UFSL Hold Value 12783 11185 9587 7989
SFB Post Issue MCAP 31958 27963 23968 19973

Caveats:

  1. The effect of the dilution on UFSL holding is neutral in this table because we have assumed that the dilution will happen at the CMP. If it occurs at above/below the CMP, there can be value creation/destruction in UFSL holding value post the transaction.
  2. These are just projections based on certain assumptions which will certainly not be 100% accurate. Markets are dynamics and this model assumes steady-state in many key variables, the market could under/overprice the risk in the sector in which USFB operates, there could be un/favourable regulatory actions, political interventions, natural calamities etc. that could change the repayment behaviour of the borrower. The valuations could change as a bear market could manifest unannounced at any time.
  3. I have assumed that the dilution occurs in one go, while in the real world, the could achieve in 2 or 3 different transactions over 2 years. This would result in a different outcome.
  4. Please do not take this as a buy/sell recommendation and be aware of the sensitivities in projection models.

If there are any errors in my calculations, assumptions or accounting treatment please do correct me.

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619

https://www.sptulsian.com/f/ipo-analysis/ujjivan-sfb

621

I was going through the investor presentation of UFSL.
I wanted to understand what is refinance in borrowing. It has reduced from 39% to 23 % YoY.
If someone could help me understand how it works (including accounting nuances) & how it affects the COB.

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622

Refinance is replacing existing borrowing with new one, which is at a lower cost in this context but not necessary.

623

A few reports from SIDBI.

624

In USFB IPO, shareholder category allotment was proportionate subject to minimum lot. What this means is all applicants will be given 1 lot each and then remaining shares will be distributed proportionately (Typically how share allotment happens for HNI category) according to the number of shares applied for.

To clarify further, it didn’t matter whether you have 1 share of UFSL or 1,00,000 shares. Both are shareholders and both apply from 5600 shares would have got 625 shares of USFB in IPO.

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