Ujjivan Small Finance Bank's (USFB) Rs 750 crore initial public offering opened for subscription on Monday. The IPO has a price band of Rs 36-37 per share and closes on December 4. The proposed issue will see promoter shareholding fall to 85 percent after the IPO.
The Rs 750 crore IPO entirely consists of a fresh issue which would result in 17 percent dilution. The funds raised will be utilized for augmenting the bank’s tier–1 capital base to meet future growth requirements. Post private placement and fresh issue in the IPO, the tier-1 ratio will improve to 28.6 percent from 18.8 percent as on Q2FY20.
Most brokerages have a 'subscribe' rating on the issue as it provides a variety of banking services in mass market customer segments with a focus on serving the financially unserved and underserved segments in India. They also said that the company's pan-India presence and technology-driven operating model with the advanced digital platforms are also key positives.
Here's what top brokerages recommend for the Ujjivan Small Finance Bank IPO:
At the upper price band of Rs 37, the brokerage feels the pricing is attractive. Given the strong return on equity of trend of 19 percent pre-issue, The brokerage feel the stock should attract premium valuations. Further, post-issuance the capital adequacy ratio will improve by 700 basis points to 25.8 percent. Given these factors, the brokerage feels the USFB IPO has the potential to deliver investors a strong return over the medium term and accordingly they recommend 'subscribe' to the issue.
The bank has performed well over the years and is expected to grow its business further with its product innovation strategy and customer-centric approach, said KRChoksey Research. There was robust growth in advances/deposits of 21.7 percent/229.4 percent CAGR (FY17 to FY19) where loan to deposit ratio was 1.43 in FY19.
The brokerage expects the bank to get the benefits from its digital advanced technology developments. Also, it focuses more on the middle-income segment of India to serve the unserved and underserved customers. It believes the bank is expected to be profitable in the long run and investors can 'subscribe' for the issue.
Within three years of operation, USFB has been able to improve the funding mix towards deposit and current and savings account (CASA) ratio of 12 percent. In FY17, out of total borrowing, only 3 percent was sourced through term deposit and reached 76 percent in Q2FY20.
At the upper end of the price band, USFB is valued at 2.8 times its Q2FY20 book value (Pre-IPO) and on post dilution basis at 2.3 times of book value which the brokerage believes is attractive considering similar businesses are trading at higher valuations. Moreover, experienced management, pan-India presence, and pristine asset quality provide comfort. It recommends a 'subscribe' to the issue.
Geojit Financial Services
The experience of Ujjivan Small Finance Limited (UFSL), USFB's parent, as an erstwhile microfinance institution, coupled with the ability to address mass-market customers will further aid USFB to be among the leading SFBs in India. At the upper price band of Rs 37, USFB is available at P/BV of 2.5 times FY19, which is at a significant discount to its peers and the brokerage has a ‘subscribe’ rating with a long-term perspective.
USFB had a steady ride in terms of advances growth along with maintaining asset quality. There was a continued focus on garnering retail liability along with building the CASA base. The brokerage has a 'subscribe' recommendation on the stock. Further, at the IPO price band of Rs 36-37, the stock is available at a P/BV of 2.2 times (post issue) at the upper band on the H1FY20 basis.
The issue is priced at two times FY20 BV (on a fully diluted and annualized basis—including fresh issue and private placement). The valuations seem comfortable, given the improving financials, good asset quality, and healthy return ratios. Hence, investors can 'subscribe' to the IPO.
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