Ujjivan come out with the Q1 FY18 results in August. Let us look at the results. But before going through the numbers I recommend you to go through the following links in case you have not done already:

Financial Analysis
The table below shows the financial performance of Ujjivan finance for Q1 of FY18. We compare the results with Q1 of FY17

Q1 FY18 (Crores) Q1 FY17 (Crores) % change
Revenue 358.64 329.32 8.9%
Expenses 473.30 221.21 113.96%
Profit before taxes -114.66 108.11 -206.06%
Tax -39.72 36.74 -208.10%
Profit after taxes -74.94 71.37 -205.01%

The revenue numbers showed a very slow growth of 8.9% compared to Q1 FY17. What came as a surprise was the huge growth in expenses. Expenses shot up by about 114% resulting in the expenses overshooting the revenue. This would naturally result in a negative PBT and a negative PAT.
Let us now look at the expenses to understand the reason for this large increase in expense.

Expenses

Expense Item Q1 FY18 (Crores) Q1 FY17 (Crores) % Change
Finance costs 157.25 120.40 30.61%
Employee expense 88.03 59.87 47.03%
Other expenses 60.96 32.47 87.76%
Provisions and write-offs 159.21 6.25 2448.22%
  • Finance Costs: Finance cost has increased by 30% which is much more than the revenue growth. However quarter on quarter the growth is much less.
  • Employee Expense: Employee expense has grown by 47%. Clearly the SFB related hiring is adding to the expenses.
  • Other Expenses: Other expenses have gone up by 87.76%. I believe this is again due to the SFB costs (setting up new branching and modifying existing MF branches into SFB branches).
  • Provisions and write-offs: What skewed the numbers was the provisions and write-offs. It grew by 2448%! First this needs clarification: This is not a write-offs (write-off was about 9 crores this quarter for very old loans). All this is provisioning done on the hardcore loans which the company has very less hope of recovering. So it has identified such accounts and made provisioning in one shot. With this the company believes it has done the necessary provisioning. I have my lingering doubts on this. Note that this provisioning does not cover all the loans that might default (i.e. the entire PAR). This provisioning covers only those loan account which the COMPANY believes may default. In future if more such accounts are identified then, I believe, additional provisioning might be needed.

Ok, now let us play the what-if game. Let us take the sunny day scenario: What if this provisioning was not required because the customers would pay as usual (i.e. the way they were doing before demonetization). Let us retain all the other expenses the way it is and only change the “provisions and write-offs” to say 7 crores. The numbers would stack up as below. We can see that the numbers would still be red but not as bad as the current numbers. Clearly, even without provisioning, Ujjivan had a tough quarter due to employee expense, finance cost and other expense. What worries me is how do we judge this for future quarters. Provisioning is generally one off or probably lasts couple of quarters. But how do we put a roof on things like “other expenses” and “employee cost”. The increase is being attributed to SFB. After the conversion of MF branches to SFB, I hope they become stable and these numbers start truly behaving like fixed costs (which they are currently not).

Hypothetical Scenario Q1 FY18 (Crores) Q1 FY17 (Crores) % change
Revenue 358.64 329.32 8.9%
Expenses 321.09 221.21 45.15%
Profit before taxes 37.55 108.11 -65%
Tax 12.76 36.74 -65.2%
Profit after taxes 24.79 71.37 -65.26%

Other Numbers

  • Cost-to-Income: The cost to income has shot up drastically. One of the reasons could be the expenses incurred due to SFB conversion. By the end of FY18 the company would like to reduce the cost-to-income to 70%.
    Q1 FY18 Q1 FY17 Q4 FY17
    Cost-to-Income 78% 45.6% 76.6%
  • Net Interest Margin: The NIM for Q1 FY18 are given below. Year-on-Year the numbers have dropped substantially! However with more low cost sources of funds, I hope the interest cost will come down leading to higher NIM.
    Q1 FY18 Q1 FY17 Q4 FY17
    NIM 9.23% 12.96% 8.61%
  • Gross Non-performing Asset (GNPA) The GNPA number shot up drastically this quarter to 6.16% and the NNPA came in at 2.3%. In Q1 FY17 GNPA was 0.18% and NNPA was 0.04%. As discussed above the company has made provisioning in this quarter.
  • PAR and Provisioning: The principal at risk (PAR) stands at 571 crores. The provisioning done for this is only 277 crores (as of June 2017). I believe the company is hopeful of recovering the money for the non-provisioned accounts.
  • Employee Strength: The current employee strength stands at 10,653. Ujjivan has 457 branches (this includes both the asset only MFI branches as well as liability bank branches)
  • Customer Base: The number of customers of Ujjivan stands at 36.25 lakh. About 1.76 lakh new customers were added in Q1 FY18

Borrowing Profile

  • Borrowing profile describes the various sources of borrowings for Ujjivan and the composition of these instruments in the overall borrowing mix. Even on Q-o-Q basis we can see a noticeable drop in term loans. This is a good sign as term loans are the expensive ones and need to be taken judiciously. The other aspect is the increase in deposits from 206 crores to 403 crores. We will look at Deposits separately under SFB section.
    Type of Lender As on Q1 FY18 (Crores) As a % of Total As of Q4 FY17 (Crores) As a % of Total
    Term Loan 3717.93 54.76% 4442.47 63.4%
    Refinancing Facility 1198.93 17.66% 1023.93 14.61%
    Securitization 346 5% 508.32 7.25%
    NCD 625 9.2% 825 11.77%
    Short Term Borrowing 497 7.32%
    Deposits 403.71 6% 206.4 2.94%
    Total Outstanding Amount 6788.57 7006.12
  • How does this borrowing profile result in the interest rate paid by the company to its lenders. Below table shows the details. Marginal cost of Interest indicates the interest paid by the company on new loans taken. As we can see it has come down by more than 200 bps to 7.5%. Weighted average cost of interest indicates the interest cost for all loans (old ones as well as new ones) has come down by 32 bps. The short term borrowings and the deposits seem to have contributed in lowering the interest cost for the company. This is a very good sign. Hope to see the Marginal cost of interest translating to entire borrowing basket. The company believes that the weighted average cost should decrease by 150 bps by the end of FY18.
    Item Q1 FY18 Interest Rate (%) FY 2016-17 Interest Rate (%)
    Marginal cost of Interest 7.5% 9.67%
    Weighted Average Cost of Interest 10.13% 10.45%

Loan Book Analysis
Gross Loan Book
The gross and net loan book details are as given below. The loan book growth has been very modest at around 10%. Clearly these seem to be the after effects of demonetization. I feel Ujjivan deserves another quarter or two to recover. Probably Q4FY18 would be an opportune time to critically evaluate Ujjivan on its loan book growth rate.

Type of Loan Q1 FY18 (Crores) Q1 FY17 (Crores) Growth (%)
Net Loan book 6110.70 5557.48 10%
Securitization 348.57 293.39 18.8%
Gross Loan Book 6459.27 5850.87 10.4%

Type of Loans
Table below shows the ratio of disbursement for repeat v/s fresh customers. Year-on-year there does not seem to be a change in repeat v/s fresh customer. But this number hides the pain and the cautious pullback that Ujjivan witnessed in Q4 FY17. When we compare the numbers with Q4 FY17, it becomes obvious. Another thing to notice is the gain in confidence by the company. Between Q4FY17 and Q1FY18, Ujjivan has gone back to its pre-demonetization days and started lending to fresh customers. This, to me, is a positive sign.

Type of Loan Q1 FY18 Q1 FY17 Q4 FY17
Repeat 64.11% 66% 79.03%
Fresh 35.89% 34% 20.97%

Customer Retention Ratio
Let us look at the customer retention ratio. The company managed to retain 85.79%% of its customers. Year-on-year the number has remained constant. This shows customer stickiness which is an important factor for any company. A one-off loan by a customer helps a particular quarter, but a repeat customer brings future revenue and profits. I believe retaining 86% of the customers is a good sign.

Q1 FY18 Q1 FY17
Customer retention 85.79% 85.60%

Rejection of Customers loan application
Ujjivan rejects loan requests of its customers. These rejections happen irrespective of whether the customer is a new customer or an existing customer. Below are some of the major reasons why Ujjivan rejected loan applications. The Major reason for rejection is due to multiple borrowing accounts held by the prospective clients with other MFI/SFB.

Rejection Reason Rejection Rate in Q1 FY18
Customers already had 3 MFI loans 36%
The customers are overdue on their existing loans 35%
Customers have existing loans > 60,000 13%
Customers already had 3 MFI Loans or existing loans > 60,000 2%

Loan Book Composition
Let us look at loan book composition. The first two rows collectively make up the microfinance loans. These, cumulatively make up 96.77% of the loan book. MSE loans make up 1.29% of the loan book and Housing makes up 1.95% of the loan book. Even though MSE and Housing make up a miniscule part of loan book they are growing. Ujjivan wants the ratio between Microfinance vs MSE&Housing to be 50%-50%. I guess we are a long way from that, but we are making progress.

Loan Book Composition Up to Q1 FY18 (Crores) Up to Q1 FY17 (Crores) Y-o-Y Growth (%)
Micro-finance 5497 5066.46 8.49%
Micro Individual Loans 753.89 742.14 1.58%
Micro-Small Enterprise 83.06 10.71 675%
Housing 125.81 31.33 299%

Loan Disbursements

Loan disbursement gives a picture on the lending done by Ujjivan. The table below shows the Y-o-Y loan disbursement for Ujjivan.  I personally like to look at the loan disbursement numbers. It clearly shows the thought process of management. We can see a drop in micro-finance related loans. Point to note is the huge drop in micro individual loans. This clearly shows that Ujjivan was not comfortable disbursing to individuals this quarters (unsecured MF individual loans). MSE and Housing related disbursements seemed to have continued at a very healthy pace.

Loans Disbursed Q1 FY18 (Crores) Q1 FY17 (Crores) Y-o-Y Growth (%)
Micro-finance 1534.27 1662.98 -7.73%
Micro Individual Loans 106.76 199.98 -46.6%
Micro-Small Enterprise 30.71 4.55 575%
Housing 30.18 11.17 170%
Total 1709.92 1878.68

Small Finance Bank

  • Out of the 457 branches of Ujjivan, 52 branches have been converted into SFB branches and these are capable of opening lability accounts. By end of FY18 the company plan to increase the count to 189 branches.
  • Deposit base of SFB has grown to ₹403.7 Crore against ₹206.4 crore in March 2017. Let us have a quick look at how the deposits look like. Retail portion is clearly a big disappointment. Out of 403 crores, only 21.5 crores has come in as CASA (Current account and savings account) contributing to 5.3% of total deposits. Now CASA accounts have an interest rate of 4%. Increasing CASA accounts will result in lower borrowing costs for Ujjivan. So a dedicated push towards increasing CASA should be taken up. At 364 crores, the Institutional deposits make up 90% of the deposits. In-spite of this the company managed to keep the cost of deposits at 5.6% which indicates that the Institutional deposit rates are not high either.
  • One positive trend is the growth in deposit vis-a-vis Q4FY17. The deposit has grown by close to 100%. The retail deposits have grown by 550%. These are definitely encouraging, but personally I believe this is expected from a company which has its base that covers the entire country and has a customer base of close to 35 lakh. Moreover Ujjivan is starting with a lower base, so due to base effect the percentages look higher but on absolute number terms it has a long way to go.
    Deposit Type Q1 FY18 Amount in Crores (or %) Q4 FY17
    Retail Deposits (Total)

    CASA

    Term Deposit

    		 39.4 Crores

    21.56 crores

    17.85 crores

    		 6 Crores
    Institutional Deposits 364.3 Crores 200 Crores
    CASA to Total Deposits 5.3%
    Retail to Total Deposits 9.8% 3%
    Average cost of Deposits 5.6%
  • The bank has maintained SLR at ₹1,394 crore and CRR maintained at ₹204.6 crore. I am assuming they keep just at the bare minimum level that RBI mandates.
  • In order to cover the default risk due to death, the company also offers third party insurance to its customers. So whenever a customer takes a loan he can cover it up with an insurance policy. A policy is not mandatory though. So I am not sure whether people take this insurance considering the client profile of Ujjivan.
  • In Q2 FY18 Ujjivan received scheduled bank status. This allows Ujjivan to raise money via institutional deposits and certificate of Deposits (CD). These are low-cost sources of funds which should help Ujjivan in reducing its borrowing costs. Ujjivan can make-use of this opportunity in two ways:
    • Option 1: Reduce the lending rate and maintain NIMs. By reducing the rate the company should be able to attract new customers and retain existing customers.
    • Option 2: Maintain the lending rate as is and increase the NIM.
    • I have a feeling the company will maintain the lending rate. But it will not get the benefit of increased NIM because Ujjivan is going to incur costs due to SFB transition which needs to be offset via higher lending rate. Hence the company may maintain the lending rate as is.
    • I have another thought. Probably the company may maintain the lending rate as is for MFI loans but it might reduce the lending rate for Home Loan and SME loans. The reason being that the entire Home Loan and SME loan portfolio is miniscule for Ujjivan. Once it starts accepting the CDs and institutional deposits at lower rates it can lend at lower rates.

Summary

  • Overall this was a very soft quarter. The revenues were down, expenses and cost-to-income shot up, profits down. NIM is down but better than Q4 FY17. The pain of Q4F17 has rolled over to Q1 FY18.
  • Reasons for the lackluster quarter
    • Provisioning: Clearly, the after effects of demonetization has led to higher provisioning which have brought down the numbers.
    • SFB: Employee expenses, other expenses are all up (probably due to SFB). This further hit the company hard.
    • To me both these are open points and unpredictable till the dust settles down.
  • Borrowing costs: Borrowing costs have already started to come down. With Ujjivan receiving Scheduled Bank status, now it can take institutional deposits as well as issue certificate of Deposits which are low cost sources of funds. These can further reduce the borrowing costs.
  • Outlook for FY18: As noted in Q4 FY17 analysis, Ujjivan may see a growth in the range of 20-25% in the long term. For FY18 the company expects a revenue growth of 20%. I believe FY18 will be a year of consolidation.
  • If you want to take away one important thing from the results of Q1 FY18 it is the following: “Collection efficiency has returned back to 99.76% for all the new loans taken from January to June 2017“. These “new” loans now make up 50-55% of the total loan portfolio. This is definitely reassuring. We “seem” to be back to the good old days 🙂

References

Disclaimer
I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.