Ujjivan finance announced the results for Q1 FY19 in August. Let us look at the results for Q1. But before we go through the results I recommend you to go through the following links in case you have not done yet.

Financial Analysis

The table below shows the financial performance of Ujjivan finance for Q1 of FY19. We compare the results with Q1 of FY18

Q1 FY19 (Crores) Q1 FY18 (Crores) % Change
Revenue 461.7 358.6 28.7%
Expenses 393.5 473.3 -16.9%
Profit before taxes 68.2 -114.7 159.5%
Tax 23.1 -39.7 158.3
Profit after taxes 45.0 -74.9 160.1%

Q1 saw the company come back in black. Ujjivan registered a revenue growth of close to 29% with the profits being positive 45 crores. The revenue includes ‘other income’ of 58 crores. This “other Income” comprises of 25 crores of priority sector lending (PSLC) and fee income. Optically the profit growth for Q1 FY19 appears to be huge in comparison with Q1 FY18, but the reason for this profit growth is due to higher provisioning done in FY18 to take care of possible delinquencies due to demonetization.

Let us now look at the expense items.

Expenses

The table below compares the expenses for Q1 FY19 and Q1 FY18.

Expense Item Q1 FY19 (Crores) Q1 FY18 (Crores) % Change
Finance costs 161.8 157.3 2.9%
Employee expense 114.8 88 30.4%
Other expenses 89.7 61.0 47.2%
Provisions and write-offs 15.1 159.2 -90.5%
  • Finance Costs: Finance cost is a major expense for the company and it has increased by about 2.9%. As the loan book and disbursements increase, the finance costs would automatically increase. The company needs to pay interest on the loans that it has taken and deposits that it holds. An interesting metric would be the finance cost as a percentage of revenue. The table below shows the values. As a percentage of revenue, there seems to be a decline in finance cost by about 882 bps. This clearly indicates that the company earned more revenue compared to the amount of money it paid as interest. This is possible mainly because the company now has deposit facility (as it is a bank) and its interest costs are much lower due to low cost deposits.
Expense Item Q1 FY19 Q1 FY18
Finance costs as a % of revenue 35.04% 43.86%
  • Employee Expense: Employee expense has grown by about 30%. As the number of SFB branches keep increasing, the company has to hire specialized people to run the branches. This increases the employee expenses. Employee cost as a percentage of revenue is captured below. Year-on-year it has remained constant at around 24%.
Expense Item Q1 FY19 Q1 FY18
Employee cost as a % of revenue 24.86% 24.53%
  • Other Expenses: Year-on-Year, the ‘other expenses’ have gone up by about 47%. I believe that the ongoing branch expansion is contributing to the other expense. Other expenses as a percentage of revenue is shown below.
Expense Item Q1 FY19 Q1 FY18
Other expense as a % of revenue 19.42% 17.01%
  • Provisions and write-offs: One of the positive aspect of this quarter was the substantial decrease in the provisioning. There has been a 90% decrease in provisioning compared to Q1 FY18. This is a conclusive proof that the company is back to its old pre-demonetization days. Provisioning as a percentage of revenue is shown below. However note that the company did do a write-off of 56 crores. But this write-off is from the provisioned money. Hence it does not have an impact on P&L for Q1.
Expense Item Q1 FY19 Q1 FY18
Provisioning as a % of revenue 3.2% 44.39%

Other Numbers

  • Cost-to-Income: The cost to income has come down from 78% in Q1 FY18 to about 72% in Q1 of FY19. The branch transition is adding up to the costs. In Q2 of FY18 the management had indicated that for FY19 they expect the cost-to-income to range between 55-60%. However, in this quarter, the management informed that they see the cost-to-income hovering around 70% for FY19. Over a longer term of five years management expects the cost-to-income to be 55%. I am not very happy with this delay in bringing down the cost-to-income. Sigh.
Q1 FY19 Q1 FY18
Cost-to-Income 72.3% 78%
  • Net Interest Margin: The NIM for Q1 FY19 has improved by 240 bps! Quarter-on-quarter the number is flat though. An increased NIM is definitely a good sign. The main reason for increased NIM is the fact that the borrowing costs have come down and the main contributor to this lower borrowing cost seems to be the growth in deposits. By the way the management is guiding a NIM of 10.6% for the entire FY19. When asked about the reason for NIM to drop from current 11.6% to 10.6%, management informed that the company will see a change in product mix which will tilt towards MSE and housing finance. These low-yield products will put pressure on the NIMs. Hence the NIM will settle down to 10.6% or thereabouts for FY19.
Q1 FY19 Q1 FY18
NIM 11.6% 9.2%
  • Gross Non-performing Asset (GNPA) The GNPA and NNPA have drop down to 2.7% and 0.3%% respectively. The table below show the impact of demonetization in Q1 of FY18 and the slow recovery over the next few quarters leading up to Q1 of FY19. It is heartening to see that the dedicated efforts to recover money is bearing fruits and NPA is gradually dropping down. I hope we can go back to the heyday when GNPA used to be less than 1%.
Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
GNPA 2.7% 3.6% 4.24% 4.99% 6.16%
NNPA 0.3% 0.7% 1.04% 1.38% 2.30%
  • PAR and Provisioning: The principal at risk (PAR) has reduced to 255 crores. The provisioning done for this is about 220 crores. The quarter started with 304 crores of PAR. Note that some of the PAR might have got written off in Q1 (about 56 crores I guess).
  • Employee Strength: At the end of Q1 the Employee strength stands at 12,295. The table below captures the employee strength over the past few quarters. Employee strength is an indirect indicator that the company is growing and expects to grow in future as well. The pace of employee addition in the past couple of quarters is another indicator that the tough days are probably a thing of the past.
Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Employee strength 12,295 11,242 10881 10,755 10,653
  • Customer Base: The customer base of Ujjivan consists of about 37 lakh active borrowers. The table below captured the customer base over the past few quarters. To me, this was one of the disappointing numbers to take away from Q1 results. Over the past one year there has been no meaningful addition to the number of customers. When asked about this, Management informed that Q1 saw 1.7 lakh new customers and 37,000 customers were written off (probably due to delinquencies) and probably some more customers did not come back for new loans. That might explain the stagnant customer base.
Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Customer base 36.9 lakh 37.1 lakh 37.13 lakh 36.64 lakh 36.25 lakh

Borrowing Profile

  • Borrowing profile provides details on the various sources of borrowings for Ujjivan and the composition of these instruments in the overall borrowing mix. Things have continued to change for the better. Quarter-on-quarter there is a substantial drop in high cost bank term loans. To compensate this, there has been a sizeable increase in the low cost deposits. There is an increase seen in the refinancing activity as well. So overall the borrowing profile looks good! By the way the company has 2000 crore worth of high cost borrowing which it plans to retire in FY19. It pays close to 10.1% on these high cost loans.  For FY19, the management indicated that the deposits should constitute 75-80% of the total borrowing profile.
Type of Lender As of Q1 FY19 (Crores) As a % of Total As on Q4 FY18 (Crores) As a % of Total
Term Loan (banks/NBFC) 933 12% 1220 16%
Refinancing Facility 2410 31% 1983 26%
NCD 622 8% 610 8%
Deposits 3810 49% 3737 49%
Total Borrowing 7775 7,625
  • The above table does a great disservice to the company. It hides the efforts done by the company in moving away from Term loans and into deposits. A better picture is seen when we look at the borrowing profile as it has evolved over the past six quarters. The table below lists the transformation of the company towards low cost options. Over the past six quarters term loans from Banks have drastically come down. Deposits have seen a significant rise and Refinance has seen a steady rise. Clearly, the company has taken very good steps to balance its borrowing profile.
Type of Lender Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q4 FY17
Term Loan (banks/NBFC) 12% 16% 25% 39% 55% 63%
Refinancing Facility 31% 26% 24% 21% 18% 15%
NCD 8% 8% 9% 9% 9% 12%
Deposits 49% 49% 35% 20% 6% 3%
Others 0% 0% 8% 11% 12% 7%
  • The above steps are bearing fruits in the form of lower borrowing cost. The average cost of fund has gone down to 8.6%. As seen above, the major contributor to this is the deposits garnered by the SFB. We know that the CASA and institutional deposit rates are generally lower. These would have further helped in bringing down the cost of borrowing. However looking at overall trend in India, the interest rates seem to be rising. So I believe the Q1 cost of borrowing may not be sustainable. The management expects the average cost of borrowing to be about 8.4% for FY19. The 20 bps drop is expected to be due to retirement of high cost sources of borrowing and increase in deposits.
Item Q1 FY19 Interest Rate (%) Q4 FY18 Interest Rate (%) Q3 FY18 Interest Rate (%) Q2 FY18 Interest Rate (%) FY 2016-17 Interest Rate (%)
Weighted Average Cost of borrowing + Deposits 8.6% 9.0% 9.3% 9.61% 10.45%

Loan Book Analysis

Loan Book Composition:

Let us now look at loan book composition. As of Q1 FY19 the size of loan book is 7,787 crores. The below table shows the loan book composition across different categories of products. Now, how should one interpret the below table? We know that the management wants to move away from MFI and concentrate on MSE and Housing. In the table below, the Group loans and Micro Individual loans together make up the MFI pie. From the table we can clearly note that the loan book growth for these two has been tepid. Housing and MSE loans have seen good amount of traction. Together Housing and MSE make up about 10% of the loan book. In Q3 FY18 the MSE and Housing collectively constituted about 5.5% of the total loan book. This shows that the company is diligently moving towards MSE and Housing. A notable thing for Q1 FY19 is the “Other” loan segment. The company did not provide more information on this, but I believe this should include the new products that Ujjivan has launched in this quarter i.e. Personal loans and Two-wheeler loans. By the way, the management is guiding the AUM to grow by about 30-35% for FY19.

Note: For Q1 FY19, the yield on group loan is about 20% and on micro individual loans the yield is about 100 bps more at around 21.2%.

Note: Till Q3 of FY18, Ujjivan used to have securitization as one of the options. The quantum of securitized loans used to be about 600 crores. But, over the past two quarters the company has completely stopped securitization and does not plan to securitize its loans in the coming few quarters.

Loan Book Composition Up to Q1 FY19 (Crores) Up to Q1 FY18 (Crores) Y-o-Y Growth (%)
Group Loans 6,338 5,497 15.29%
Micro Individual Loans 683 754 -9.41%
Micro-Small Enterprise 280 83 237.34%
Housing 417 126 230.95%
Other 69 0

Loan Disbursements:

Loan disbursements gives us a dynamic view of the loan book. The table below shows the loan disbursements for Q1 FY19 vis-a-vis Q1 FY18. In Q1 FY19 the company saw collective disbursals of about 2092 crores. The important point to note from the loan disbursal numbers is the gradual shift in the quantum of loans disbursed towards MSE and Housing. Disbursals clearly shows that Ujjivan is moving in this direction albeit slower that what I would have expected them to do. I hope that by the end of FY19 the MSE and housing disbursals would gather pace.

Loans Disbursed Q1 FY19 (Crores) Q1 FY18 (Crores) Y-o-Y Growth (%)
Group Loan 1720 1534 12.12%
Micro Individual Loans 151 107 41.12%
Micro-Small Enterprise 76 31 145.16%
Housing 108 30 260%
Others 36 0

The other interesting metric is the average ticket size of the loan. I am a proponent of higher ticket size loans. If the customers are good and average ticket size is higher, then the company need not hunt for a lot of customers to reach its loan book growth goal. The table below shows that the company is heading in the direction of higher ticket loans. I am particularly interested to track the ticket size of housing loans. Housing generally has a lower spread but is backed by collateral so it is a safe bet to lend. I hope we get to see higher average ticket sizes on all the loans in the coming quarters.

Loans Disbursed Average Ticket Size Q1 FY19 (Rs) Average  Ticket Size Q4 FY18 (Rs) Average  Ticket Size Q3 FY18 (Rs) Average Ticket Size Q2 FY18 (Rs) Average Ticket Size Q1 FY18 (Rs)
Group Loan 30,192 26,828 27,591 24,677 25,572
Micro Individual Loans 79,545 75,518 75,646 73,893 72,301
Micro-Small Enterprise 5,21,620 3,46,830 3,47,040 3,27,816 2,96,106
Housing 8,26,000 6,31,213 6,41,463 5,79,447 4,85,264

Small Finance Bank

  • Regarding long term growth, In Q3 of FY18 Samit had indicated that the company should grow anywhere between 20-30% for many more years to come.
  • Ujjivan currently has 462 branches and 275 of these have been converted to bank branches. In Q3 FY18 this number was about 121. Q1 saw about 87 of these centers/branches being converted to bank branches. By the end of FY19 the company wants to have 475 bank branches and 49 non-bank centers. These 49 centers/branches would subsequently get converted to bank branches in FY20.
  • Deposits now form about half of the borrowing profile. Let us try to dissect the deposits. CASA has been slowly picking up. This is one of the cheapest source of funds. The company has a base rate of 4% for Savings account for retail investors (with deposits less than 5 lakhs in their savings account). For wholesale clients (trusts, societies and corporates) the savings account rates are higher. Management informed that this approach had to be taken in order to be competitive in the market. By the way the retail portion of the total deposit basket has reached close to 20%. The company offers higher rate for term deposits compared to most of the bank. I remember seeing ads from Ujjivan with 8.25% interest rate for retail FDs.
Deposit Type Q1 FY19 Crores or % Q4 FY18 Crores or % Q3 FY18 Crores or % Q2 FY18 Crores or % Q1 FY18 Crores or % Q4 FY17
Retail Deposits

CASA

Term Deposit

 750 Crores

239 Crores

511 Crores

 427 Crores

138 Crores

289 Crores

 258 Crores

90 Crores

168 Crores

  127 Crores

62 Crores

65 Crores

 39.4 Crores

21.56 crores

17.85 crores

 6 Crores
Institutional Deposits 1307 crores 1179 Crores 799 crores 607 Crores 364.3 Crores 200 Crores
Certificate of Deposit 1746 Crores 2166 Crores 1379 Crores 615 Crores 0 0
CASA to Total Deposits 6.28% 3.65% 3.69% 4.59% 5.3%
Retail to Total Deposits 19.72% 11.32 10.58% 9.4% 9.8%
Average cost of Deposits 7% 5.6%

Summary

  • Revenue grew at a healthy rate of 28%. With respect to PAT, the company is in black.
  • Cost-to-income is still at an elevated level of 72% and it will remain at 70% for FY19. I am disappointed on this front.
  • NIM was higher in Q1 at 11.6%. It should settle down at 10.6% for FY19.
  • NPA has been dropping over the past few quarters. Hope to see the numbers return back to pre-demonetization days (i.e. both GNPA and NNPA being less than 1%).
  • Ujjivan is consciously moving towards a borrowing profile dominated by deposits. Deposits currently make up 49% of the borrowing profile and by the end of FY19 the management envisages it to move to about 80%. Great move!
  • Management is expecting the AUM to grow by about 30 to 35% in FY19. This, I believe, is a decent number.
  • The company is fairly comfortable with the Tier 1 capital which stands at around 23%. Management does not see an immediate need for equity infusion in FY19. The company may come to the capital market sometime in FY20.
  • The company ventured into Personal loan and two wheeler loan segment in this quarter. The company has tied up with channel partners for both these products. Quantum of personal loan is currently tied to the salary and interest bearing capacity of the customers. Such products, without a collateral, always makes me uneasy. I hope the management handles such products with utmost care. The two-wheeler loans are secured and the interest rates charged on 2-wheeler loans are 200 bps lower than the individual loans (which should work out to about 19%)
  • The collection efficiency stands at 99.6% which is very good. The company has been able to maintain this level of efficiency for the past 15 months.

Overall this was a very decent quarter. I expect FY19 to be a good year for the company and FY20 should see the company make meaningful addition to shareholders wealth.

References

  1. Ujjivan Finance Quarterly Results Announcement Q1 FY19
  2. Ujjivan Finance Investor Presentation Q1 FY19
  3. Ujjivan Finance Investor Call Q1 FY19

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.