Ujjivan come out with the Q2 FY18 results in October. 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 Q2 of FY18. We compare the results with Q2 of FY17

Q2 FY18 (Crores) Q2 FY17 (Crores) % Change Q1 FY18 (Crores)
Revenue 378.03 356.99 5.89% 358.64
Expenses 396.04 244.36 62.07% 473.30
Profit before taxes -18.02 112.63 -116% -114.66
Tax -6.07 39.62 -115.32% -39.72
Profit after taxes -11.95 73.01 -116.37% -74.94

Continuing the slow growth from Q1, Q2 FY18 saw a very modest growth in revenue by 5.89%. The expense numbers came in higher and the growth in expense was 62%. Due to the higher expenses, PBT took a hit and hence the company saw a loss in Q2.

Let us try to dissect the expense items.

Expenses

The table below compares the expenses for Q2 FY18 and Q2 FY17.

Expense Item Q2 FY18 (Crores) Q2 FY17 (Crores) % Change Q1 FY18 (Crores)
Finance costs 152.97 127.43 20.04% 157.25
Employee expense 89.53 64.48 38.84% 88.03
Other expenses 55.23 42.97 28.52% 60.96
Provisions and write-offs 88.19 6.95 1168.84% 159.21
  • Finance Costs: Finance cost has increased by 20% which was higher than the revenue growth. Is the company borrowing for activities other than lending (possibly to fund its branch expansion etc)?
  • Employee Expense: Employee expense has grown by about 39%. Looks like hiring and salary hikes have resulted in an increase in the expenses.
  • Other Expenses: Other expenses have gone up by about 28%. Q1 saw ‘Other Expenses’ growth at 87.76%. It appears that this quarter might have had a modest increase in the expenditure due to to branch conversion.
  • Provisions and write-offs: On the same lines of Q1 FY18, Q2 had disproportionate increase in provisions and write-offs. This skewed the overall expense numbers as the provisions/write-offs grew by 1168%. In Q1 FY18 I had mentioned that the provisions in Q1 may not be the last. Q2 saw write-offs for some more accounts. Hopefully this will be the last set of major provisions/write-offs due to demonetization.

Let us do the hypothetical analysis where we remove the provisioning and compare the performance. Let us take all the other expenses ‘as-is’ and change the “provisions and write-offs” to say 7 crores (The intent is to have an analysis on the lines of EBIT/Operating Margins). We can see that the numbers would still be in red. However they are not as bad as the current numbers. Clearly, even without provisioning, the growth in expenses was high.

Hypothetical Scenario Q2 FY18 (Crores) Q2 FY17 (Crores) % change
Revenue 378.03 356.99 5.89%
Expenses 314.85 244.36 28.84%
Profit before taxes 63.18 112.63 -43.9%
Tax 22.22 39.62
Profit after taxes 40.96 73.01 -43.89

Other Numbers

  • Cost-to-Income: Quarter on quarter the cost to income has come down to 68.8%. This is in spite of the expenses incurred due to SFB conversion. Looks like incremental conversions to SFB are adding costs but they may not be very significant. This is indeed a good news! Another interesting aspect is the confidence of management to bring this further down in the second half of FY18 in-spite of the plan to convert 82 MFI branches to SFB branches in H2 FY18. For FY19 the management expects the cost-to-income to range between 55-60%. The company expects to see the cost-to-income to drop below 50% in FY20. Ujjivan in on the path of cost optimization and improvement in efficiency.
Q2 FY18 Q2 FY17 Q1 FY18
Cost-to-Income 68.82%  46.95% 78%
  • Net Interest Margin: The NIM for Q2 FY18 is given below. Quarter on quarter the numbers have gone up by more than 100 bps. This clearly shows that the borrowing costs have come down leading to higher NIM. I feel we may not see the NIM reaching the Q2 FY17 numbers ever. This is because of the fact that group lending (aka micro finance) is a business that attracts huge margin. But Ujjivan is moving towards higher allocation to MSE and Housing loans. MSE and housing loans have lower interest rates and hence are low margin business. I believe the NIMs may stay at these levels for the foreseeable future (Unless the focus moves back to microfinance in a big way).
Q2 FY18 Q2 FY17 Q1 FY18
NIM 10.55%  13.02% 9.23%
  • Gross Non-performing Asset (GNPA) In Q1 FY18 the GNPA number shot up drastically to 6.16% and the NNPA was at 2.3%. This was due to the provisioning for demonetization. Q2 saw a write-off of close to 88 crores and hence the GNPA and NNPA were higher compared to Q2 FY17. By the end of FY18, the management expects the credit cost to be around 4%. For FY19 company expects credit cost to reach 1% or less. So a once-in-a-decade event has resulted in huge NPA that will need three years to recover to normalcy!
Q2 FY18 Q2 FY17 Q1 FY18
GNPA 4.99% 0.17% 6.16%
NNPA 1.38% 0.04% 2.30%
  • PAR and Provisioning: The principal at risk (PAR) has reduced to 445 crores. Till now, the provisioning done for this is about 276 crores. The quarter started with 571 crores PAR. Out of this 89 crores were written off. Further 91 crores was reduced due to customer repayment. Rs 54 crore was the new principal that became risky. Hence, by the end of Q2 the PAR stood at 445 crores.
  • Employee Strength: Employee strength stands at 10,755. At the end of Q1 the strength was 10,653.
  • Customer Base: The number of customers of Ujjivan stands at 36.64 lakhs. In Q1 the customer base was 36.25 Lakhs. In Q2 the company added 1.73 lakh new borrowers.

Borrowing Profile

  • Borrowing profile describes the various sources of borrowings for Ujjivan and the composition of these instruments in the overall borrowing mix. The effect of SFB is quite evident from the borrowing profile. The term loans have drastically come down within a quarter. Simultaneously, the deposits have grown rapidly. Ujjivan has also borrowed more from the refinancing facility. Within one quarter the picture seems to have changed dramatically!
Type of Lender As on Q2 FY18 (Crores) As a % of Total As on Q1 FY18 (Crores) As a % of Total
Term Loan (banks/NBFC) 2670 39.4% 3717.93 54.76%
Refinancing Facility 1440 21.25% 1198.93 17.66%
Securitization 305 4.5% 346 5%
NCD 625 9.22% 625 9.2%
Short Term Borrowing 385 5.68% 497 7.32%
Deposits 1349 20% 403.71 6%
Total Outstanding Amount 6774 6788.57
  • Due to a healthy mix of sources of borrowing, the cost of fund has come down. The average cost of fund is now at 9.61%. Year-on-year there is a drop of 300 bps!
Item Q2 FY18 Interest Rate (%) Q2 FY17 Interest Rate (%) FY 2016-17 Interest Rate (%)
Marginal cost of fund 7.2% 9.67%
Weighted Average Cost of fund 9.61% 12.6% 10.45%

Loan Book Analysis

Gross Loan Book:

The gross and net loan book details are as given below. The loan book growth was disappointing at a meagre 6%. Clearly the company is cautious in sanctioning new loans. I was hoping that probably Q4FY18 would be an opportune time to critically evaluate Ujjivan on its loan book growth rate. But looking at current numbers, I feel Q1 FY19 might be the right time.

Type of Loan Q2 FY18 (Crores) Q2 FY17 (Crores) Growth (%)
Net Loan book 6364.39 6000.19 6.06%
Securitization 304.82 485.74 -37.2%
Gross Loan Book 6669.21 6485.93 2.83%

Customer Retention:

Let us look at the customer retention ratio. The company managed to retain 88%% of its customers. Even on a Q-o-Q basis the number has increased. This shows customer stickiness and this factor is very important for any company as repeat customers indicates that the company is doing something good which is causing the customers to come back every time.

Q2 FY18 Q2 FY17
Customer retention 88% 86%

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 the observation that these customers already have multiple borrowing accounts with other MFI/SFB. This has been the ‘number one’ reason right from the time when Ujjivan got listed.

Rejection Reason Rejection Rate in Q2 FY18
Customers already had 3 MFI loans 45%
The customers are overdue on their existing loans 26%
Customers have existing loans > 60,000 12%
Customers already had 3 MFI Loans or existing loans > 60,000 10%

Loan Book Composition:

Let us look at loan book composition.  Micro finance and micro individual loans make up the major chunk of lending. However, year-on-year they are either stagnant or there was a de-growth. On the other hand MSE and Housing saw a growth in percentage terms. In absolute number terms they still have a long way to go. However it is quite evident that the company is focusing on MSE and housing which is their area of interest as the company wants to have a 50:50 split between Micro finance and MSE/Housing loans. Management expects the Micro finance loan book to grow at 15-20% annually. If Ujjivan has to reach a 50:50 split between Micro finance and MSE/Housing then it is expected that both MSE and Housing would grow at a much faster rate than 20%. In the next 3 years the management expects the ratio to trend around 70:30 with micro finance being at 70% and ‘MSE & Housing’ collectively at 30%. As I mentioned during the discussion on NIM, this is margin dilutive as micro-finance has higher margins.

Loan Book Composition Up to Q2 FY18 (Crores) Up to Q2 FY17 (Crores) Y-o-Y Growth (%)
Group Loans 5682.75 5595.83 1.55%
Micro Individual Loans 701.33 819.03 -14.3%
Micro-Small Enterprise 119.14 21.07 465.44%
Housing 165.99 50.00 231.98%

As stated above, the point to note is the returns on MSE and Housing loans are less compared to microfinance lending. By increasing the weightage to MSE and Housing, the company is moving towards secured lending but at the cost of lower yields (and hence lower margins). The yields as of Q2 FY18 on the different products is as below.

Yields as of Q2 FY18 (%)
Micro finance Loans 21%
Micro-Small Enterprise Loans 17%
Housing Loans 15%

Loan Disbursements:

Loan disbursement numbers provide a dynamic view of loan book. It reveals details on the new loans that were sanctioned as well as disbursements of these loans. From the table it is clear that the disbursement numbers follow the loan book composition numbers. Group loans as well as micro individual loans constitute a major chunk but there was de-growth in both these segments. Whereas MSE and Housing saw a healthy loan disbursement. Clearly the company has played it safe for the quarter and largely kept the disbursement for group and individual lending at a lower pedestal. This seems to be in line with other lenders as well.

Loans Disbursed Q2 FY18 (Crores) Q2 FY17 (Crores) Y-o-Y Growth (%)
Group Loan 1753.11 1942.78 -9.76%
Micro Individual Loans 111.49 210.80 -47.11%
Micro-Small Enterprise 43.80 10.95 300%
Housing 45.89 19.26 138.26

There is another metric which clearly shows that the company is betting big on MSE and housing loans for its growth. Analysis of average ticket size shows that even on quarter on quarter basis there is a noticeable increase for MSE and housing. We can also notice that the average ticket size for group lending has decreased by 3.4%. Clearly the focus seems to have shifted towards MSE and housing. With respect to group loans there is one more aspect to remember though. The upper limit on a group loan is 30,000 so the average ticket size for group loan might not inch further from here.

Loans Disbursed Average Ticket Size Q2 FY18 (Rs) Average Ticket Size Q1 FY18 (Rs) Q-o-Q Growth (%)
Group Loan 24,677 25,572 -3.4%
Micro Individual Loans 73,893 72,301 2.20%
Micro-Small Enterprise 3,27,816 2,96,106 10.70%
Housing 5,79,447 4,85,264 19.4%

Small Finance Bank

  • Out of the 445 branches of Ujjivan, 92 branches have been converted into SFB branches and these are capable of opening lability accounts. This is an increase of 40 branches compared to Q1 FY18. In H2 FY18 the company plans to roll out 82 more branches. By end of FY18 we should see total branch count to be around 174 which seems to be lower than the projected number of 189 at the beginning of the financial year.
  • Deposits for SFB has grown to ₹1,349 crores in Q2 compared to ₹403.7 Crore in Q1 and ₹206.4 crore at the end of Q4 FY17. Let us have a quick look at the break-up of the deposit numbers. Retail portion has seen a growth of 222% Q-o-Q. Increasing CASA accounts will result in lower borrowing costs for Ujjivan. I hope there is more push from Ujjivan to increase the CASA portion. The contribution of Institutional deposits has increased by 66% to 607 crores. Currently institution deposits contribute about 45% to the total deposits. Ujjivan received the Scheduled bank status in August. It can now issue Certificate of deposit. Ujjivan was able to garner 615 crores by issuing certificate of deposit.
Deposit Type Q2 FY18 Crores or % Q1 FY18 Crores or % Q-o-Q Growth (%) Q4 FY17
Retail Deposits

CASA

Term Deposit

  127 Crores

62 Crores

65 Crores

 39.4 Crores

21.56 crores

17.85 crores

 222.33%

187.56%

264.14%

 6 Crores
Institutional Deposits 607 Crores 364.3 Crores 66.62% 200 Crores
Certificate of Deposit 615 Crores 0 0
CASA to Total Deposits 4.59% 5.3%
Retail to Total Deposits 9.4% 9.8%
Average cost of Deposits 5.6%

There is one observation on the duration of deposits. The retail deposits are, on an average, of twelve months duration. However the Non-retail deposits are currently between three to six months. It appears that the retail is inclined to keep its money for a longer duration.

  • In order to increase its revenue streams, Ujjivan is also planning to introduce personal loans in the future.

Summary

  • Overall Q2 seemed to be a continuation of the recovery from the impact of demonetization. Revenue growth was modest. PAT saw a decline.
  • Reasons for the lackluster quarter
    • Provisioning: Due to demonetization there was a write-off leading to higher expenses and hence lower PBT.
    • SFB: Employee expenses and ‘other expenses’ are up in Q2 (probably due to SFB). Even this contributed to the growth in expenses.
  • Borrowing costs: Borrowing costs have come down in a meaningful way in Q2. Due to scheduled back status the company was able to issue certificate of Deposit leading to lower liability cost.
  • Outlook for FY18: I believe FY18 will be a year of consolidation. I hope Q3 and Q4 should see a decent profit growth. The company expects the credit cost to come down to 4% by the end of FY18. For FY19 the company expects it to reach 1% or less than that. This is a very positive development!
  • Continuing from the observation done in Q1, all the new loans issued from January of 2017 have had a recovery rate of 99.7%. Moreover the loans from January till Q2 FY18 constitutes 63% of the entire loan book. It appears that the lending ecosystem has returned to the pre-demonetization days.

Overall, the outlook for the rest of FY18 and FY19 seems to be positive and Ujjivan seems to be headed in the right direction.

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.