Ujjivan finance announced the results for Q2 FY19 in November. Let us look at the results for Q2. 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 Q2 of FY19. We compare the results with Q2 of FY18

Q2 FY19 (Crores) Q2 FY18 (Crores) % Change
Revenue 467.4 378 23.6%
Expenses 405.3 396 2.3%
Profit before taxes 62.1 -18
Tax 17.7 -6.1
Profit after taxes 44.3 -12.0

Continuing the positive trend from Q1,in Q2 FY18 the company saw the revenue grow by 23.6% with PAT coming in at 44.3 crores. In Q1 FY18 the revenue grew by close to 29% with the profits being positive 45 crores. The revenue includes ‘other income’ of about 38 crores.

Expense growth was much lower compared to revenue growth. One reason for this is the base effect. In Q2 FY18 the company made a huge provisioning of 88 crores to take care of the possible delinquencies due to the impact of demonetization this was not needed in Q2 FY19. Let us now look at the expense items in detail.

The tax slab for the company was 25% in Q2 as the turnover was less than 250 crores and as per finance ministry (union budget 2017), for a company with turnover of less than 250 crores the tax rate would be 25%.

Expenses

The table below compares the expenses for Q2 FY19 and Q2 FY18.

Expense Item Q2 FY19 (Crores) Q2 FY18 (Crores) % Change
Finance costs 166.7 153 9%
Employee expense 121.6 89.5 35.8%
Other expenses 95.9 55.2 73.5%
Provisions and write-offs 6.2 88.2 -93%
  • Finance Costs: Finance cost is a major expense for the company and it has increased by about 9%. Let us look at 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 of 481 bps. Note that in Q1 FY19 there was a decrease by about 882 bps. Hence the company earned more revenue compared to the amount of money it paid as interest. There could be many reasons for this drop. One, the company would have retired high cost loans. Two, the company is able to mobilize deposits (FDs) at lower costs. Three, the company is able to increase its CASA accounts. From the numbers it is evident that it is a combination of all the three.
Expense Item Q2 FY19 Q2 FY18 Growth (bps)
Finance costs as a % of revenue 35.66% 40.47% – 481
  • Employee Expense: Employee expense has grown by about 36% in Q2. Q1 had seen the expenses grow by 30%. The main reason for the rise in employee expense is the conversion of MFI branches into SFB branches. This would entail hiring more specialized staff. This increases the employee expenses. This is evident from the employee cost as a percentage of revenue which is captured below. There has been a 234 bps increase in the numbers. Once the branch conversions are completed by around Q1 FY20 we should see these numbers stabilize.
Expense Item Q2 FY19 Q2 FY18 Growth (bps)
Employee cost as a % of revenue 26.01% 23.67% 234
  • Other Expenses: Year-on-Year the Other expenses have gone up by about 73%. Again the rise in other expense should be due to the branch expansion. Other expenses are a percentage of revenue are depicted below. Let us wait for Q2 FY20 results to evaluate and judge these numbers. Branch expansion/conversions will skew these numbers.
Expense Item Q2 FY19 Q2 FY18 Growth (bps)
Other expense as a % of revenue 20.51% 14.60% 591
  • Provisions and write-offs: There is a 93% drop in provisioning for the quarter Q2 FY19. At about 6 crores the numbers are definitely healthy. In fact in Q2 FY17 the provisioning was around these numbers. Provisioning as a percentage of revenue has dropped substantially. It is evident that the demonetization daemon has been buried for good.
Expense Item Q2 FY19 Q2 FY18 Growth (bps)
Provisioning as a % of revenue 1.32% 23.33% 2201

Other Numbers

  • Cost-to-Income: The cost to income has risen to 77% in Q2 FY19 which was about 69% in Q2 FY18. The branch transition is adding up to the costs. The management expects the cost-to-income to be round 70% for FY19. Over a longer term of three to four years, management sees the cost to income to drop down to around 55%. When quizzed about this the management attributed the delay in reduction of cost-to-income to the fact that demonetization slowed the growth leading to lower income but the cost does not come down (i.e. branch expansion). It will take couple of years to get the Cost-to-income back to sane numbers. A significant drop is expected in FY20 as branch conversion frenzy slows down in FY20. There is another thing that I noted in the management commentary. The cost of running a bank branch is significantly higher compared to a MFI due to IT cost, employee cost and probably the rental costs. Ujjivan is expecting to counter these higher cost by selling new products that are being launched this year and in the coming years.
Q2 FY19 Q2 FY18 Q1 FY19
Cost-to-Income 77.4% 68.8% 72.3%
  • Net Interest Margin: The NIM for Q2 FY19 has improved by 260 bps to 12! Even Quarter-on-quarter there is a 40 bps increase. An increased NIM is definitely a good sign. The main contributor to this seems to be the rise in deposits, higher refinancing and lower term deposit loans taken by USFB. In Q1 FY19 the management was guiding a NIM of 10.6% for the entire FY19. I hope we see better average by end of FY19.
Q2 FY19 Q2 FY18 Q1 FY19
NIM 12.0% 10.6% 11.6%
  • Return on Equity: The return on equity is about 12%. Management expects the return on equity to reach 17-18% over the longer term (say in another 2-3 years). Though it would be higher than cost of equity, I hope the management is able to achieve a higher ROE.
  • Gross Non-performing Asset (GNPA) The GNPA and NNPA have drop down to 1.9% and 0.3%% respectively. I have retained the numbers right from the demonetization days. We can clearly see that the management has been diligent in recovering the loans. There would be component of write-off as well. But I am pretty sure the branch level employees would have managed to recover the loans and this should have led to drop in the NPA number. The company is making steady progress towards a GNPA that is less than 1%.
Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
GNPA 1.9% 2.7% 3.6% 4.24% 4.99% 6.16%
NNPA 0.3% 0.3% 0.7% 1.04% 1.38% 2.30%

The company also published segment wise NNPA numbers for the past five quarters. Clearly the individual loan was the major factor for the higher NNPA and over the past few quarters the defaults have come down. Another interesting fact to note is the NNPA number for Housing. During all this turmoil, the NNPA for housing has remained stable at 0.1%. This is an indication of two things: (a) For the borrowers, a house is a big thing and they wouldn’t like to lose their house under any circumstances. (b) Ujjivan should expand its housing loan book at a higher rate.

Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
Individual Loan 0.5% 0.8% 1.7% 2.3% 2.7%
Group Loan 0.3% 0.3% 0.6% 1.0% 1.3%
MSE 0.6% 0.6% 0.5% 0.5% 0.5%
Housing 0.1% 0.1% 0.1% 0.1% 0.1%
  • PAR and Provisioning: The principal at risk (PAR) has increased to 267 crores. The provisioning done for this is about 183 crores. The quarter started with 256 crores of PAR.
  • Employee Strength: At the end of Q2 the Employee strength stands at 13,169. The table below captures the employee strength over the past few quarters. Rising employee count is an indication of a company that is growing at a healthy pace. Since the company is customer facing it needs more staff on its payroll.
Q2 FY18 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Employee strength 13,169 12,295 11,242 10881 10,755 10,653
  • Customer Base: The number of customers of Ujjivan stands at 40.3 lakh active borrowers. After close to five quarters of nearly stagnant customer base, Q2 saw a rise in the customer base This is definitely a good sign. It indicates that the company has started to lend at a brisk pace and is not hesitant to take in new customers.
Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Customer base 40.3 lakh 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. We can see that Quarter on quarter there is a drop in term loans. The company has upped its borrowing from both refinancing and deposits. So overall the borrowing profile looks good! In Q1 FY19, the management had indicated that for FY19, the deposits will constitute about 75-80% of the total borrowing profile. However the company is not there yet and will have to put in a lot of effort to reach there.
Type of Lender As of Q2 FY19 (Crores) As a % of Total As of Q1 FY19 (Crores) As a % of Total
Term Loan (banks/NBFC) 426 5% 933 12%
Refinancing Facility 3325 39% 2410 31%
NCD 512 6% 622 8%
Deposits 4177 49% 3810 49%
Total Borrowing 8525 7775
  • A better picture is seen when we look at the borrowing profile as it has evolved over the past seven quarters. The table below lists the transformation of the company towards low cost options. We can clearly see the progression of the company from high cost term loans to low cost deposits. It is on the right track to reduce its cost of funds.
Type of Lender Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q4 FY17
Term Loan (banks/NBFC) 5% 12% 16% 25% 39% 55% 63%
Refinancing Facility 39% 31% 26% 24% 21% 18% 15%
NCD 6% 8% 8% 9% 9% 9% 12%
Deposits 49% 49% 49% 35% 20% 6% 3%
Others 2% 0% 0% 8% 11% 12% 7%
  • Due to the above borrowing profile the cost of borrowing has been coming down for the company. In Q2 FY19 the weighted average cost of borrowing has dropped by 10 bps to 8.5%. I think it would be tough to go down further as the company’s deposit rates are around 8.25% and considering other higher cost sources, getting further down might be very tough. By the way the marginal cost of borrowing was 8.8% for this quarter.
Item Q2 FY19 Interest Rate (%) 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 (including the Deposits) 8.5% 8.6% 9.0% 9.3% 9.61% 10.45%

Loan Book Analysis

Loan Book Composition:

Let us now look at loan book composition but before that note the comment from the management that they expect the company to grow at 30-35% overall. The microfinance is expected to grow at around 20%. As of Q2 FY19 the size of loan book is 8,317 crores. In Q2 FY18 the size of loan book was 6,689 crores and In Q1 FY19 the loan book was 7787 crores. Hence year-on-year the loan book grew by 24.3% and quarter-on-quarter it grew by 6.8% The below table shows the loan book composition. MSE and housing loan make up about 10.6% of the loanbook. In Q1 FY19 they were 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 management is trying to moving towards MSE and Housing. The other loan segment now makes up 117 crores. The company did not provide more information on this, but I believe this should include the new initiatives like Personal loans and Two-wheeler loans.  In Summary, Housing is growing fast, MSE is growing fast and individual loans are going slow (as expected) and group lending is going at moderate pace. The company expects the AUM to grow at 30-35% for the foreseeable future.

Loan Book Composition Up to Q2 FY19 (Crores) Up to Q2 FY18 (Crores) Growth (%) Up to Q1 FY19 (Crores)
Group Loans 6,634 5,683 16.73% 6,338
Micro Individual Loans 681 701 -2.85% 683
Micro-Small Enterprise 352 119 195.79% 280
Housing 533 116 359.48% 417
Other 117 0 69

Loan Disbursements: Loan disbursements gives us a dynamic view of the loan book. The table below shows the loan disbursements for Q2 FY19 vis-a-vis Q2 FY18. In Q2 the total loan disbursed was 2,383 crores where as in Q1 FY19 the company saw disbursals of about 2092 crores. Again, as we noted in Q1, the loan disbursal numbers are gradually shifting towards MSE and Housing and the company is consciously reducing the micro individual loans (in fact quarter-on-quarter the individual loan disbursement has remained stagnant).

Loans Disbursed Q2 FY19 (Crores) Q2 FY18 (Crores) Y-o-Y Growth (%) Q1 FY19 (Crores)
Group Loan 1,958 1,753 11.69% 1,720
Micro Individual Loans 151 111 36% 151
Micro-Small Enterprise 101 44 129% 76
Housing 130 46 182% 108
Others 43 0 36

The other metric worth looking at is the average ticket size of the loan. I have always been 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 average ticket size of MSE and Housing loans are growing at a faster rate. Note that It is not a big deal to keep lending huge amounts all you need to do is open your purse. Prudent lending is very important and I hope that the company lends in a prudent way.

Average Ticket Size Q2 FY19 (Rs) Q1 FY19 (Rs) Q4 FY18 (Rs) Q3 FY18 (Rs) Q2 FY18 (Rs) Q1 FY18 (Rs)
Group Loan 29,506 30,192 26,828 27,591 24,677 25,572
Micro Individual Loans 80,929 79,545 75,518 75,646 73,893 72,301
Micro-Small Enterprise 5,80,000 5,21,620 3,46,830 3,47,040 3,27,816 2,96,106
Housing 9,30,000 8,26,000 6,31,213 6,41,463 5,79,447 4,85,264

Small Finance Bank

  • Ujjivan currently has 462 branches and 367 of these have been converted to bank branches. In Q1 this number was 275 and in Q3 FY18 this number was about 121. So in Q2, 92 of these centers were converted to bank branches. By the end of FY19 the company wants to have 475 bank branches and 48 non-bank centers. These 48 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 having less than 5 lakhs in Savings account. For wholesale clients (trusts, societies and corporates) having savings account with Ujjivan, the savings account rates are higher. Retail term deposits grew by 83% quarter-on-quarter. Institutional deposits have seen a growth of 31%. Overall deposits are seeing great traction among the public. By the way the cost of deposit for the quarter was 7.7% and the marginal cost of deposit was 8.01%
Deposit Type Q2 FY19 Crores or % 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

 1313 Crores

377 Crores

936 Crores

 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 1714 Crores 1307 Crores 1179 Crores 799 crores 607 Crores 364.3 Crores 200 Crores
Certificate of Deposit 1162 Crores 1746 Crores 2166 Crores 1379 Crores 615 Crores 0 0
CASA to Total Deposits 9% 6.28% 3.65% 3.69% 4.59% 5.3%
Retail to Total Deposits 31.3% 19.72% 11.32 10.58% 9.4% 9.8%
Average cost of Deposits 7.5% 7% 5.6%

Summary

  • Management expects the company to grow at 30-35% overall. The microfinance is expected to grow at around 20%.
  • Revenue grew at a very modest rate of 23%. With respect to PAT, the company is in black now as the provisioning has significantly come down to the levels of FY17.
  • The return-on-equity stands at 12%. This was disappointing. An ROE that is less than 15% is definitely bad news. The company wants to reach a steady state ROE of 17-18% in the next couple of years.
  • Cost-to-income is still at an uncomfortable level of 77% and the management expects it to remain at 70% for FY19. I am disappointed on this front. NIM was higher in Q2 at 12% which was a positive aspect of the results
  • NPA has been dropping over the past few quarters. GNPA at about 1.9% is still a little uncomfortable. NNPAs have stabilized at around 0.3%.
  • Ujjivan is swiftly moving towards a borrowing profile predominantly made up of deposits. Deposits currently make up 49% of the borrowing profile.
  • The company is fairly comfortable with the Tier 1 capital which stands at around 23%. There is no immediate need for equity infusion in FY19. However the recent news flows on listing of SFB are definitely distracting. I hope we get some clarity in the near future.
  • The company ventured into Personal loan and two wheeler loan segment in Q1 and it seems to be aggressively pursuing these options.
  • The collection efficiency stands at 99.6% which is very good. The company has been able to keep this number intact for the past 15 months.

Overall this was a decent quarter. In H1 FY19 the company has seen a decent growth and I hope that the company manages to maintain the growth rate for the entire 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.