Ujjivan finance announced the results for Q3 FY18 in February. Let us look at the results for Q3. 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 Q3 of FY18. We compare the results with Q3 of FY17

Q3 FY18 (Crores) Q3 FY17 (Crores) % Change Q2 FY18 (Crores)
Revenue 384.13 371.32 3.44% 378.03
Expenses 337.47 304.92 10.67% 396.04
Profit before taxes 46.66 66.39 -29.71% -18.02
Tax 17.34 22.45 -6.07% -6.07
Profit after taxes 29.32 43.94 -11.95% -11.95

Continuing the slow growth from Q1 and Q2, the revenue in Q3 grew by a meagre 3.44%. The expense growth has moderated to 10.67%. The company was able to show a profit after tax of 29.32 crores which was a de-growth of 11.95% compared to Q3 FY17.

Let us now look at the expense items.

Expenses

The table below compares the expenses for Q3 FY18 and Q3 FY17.

Expense Item Q3 FY18 (Crores) Q3 FY17 (Crores) % Change Q2 FY18 (Crores)
Finance costs 141.35 133.19 6.13% 152.97
Employee expense 93.22 70.72 31.82% 89.53
Other expenses 63.06 43.51 44.92% 55.23
Provisions and write-offs 28.69 54.75 -47.59% 88.19
  • Finance Costs: Finance cost has increased by about 6.13%. As the loan book and disbursements increases the finance costs would automatically increase. However quarter-on-quarter there is a decrease in finance cost.

An interesting metric would be the finance cost as a percentage of revenue. The table below shows the values. It forms slightly more than 1/3rd of the revenue.

Expense Item Q3 FY18 Q3 FY17
Finance costs as a % of revenue 36.79% 35.86%
  • Employee Expense: Employee expense has grown by about 32%. In Q2 we saw the employee expense grow by 39%. As more and more MFI branches are converted to liability branches, specialized people would be needed. Hence the employee costs are bound to increase. Also in Q3 the company has increased its emphasis on housing and MSE. So it has hired people with expertise in these areas. This would have further increased the employee expense. For example, for many of the SFBs branches the company is hiring Branch managers who come with banking experience.

Employee cost as a percentage of revenue is captured below. Clearly the increase in employee expense is reflected in this metric as well. So the company is now paying close to a quarter of its revenue to employees which is up from about 1/5th in Q3 FY17. This number needs to be monitored as the number of SFB branches increase.

Expense Item Q3 FY18 Q3 FY17
Employee cost as a % of revenue 24.26% 19.04%
  • Other Expenses: Other expenses have gone up by about 45%. In Q2 we saw the other expense grow by 28% and in Q1 we saw other expenses grow by 87.76%. I believe the branch expansion is adding to the other expense.

‘Other expenses as a percentage of revenue’ is depicted below.

Expense Item Q3 FY18 Q3 FY17
Other expense as a % of revenue 16.41% 11.71%
  • Provisions and write-offs: Compared to Q2 and Q1 of FY18, the provisioning and writeoffs have come down. Even year on year, the provisioning is down. This is good news indeed.

Other Numbers

  • Cost-to-Income: Quarter on quarter the cost to income has inched up to 69.22% compared to 68.22% in Q2 FY18. Year on year as well there has been a steep increase from 49.33%. The SFB conversion has increased the cost. In Q2 the company had stated that, for FY19 they expect the cost-to-income to range between 55-60%. But when asked about this in Q3, the management was not ready to commit to a number. They would like to provide the details around the timeframe of Q1 FY19.
Q3 FY18 Q3 FY17 Q2 FY18
Cost-to-Income 69.22% 49.33% 68.82%
  • Net Interest Margin: The NIM for Q3 has improved by more than 50 bps. But year on year the numbers are still down.
Q3 FY18 Q3 FY17 Q2 FY18
NIM 11.79% 13.22% 10.55%
  • Gross Non-performing Asset (GNPA) The GNPA and NNPA have drop down to 4.24% and 1.04% respectively compared to higher numbers in Q2 and Q1 of FY18. These numbers however are nowhere close to the 0.25% and 0.05% we saw in Q3 FY17. Q3 FY17 is when demonetization hit the company. We did not see the non-performing assets rising in that quarter, but the subsequent quarters saw the brunt of demonetization. By the way, the GNPA for micro individual loans is about 7.5%. This is the hardest hit segment of all the loans. The GNPA number for group loans is about 4% which is less than the overall GNPA of 4.24%.
Q3 FY18 Q3 FY17 Q2 FY18 Q1 FY18
GNPA 4.24% 0.25% 4.99% 6.16%
NNPA 1.04% 0.05% 1.38% 2.30%
  • PAR and Provisioning: The principal at risk (PAR) has reduced to 383 crores. The provisioning done for this is about 271 crores. The quarter started with 445 crores of PAR. In FY18 the company has written off about ₹131.71 crore. In Q3-FY18 the company has written off about ₹33.53 crore.
  • Employee Strength: Employee strength stands at 10881 compared to 10,755 in Q2 and 10,653 in Q1 FY18.
  • Customer Base: The number of customers of Ujjivan stands at 37.13 lakhs in Q3 FY18 compared to 36.64 lakhs in Q2 and 36.25 Lakhs in Q1 of FY18. In this quarter the company added 1.88 lakh new borrowers.

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 (in the SFB arm). There is an increase in the amount from refinancing facility as well. So overall the borrowing profile looks good!
Type of Lender As on Q3 FY18 (Crores) As a % of Total As on Q2 FY18 (Crores) As a % of Total
Term Loan (banks/NBFC) 1740 24.71% 2670 39.4%
Refinancing Facility 1695 24.07% 1440 21.25%
Securitization 169 2.4% 305 4.5%
NCD 600 8.5% 625 9.22%
Short Term Borrowing 400 5.68% 385 5.68%
Deposits 2436 34.59% 1349 20%
Total Outstanding Amount 7041 6774
  • The average cost of fund has further gone down to 9.3%. This is clearly the effect of increase in deposits in the SFB. This seems to have helped in bringing down the cost of borrowing.
Item Q3 FY18 Interest Rate (%) Q2 FY18 Interest Rate (%) FY 2016-17 Interest Rate (%)
Weighted Average Cost of borrowing + Deposits 9.3% 9.61% 10.45%

Loan Book Analysis

Gross Loan Book

The gross and net loan book details are as given below. In Q2 FY18, the net loan book growth was disappointing at a mere 6%. In Q3 however the net loan book growth has been much better at 14.56%. I feel that by Q1 FY19 we might see better numbers for loan book growth. Note that the securitization has dropped down significantly by 68.8%. Probably there are no buyers for Mortgage Backed Securities. Overall the company expects the loan book growth of 18-20% in FY18. The company is hopeful of growing the loan book at 25% in FY19.

Type of Loan Q3 FY18 (Crores) Q3 FY17 (Crores) Growth (%)
Net Loan book 6926.66 6045.88 14.56%
Securitization 168.62 541.54 -68.8%
Gross Loan Book 7095.28 6587.42 7.70%

Customer Retention

The customer retention ratio has come down quarter on quarter to 85.75%. Historically I have seen that the value hovers around 86%. So the numbers are more or less in-line with the average value.

Q3 FY18 Q2 FY18
Customer retention 85.75% 88%

Loan Book Composition

Let us look at loan book composition.  As expected, Micro finance and micro individual loans make up the major chunk of lending. Micro individual loans have seen a de-growth of 19.4% this could be due to the residual effects of demonetization. The MSE loans are seeing a very good growth (albeit at lower base). Even housing is seeing a good growth. This augers well with the long term vision of the company to see MSE and Housing becoming 50% of the total loan book.  Currently they make up about 5.5% of the total loan book.

Loan Book Composition Up to Q3 FY18 (Crores) Up to Q3 FY17 (Crores) Y-o-Y Growth (%)
Group Loans 6030 5648 6.7%
Micro Individual Loans 673 835 -19.4%
Micro-Small Enterprise 163 31 425%
Housing 228 72 216.6%

Loan Disbursements: Loan disbursements gives us a dynamic view of the loan book. From the below numbers we can see that the disbursements trend follows the loan book composition trend. The group loan disbursement has picked up in Q3. However micro individual loans are down compared to last year numbers. The management has been cautious on this front as the quantum of non-performing loans has been higher due to the Micro Individual loans. MSE and housing disbursement have grown at a higher rate (from a lower base though). Samit informed that they have made some management changes in the MSE and Housing verticals and this is helping in the improvements that are being seen for MSE as well as for housing segments. Overall the loan disbursement grew by 28%.

Loans Disbursed Q3 FY18 (Crores) Q3 FY17 (Crores) Y-o-Y Growth (%)
Group Loan 1876 1463 28.2%
Micro Individual Loans 131.94 164.09 -19.6%
Micro-Small Enterprise 55.53 11.49 383.28%
Housing 70.30 23.92 193.89%

The other interesting metric is the average ticket size of the loans. From the table we see that quarter on quarter the company has managed to increase its ticket size in all the four segments that it operates in. Notable being the housing loan segment where the ticket size is trending higher. Housing has a lower spread but is backed by collateral so it is a safe bet. Looking at the trend, I hope to see even higher average ticket sizes in the coming quarters for MSE and Housing segments.

Loans Disbursed Average  Ticket Size Q3 FY18 (Rs) Average Ticket Size Q2 FY18 (Rs) Average Ticket Size Q1 FY18 (Rs)
Group Loan 27,591 24,677 25,572
Micro Individual Loans 75,646 73,893 72,301
Micro-Small Enterprise 3,47,040 3,27,816 2,96,106
Housing 6,41,463 5,79,447 4,85,264

Small Finance Bank

  • Samit visualizes Ujjivan to be mass market bank rather than limit itself to a small finance bank. He believes this was what RBI would have envisioned when SFB concept was conceived. He feels the PSB is not able to lend to the mass market and he sees Ujjivan filling up the void and catering to this market sometime in the future.
  • Regarding long term growth, Samit believes the company should grow anywhere between 20-30% for many more years to come.
  • In Q3 FY18, Ujjivan SFB started the senior citizens account products [4]. Ujjivan plans to provide 8.5% interest to senior citizens for their Fixed Deposits.
  • Out of the 441 branches, Ujjivan has been able to convert 121 MFI centers into SFB branches. This is an increase of about 30 branches compared to Q2 FY18. In Q4 the company wants to roll out 67 more branches taking the total number to 188. The projected number at the beginning of the financial year was 189, so the company seems to be on track to reach its target for FY18.
  • The best part of this quarter was undoubtedly the deposit growth. Deposits of SFB have grown to ₹2,437 crores compared to ₹1,349 crores in Q2, 403.7 Crore in Q1 and ₹206.4 crore at the end of Q4 FY17. This is a very heartening sign. Deposits now form more than 1/3rd of the borrowing profile! Let us try to dissect the deposits. CASA is not able to keep up with the overall deposit growth. I hope that the company can drive and increase its share. At 4% interest rate this is the best bet for the company to achieve higher NIMs. However a positive side of the deposits is the fact that the retail portion has reached 10% of the total deposits thanks to higher Term deposits. The company offers higher rate for term deposits compared to most of the bank. With respect to Certificate of deposits, there has been a 124% increase quarter on quarter. The cost of ‘Certificate of Deposit’ is about 6 – 6.8% for Ujjivan. The duration of CDs for Ujjivan is anywhere between 3 months to 6 months.
Deposit Type Q3 FY18 Crores or % Q2 FY18 Crores or % Q1 FY18 Crores or % Q4 FY17
Retail Deposits

CASA

Term Deposit

 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 799 crores 607 Crores 364.3 Crores 200 Crores
Certificate of Deposit 1379 Crores 615 Crores 0 0
CASA to Total Deposits 3.69% 4.59% 5.3%
Retail to Total Deposits 10.58% 9.4% 9.8%
Average cost of Deposits 7% 5.6%
  • Regarding CASA accounts, Samit is inclined more towards Savings account compared to current account. He sees savings account making up about 20% of the deposit base in another 2 years. In case of Current account, he believes his clientele would predominantly be MSE customers who may not have large sums of money to keep in current account.

Summary

  • This quarter Ujjivan chugged along and saw modest improvements in Revenue. Profit de-growth continues in Q3 as well.
  • The positive thing to take away from Q3 is the fact that deposits have seen a very healthy growth and now forms a quarter of the borrowing basket. Institutional deposits and certificate of deposits make up a large portion of this. However I hope CASA can improve as the branch conversion gathers momentum.
  • Loan disbursements (at 28%) was healthy. The repayments rates are at 99.7% since Jan 2017. This is definitely a good sign.
  • Provisions and writeoffs are down quarter-on-quarter which is again a good sign.

Overall Q3 FY18 turned out to be a quarter that saw the company walk along the path towards growth and recovery. Hopefully Q4 should be a better quarter.

References

  1. Ujjivan Finance Quarterly Results Announcement Q3 FY18
  2. Ujjivan Finance Investor Presentation Q3 FY18
  3. Ujjivan Finance Investor Call Q3 FY18
  4. https://timesofindia.indiatimes.com/business/india-business/ujjivan-sfb-introduces-customised-senior-citizen-account/articleshow/62039004.cms
  5. https://www.bloombergquint.com/business/2017/11/21/ujjivan-small-finance-bank-puts-merger-rumours-to-rest
  6. http://www.moneycontrol.com/news/business/stocks-business/focus-on-charting-independent-path-eyeing-18-20-growth-in-fy18-ujjivan-fin-servs-2442341.html
  7. https://economictimes.indiatimes.com/industry/banking/finance/banking/ujjivan-bank-to-deploy-500-graduates-to-assist-customer-in-the-digital-platform/articleshow/61771854.cms
  8. http://www.financialexpress.com/industry/over-the-years-microfinance-may-be-only-50-of-our-business-says-coo-of-ujjivan-small-finance-bank/1000892/

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.