Ujjivan announced its Q3 FY19 results in January. Let us have a  look at the results. But before looking into the results I recommend you go through the following links, in case you have not read them yet.

You can also watch the abridged version of the review at the below link.

Financial Analysis

The table below shows the financial performance of Ujjivan finance for Q3 of FY19. We compare the results with Q3 of FY18

Q3 FY19 (Crores) Q3 FY18 (Crores) % Change
Revenue 512.6 384.1 33.4%
Expenses 445.9 337.5 32.1%
Profit before taxes 66.7 46.7 42.9%
Tax 21.5 17.3 24%
Profit after taxes 45.2 29.3 54%
  • Revenue and PAT: The positive momentum from Q1 and Q2 has been carried on to Q3 as well. The company saw the revenue grow by about 33% while the PAT was about 45.2 crores which was a 54% improvement when compared to the PAT for Q3 FY18. The table below captures a quick snapshot of the improvements that the company has seen in its performance in the past 3 quarters.
Q3 FY19 (Crores) % Change (Y-o-Y) Q2 FY19 (Crores) % Change (Y-o-Y) Q1 FY19 (Crores) % Change (Y-o-Y)
Revenue 512.6 33.4% 467.4 23.6% 461.7 28.7%
Profit after taxes 45.2 54% 44.3 45 160.1%
  • Expenses: Expense growth was in line with the revenue growth. The main reason for the increase in PAT growth is due to a relatively lower growth in expense. And the reason for the drop in expenses is due to the lower provisioning numbers. Let us now look at the expense items in detail.

Expenses

The table below compares the expenses for Q3 FY19 and Q3 FY18.

Expense Item Q3 FY19 (Crores) Q3 FY18 (Crores) % Change
Finance costs 182.7 141.4 29.2%
Employee expense 137.3 93.2 47.3%
Other expenses 102.1 63.1 62%
Provisions and write-offs 7 28.7 -75.6%
  • Finance Costs: Finance cost is a major expense for the company which increased by about 29.2%. The important point to note is the fact that revenue grew faster than the finance cost. This is an indicator that the company earned more money than it spent in financing its liabilities. Let us look at the finance cost as a percentage of revenue. The table below shows the values. As a percentage of revenue, there is a decline of 117 bps.
Expense Item Q3 FY19 Q3 FY18 Growth (bps)
Finance costs as a % of revenue 35.64% 36.81% -117
  • Employee Expense: Employee expense has grown by about 47% in Q3. 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. When a new branch is setup, the employee expense needs to be borne upfront. The profits from the branch accrue over a period of time. Hence the employee expense seems higher for Ujjivan. The company expanded/converted 97 asset centers into SFB branches in Q3 FY19. Once the branch conversions are completed by around Q1 FY20 we should see the employee expense growth stabilize at a certain level.
Expense Item Q3 FY19 Q3 FY18 Growth (bps)
Employee cost as a % of revenue 26.78% 24.26% 252
  • Other Expenses: Year-on-Year the other expenses have gone up by 62%. In Q2 FY19 it had 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. We may have to wait for Q2 FY20 results to evaluate and judge these numbers as the branch conversions seem to be skewing these numbers.
Expense Item Q3 FY19 Q3 FY18 Growth (bps)
Other expense as a % of revenue 19.91% 16.42% 349
  • Provisions and write-offs: There is a 75% drop in provisioning in Q3. This was in continuation from Q2 where we saw a 93% drop in provisioning. As expected, provisioning as a percentage of revenue has also dropped substantially as shown in the table below. This indicates that the management is confident about its assets and believes that it can recover the loans on time.
Expense Item Q3 FY19 Q3 FY18 Growth (bps)
Provisioning as a % of revenue 1.36% 7.47% -611

Other Numbers

  • Cost-to-Income: The cost to income has increased from 69% in Q3 FY18 to 77.7%, however, quarter on quarter the numbers have remained flat. The branch transition is adding up to the costs. The management expects the cost-to-income to be round 75% for FY19. Over a longer term of three to four years, management sees the cost to income to drop down to around 55%.
Q3 FY19 Q3 FY18 Q2 FY19 Q1 FY19
Cost-to-Income 77.7% 69% 77.4% 72.3%
  • Net Interest Margin: The NIM for Q3 was 11.8%. On a quarter-on-quarter basis as well as on a year-on-year basis the NIM has remained constant which is definitely a good sign.
Q3 FY19 Q3 FY18 Q2 FY19
NIM 11.8% 11.79% 12.0%
  • Return on Equity: The return on equity was 9.7 for Q3 FY19. ROE is way below the cost of capital in India. This is definitely disappointing. I hope the numbers improve in future.
Q3 FY19 Q3 FY18 Q2 FY19
ROE 9.7% 7.0% 9.7%
  • Gross Non-performing Asset (GNPA) The GNPA and NNPA have dropped down to 1.4% and 0.3%% respectively. Compared to the NPA numbers of the demonetization period, these are pretty tidy set of numbers.
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
GNPA 1.4% 1.9% 2.7% 3.6% 4.24% 4.99% 6.16%
NNPA 0.3% 0.3% 0.3% 0.7% 1.04% 1.38% 2.30%

The company has been publishing segment wise NNPA numbers for the past few quarters. Individual loan NPA has dropped significantly. However the MSE segment seems to be under some stress. The MSE loans need to be monitored closely.

Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
Individual Loan 0.4% 0.5% 0.8% 1.7% 2.3% 2.7%
Group Loan 0.2% 0.3% 0.3% 0.6% 1.0% 1.3%
MSE 1.0% 0.6% 0.6% 0.5% 0.5% 0.5%
Housing 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%
  • PAR and Provisioning: The principal at risk (PAR) has dropped from 267 crores in Q2 FY19 to 220 crores in Q3 FY19.
  • Employee Strength: The Company is adding employees at a very brisk pace. In FY19, the company has added about 1000 employees per quarter. The table below captures the employee strength over the past few quarters.
Q3 FY19 Q2 FY18 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Employee strength 14,305 13,169 12,295 11,242 10881 10,755 10,653
  • Customer Base: The number of customers of Ujjivan stands at 41.4 lakh active borrowers. In the recent quarters, the company has been adding new customers at a decent pace. Good to see that the confidence is coming back and the company is able to lend to more people.
Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18
Customer base 41.4 lakh 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. The company has made excellent progress in garnering deposits. Deposits make up 58% of the total borrowings. In Q1 FY19, the management had indicated that, for FY19, the deposits will constitute about 75-80% of the total borrowing profile. We have one more quarter left and I don’t think we will reach this number in one quarter. By the way, note the significant drop in high cost term loans.
Type of Lender As of Q3 FY19 (Crores) As a  of Total As of Q2 FY19 (Crores) As a % of Total As of Q1 FY19 (Crores) As a % of Total
Term Loan (banks/NBFC) 185 2% 426 5% 933 12%
Refinancing Facility 3143 34% 3325 39% 2410 31%
NCD 92 1% 512 6% 622 8%
Deposits 5361 58% 4177 49% 3810 49%
Total Borrowing 9244 8525 7775
  • We get a better picture when we look at the borrowing profile as it has evolved over the past eight quarters. The table below lists the transformation of the company towards low cost options. Note the constant drift away from Term loans and moving towards the deposits over these eight quarters.
Type of Lender Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q4 FY17
Term Loan (banks/NBFC) 2% 5% 12% 16% 25% 39% 55% 63%
Refinancing Facility 34% 39% 31% 26% 24% 21% 18% 15%
NCD 1% 6% 8% 8% 9% 9% 9% 12%
Deposits 58% 49% 49% 49% 35% 20% 6% 3%
Others 5% 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 Q3 FY19 the weighted average cost of borrowing was 8.5%. Quarter on quarter this number has remained constant. As I was indicating in Q2 result analysis, it would be tough to reduce the cost of borrowing further as the company advertises its deposit rates around 8.25% (for senior citizens the interest rate is about 9.1%) and 58% of the borrowings are made up of deposits. Hence getting further down might be very tough unless the company decides to reduce its FD rates. By the way, average cost of deposits is 7.8%.
Item Q3 FY19 (%) Q2 FY19 (%) Q1 FY19 (%) Q4 FY18 (%) Q3 FY18 (%) Q2 FY18 (%)
Weighted Average Cost of borrowing (including the Deposits) 8.5% 8.5% 8.6% 9.0% 9.3% 9.61%

Loan Book Analysis

Loan Book Composition:

Let us now look at loan book composition. As of Q3 FY19 the loan book size is Rs. 9,349 crores and in Q2 FY19 the size of loan book was 8,317 crores. In Q1 FY19 the loan book was 7787 crores. In Q3 FY19 the company securitized 276 crores worth of loans. Over the past few quarters the company had gone slow on securitization as there were (probably) lack of securitization opportunities. The company has been able to increase the securitization from 10 crores in Q2 FY19 to about 27 crores in Q3 FY19. By the way, with respect to the loan book, the company continues to maintain its focus on housing and MSE loans. Hence in Q3, MSE and housing loan were the fastest growing businesses. With respect to MSE loan book, the management confirmed that they are moving towards secured loan book for MSE. The delinquencies in unsecured book for MSE would have prompted the management to shift towards secured MSE loans.

Loan Book Composition Up to Q3 FY19 (Crores) Up to Q3 FY18 (crores) Growth (%) Up to Q2 FY19 (Crores)
Group Loans 7,267 6,030 20.51% 6,634
Micro Individual Loans 730 674 8.3% 681
Micro-Small Enterprise 451 163 176.7% 352
Housing 668 228 193% 533
Rural 99 0 66
Other 134 0 51

Loan Disbursements: Loan disbursement number gives us a dynamic view of the loan book. The table below shows the loan disbursements for Q3 FY19 vis-a-vis Q3 FY18. In Q3, the total loans disbursed was Rs. 2,885 crores and in Q2 the total loan disbursed was about Rs. 2,383 crores where as in Q1 FY19 the company saw disbursals of about Rs. 2092 crores. The growth numbers clearly indicate that the focus continues to be on MSE and Housing loans.

Loans Disbursed Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%) Q2 FY19 (Crores)
Group Loan 2268 1877 20.8% 1,958
Micro Individual Loans 202 132 53% 151
Micro-Small Enterprise 134 56 139.2% 101
Housing 157 70 124.3% 130
Rural 47 0 34
Others 77 0 9

The other metric worth looking at is the average ticket size of the loan. The ticket size for MSE loans has gone up whereas the ticket size for housing loans saw a marginal decline. Higher ticket sizes are always good as it reduces the acquisition cost for the company and the company need not hunt for many customers to achieve its AUM target. In our previous discussion we noted that the MSE loans have moved from unsecured to secured lending. The rise in MSE ticket size is the direct consequence of moving to secured loans.

Average Ticket Size Q3 FY19 (Rs) Q2 FY19 (Rs) Q1 FY19 (Rs) Q4 FY18 (Rs) Q3 FY18 (Rs) Q2 FY18 (Rs) Q1 FY18 (Rs)
Group Loan 31,517 29,506 30,192 26,828 27,591 24,677 25,572
Micro Individual Loans 81,976 80,929 79,545 75,518 75,646 73,893 72,301
Micro-Small Enterprise 7,40,000 5,80,000 5,21,620 3,46,830 3,47,040 3,27,816 2,96,106
Housing 9,10,000 9,30,000 8,26,000 6,31,213 6,41,463 5,79,447 4,85,264

Small Finance Bank

  • Ujjivan currently has 464 branches. In Q3 FY19, 97 asset centers were converted to bank branches.
  • Deposits now form close to 60% of all the borrowings. Let us try to dissect the deposits. CASA has been picking up at a steady rate it now makes up about 10.4% of the total deposits. Institutional deposits have also grown at a good pace.
Deposit Type Q3 FY19 Crores or % Q2 FY19 Crores or % Q1 FY19 Crores or % Q4 FY18 Crores or % Q3 FY18 Crores or % Q2 FY18 Crores or % Q1 FY18 Crores or %
Retail Deposits

CASA

Term Deposit

1945 Crores

561 Crores

1384 Crores

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

Institutional Deposits 2,468 Crores 1714 Crores 1307 Crores 1179 Crores 799 crores 607 Crores 364.3 Crores
Certificate of Deposit 963 Crores 1162 Crores 1746 Crores 2166 Crores 1379 Crores 615 Crores 0
CASA to Total Deposits 10.4% 9% 6.28% 3.65% 3.69% 4.59% 5.3%
Retail to Total Deposits 36.2% 31.3% 19.72% 11.32 10.58% 9.4% 9.8%
Average cost of Deposits 7.8% 7.5% 7% 5.6%

Growth Drivers for the company

In the coming quarters the growth drivers for the company shall include dedicated efforts to increase the CASA accounts, garner higher deposit base by providing better rates for fixed deposit accounts, extend the corporate internet banking service to SME industries, encourage mobile app based transactions and provide more services linked to savings accounts. The company is also hopeful that 2-wheeler loans and personal loans will drive the business forward.

Summary

  • Revenue growth was pretty decent. PAT growth was excellent at 54%. The company has made great strides in FY19. It should end FY19 on a very positive note.
  • Cost-to-income continues to disappoint and is still high at 77%
  • ROE continues to disappoint at 9.7% another disappointing quarter with respect to ROE.
  • NPAs have been steady which indicates that loan repayments are happening on time. Provisioning numbers are encouraging as well which indicates that the company does not expect large defaults in the near future.
  • Customer base has expanded which indicates that the company is confident and lending to new customers. Employee strength is increasing which is another sign of management’s confidence in the future business opportunities.
  • Borrowing profile has moved decisively towards deposits which is a healthy sign.
  • Loan book growth and disbursement growth were primarily focused on MSE and Housing segments. The company is aiming towards a 50:50 split between Group-lending vs Housing & MSE business.

Overall another quarter of consistent growth. FY19 is turning out to be the best year in recent times.

References

  1. Ujjivan Finance Quarterly Results Announcement for Q3 FY19
  2. Ujjivan Finance Investor Presentation for Q3 FY19
  3. Ujjivan Finance Conference call for Q3 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.