Ujjivan’s Q1 FY20 results are just around the corner. Before these results come out, let us have a quick look at the Q4 FY19 numbers. But before looking into the results, I recommend that you have a look at the following links (in case you have not read them yet).

Financial Analysis

The table below shows the financial performance of Ujjivan finance for Q4 of FY19. We compare the results with Q4 of FY18

Q4 FY19 (Crores) Q4 FY18 (Crores) % Change
Revenue 604.2 460.9 31.1%
Expenses 531.3 363.0 46.3%
Profit before taxes 73.0 97.9 -25.4%
Tax 9.1 33.0 -72.3%
Profit after taxes 63.8 64.9 -1.6%
  • The revenue growth was pretty decent but the PBT was not commensurate with the revenue growth. The main reason being a higher expense growth that brought down the EBIDTA. There was/were some expenses that were higher than expected leading to lower EBIDTA. We will look at them when we analyze the expense items.
  • Tax: Q4 saw a nominal tax outgo for the company. When asked about this, the management informed that they availed a tax relief from the government under section 80JJAA, wherein a company gets a tax relief if they hire more people with salaries less than Rs. 25,000 rupees per month. The relief seems to be given by the government because the bank is (supposedly) generating additional jobs. This relief is spread over three years, hence one can expect the relief to be available next year as well (though the quantum of tax reduction would vary).
    • The other reason cited by the company for lower taxes is that since its top line is less than 250 crores, it comes in the 25% corporate tax bracket! I did not get that. Probably the management meant bottom line and not top line (but even then, the PBT for FY19 was 269 crores. How can the company be in the 25% corporate tax bracket. I am not sure I got this point from the management).

The table below captures the revenue and PAT growth for the past four quarters. Clearly the revenue growth was pretty steady. PAT growth was oscillating because of higher expenses due to branch conversions which we shall explore in greater detail throughout the article.

Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19
Revenue 31.1% 33.4% 23.6% 28.7%
Profit after taxes -1.6% 54% 160.1%

Expenses

The table below compares the expenses for Q4 FY19 and Q4 FY18.

Expense Item Q4 FY19 (Crores) Q4 FY18 (Crores) % Change
Finance costs 217.2 153.3 41.7%
Employee expense 152.3 95.8 59.0%
Other expenses 132.7 67.0 98.2%
Provisions and write-offs 12.4 34.7 -64.4%
  • From the expenses table it is clear that the abnormal growth in employee expense and other expenses led to the overall increase in expense. The company was in the final lap of conversion of asset centers into SFB branches. The growth in expenses was predominantly due to branch conversions.
    • When asked specifically why Q4 got impacted (when, in fact, Q4 had only 10 branches being opened/converted), the management informed that this is an expense spillover from braches opened in previous quarters. So, the company would have opened SFB branches in Q2 and Q3 but the full hiring and other expenses (like IT etc.) for these branches would not be completely accounted/closed/reflected in Q2 or Q3. The costs for these got piled up in Q4. So Q4 costs are predominantly a spillover of branches opened in Q2 and/or Q3.

Other Numbers

  • Cost-to-Income: Employee expense and other expense growth impacted cost-to-income which came in at 78.0%. Management is guiding cost-to-income at 72% for FY20.
    • In FY20, the management would like to go into consolidation mode and hence will open only about 100 more branches (which include conversion of 50 asset centers into SFB branches).
    • By the way, when asked about the reason why the cost-to-income will be 72% for FY20, Samit made an interesting point that most of the branch conversions happened in H2 of FY19. So the impact of these branch expansion will actually be felt in FY20 (new employee onboarding for the branches opened towards the end of FY19 etc.). Moreover the 100 branch conversion/expansion will also add to the cost.
    • And management reaffirmed that they are cognizant of this fact and are starting to curtail costs (ex: the branch expansion costs are actively being optimized in FY20). Management believes that the path to reducing costs (OPEX) is to leverage cross selling opportunities to existing customers (which reduces the acquisition costs) and to exploit the fee income path.
Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19
Cost-to-Income 78.0% 77.7% 77.4% 72.3%
  • Net Interest Margin: The NIM for Q4 was 11.7%. FY19 saw fairly consistent NIMs that was on the higher side.
Q4 FY19 Q3 FY19 Q2 FY19
NIM 11.7% 11.8% 12.0%
  • Return on Equity: ROE has improved in Q4. For FY19, the ROE was 10.7%. Management is guiding an ROE of 14% for FY20. The management expects to reach an ROE of 18% in another three to four years.
Q4 FY19 Q3 FY19 Q2 FY19
ROE 13.3% 9.7% 9.7%
  • Gross Non-performing Asset (GNPA) The GNPA and NNPA dropped to 0.9% and 0.3% respectively. From the demonetization quarter till Q4, the NPA numbers have seen a steady drop.
Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
GNPA 0.9% 1.4% 1.9% 2.7% 3.6% 4.24% 4.99%
NNPA 0.3% 0.3% 0.3% 0.3% 0.7% 1.04% 1.38%
  • Employee Strength: There is a moderate increase in the employee strength in Q4 FY19.
Q4 FY19 Q3 FY19 Q2 FY18 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
Employee strength 14,757 14,305 13,169 12,295 11,242 10881 10,755
  • Customer Base: The number of active borrowers for Ujjivan stands at 46.1 lakh. The company has started to add new customers at a decent pace.
Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
Customer base 46.1 lakh 41.4 lakh 40.3 lakh 36.9 lakh 37.1 lakh 37.13 lakh 36.64 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. In Q1 FY19, the management had indicated that for FY19, the deposits will constitute about 75-80% of the total borrowing mix. The company could not achieve these numbers though.
Type of Lender Q4 FY19 (Crores) As a % of Total Q3 FY19 (Crores) As a % of Total Q2 FY19 (Crores) As a % of Total Q1 FY19 (Crores) As a % of Total
Term Loan (banks/NBFC) 239 2% 185 2% 426 5% 933 12%
Refinancing Facility 3711 31% 3143 34% 3325 39% 2410 31%
NCD 119 1% 92 1% 512 6% 622 8%
Deposits 7422 62% 5361 58% 4177 49% 3810 49%
Total Borrowing 11971 9244 8525 7775
  • We get a better picture when we look at the borrowing profile evolution over the past seven quarters. The table below lists the transformation of the company towards low cost options. Note the constant drift from Term loans to deposits over the past few quarters.
Type of Lender  Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18 Q1 FY18 Q4 FY17
Term Loan (banks/NBFC) 2% 2% 5% 12% 16% 25% 39% 55% 63%
Refinancing Facility 31% 34% 39% 31% 26% 24% 21% 18% 15%
NCD 1% 1% 6% 8% 8% 9% 9% 9% 12%
Deposits 62% 58% 49% 49% 49% 35% 20% 6% 3%
Others 4% 5% 2% 0% 0% 8% 11% 12% 7%
  • Due to the above borrowing mix, over the past few quarters, the cost of borrowing has been coming down for the company.
Item Q4 FY19 (%) Q3 FY19 (%) Q2 FY19 (%) Q1 FY19  (%) Q4 FY18  (%) Q3 FY18 (%) Q2 FY18 (%)
Weighted Average Cost of borrowing (including the Deposits) 8.5% 8.5% 8.5% 8.6% 9.0% 9.3% 9.61%

Loan Book Analysis

Loan Book Composition:

The loan book composition numbers are given below. Secured loans now make up close to 15 percent of the loan book. The emphasis on MSE and housing is quite evident in the numbers below.

  • By the way the management expects the MFI loans (including Group loans and Individual loans) to make up about 70% of the loanbook by FY 21. Their long term target for MFI : non-MFI split is 50 : 50.
Loan Book Composition Q4 FY19 (Crores) Q4 FY18 (crores) Growth (%) Q3 FY19 (Crores)
Group Loans 8311 6317 31.5% 7,267
Micro Individual Loans 857 688 24.5% 730
Micro-Small Enterprise 591 224 163.8% 451
Housing 830 323 156.9% 668
Rural 185 8 99
Other 275 134

Loan Disbursements: Loan disbursements gives us a dynamic view of the loan book. The table below shows the loan disbursement details. As envisaged by the management, the direction of disbursement is inching towards MSE and housing loans.

Loans Disbursed Q4 FY19 (Crores) Q4 FY18 (Crores) Growth (%) Q3 FY19 (Crores)
Group Loan 2805 1910 46.8% 2268
Micro Individual Loans 285 174 63.8% 202
Micro-Small Enterprise 185 73 153.4% 134
Housing 195 98 98.9% 157
Rural 107 47
Others 150 77

The other metric worth looking at is the average ticket size of the loan. The ticket size for MSE and Housing loans have been going up. Personally, I prefer larger ticket size loans. It leads to efficient management of client base (provided the customers are credit worthy).

Average Ticket Size Q4 Fy19 (Rs) Q3 FY19 (Rs) Q2 FY19 (Rs) Q1 FY19 (Rs) Q4 FY18 (Rs) Q3 FY18 (Rs) Q2 FY18 (Rs)
Group Loan 31,363 31,517 29,506 30,192 26,828 27,591 24,677
Micro Individual Loans 87,531 81,976 80,929 79,545 75,518 75,646 73,893
Micro-Small Enterprise 10,10,000 7,40,000 5,80,000 5,21,620 3,46,830 3,47,040 3,27,816
Housing 9,40,000 9,10,000 9,30,000 8,26,000 6,31,213 6,41,463 5,79,447

Small Finance Bank

  • Ujjivan currently has 474 SFB branches. In Q4, ten asset centers were converted to bank branches.
    • As we noted above, for FY20, the management would like to open 50 new branches and convert the remaining 50 asset centers into SFB branches.
  • Deposits now form close to 62% of all the borrowings. Let us try to dissect the deposits.
    • Institutional deposits have grown at a good pace. This shows the interest of institutions in lending to the bank (probably due to the higher rate of interest that Ujjivan offers)
    • By the way, the management has a long term vision of having 10x the number of customers and management realizes that one cannot reach this number by selling standalone products like current account or savings account. They will need to address the needs of customers holistically and hence there is a need to provide end-to-end solutions to their customers (and not just standalone products like CASA accounts). The company has identified seven segments which may need these holistic solutions and is trying to address their needs (ex: the company has launched cash management service, corporate Internet banking service which go beyond plain vanilla CASA accounts. The company has also tied up with fee based school/college management solution provider e-Shiksa). I am sure these initiatives will increase the stickiness of customers.
Deposit Type Q4 FY19 Crores of % Q3 FY19 Crores or % Q2 FY19 Crores or % Q1 FY19 Crores or % Q4 FY18 Crores or % Q3 FY18 Crores or % Q2 FY18 Crores or %
Retail Deposits

CASA

Term Deposit

 2739 Crores

784 Crores

1955 Crores

 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
Institutional Deposits 3,658 Crores 2,468 Crores 1714 Crores 1307 Crores 1179 Crores 799 crores 607 Crores
Certificate of Deposit 982 Crores 963 Crores 1162 Crores 1746 Crores 2166 Crores 1379 Crores 615 Crores
CASA to Total Deposits 10.6% 10.4% 9% 6.28% 3.65% 3.69% 4.59%
Retail to Total Deposits 37.1% 36.2% 31.3% 19.72% 11.32 10.58% 9.4%
Average cost of Deposits 7.8% 7.8% 7.5% 7%

Summary

  • Revenue growth was very decent. PAT growth was dismal due to increase in Employee & Other expenses.
  • Cost-to-income continues to disappoint and is still high at 78%. Management continues to guide a higher cost-to-income for FY20.
  • ROE improved in Q4 to 13.3%. ROE for FY19 was 10.7% and the management is guiding an ROE of 14% for FY20.
  • Both the NPA and provisioning numbers are very encouraging. I hope one can now take a sigh of relief.
  • Customer base growth and employee count growth is a positive sign for future growth.
  • Borrowing mix is strengthening in the direction of deposits. Again a very good sign.
  • Loan book growth and disbursement growth were primarily focused on MSE and Housing segments. The company is moving towards a 50:50 split between Group-Lending vs Housing & MSE business.

Q4 FY19 showed a consistent growth on all the parameters.

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.