Towards the end of April, Ujjivan came out with the results of Q4 FY17. Below is a summary of my analysis of the Q4 results. Before you have a look at the results I recommend you to go through the below links, in case you have not done yet.

Financial Analysis

The table below shows the financial performance of Ujjivan finance for Q4 of FY17. We compare the results with Q4 of FY16

Q4 FY17 (Crores) Q4 FY16 (Crores) % change As a % of revenue for Q4 FY17
Revenue 340 298 14.1%
Expenses 298.22 205.42 45.17% 87.7%
Profit before taxes 34.60 84.30 -58.9% 10.1%
Tax 15.25 29.39 -48.11% 44% (as a % of PBT)
Profit after taxes 19.35 54.91 -64.76 5.69%

The revenue numbers showed a very moderate growth of 14.1% compared to Q4 FY16. The expenses should have ideally grown at similar pace. But we notice that the expenses grew at 45%. This messed up all further numbers. PBT was down 58% and PAT was down 64%! There are few reasons cited by the management:

  • Revenue growth was slower due to slower payment of EMI by customers due to demonetization.
  • Expenses are higher dues to expenses related to SFB. Resulting in a decline in PAT.

We will look at both the aspects. Let us first have a look at the expenses.

Note: Ujjivan tried Priority Sector Lending Certificates (PSLC) in this quarter. Due to lack of experience, the company found the process as an uphill task and could manage to earn only 7 lakhs out of this. It plans to take this up on priority in coming quarters as it is a priority sector lender and by nature it can leverage this aspect.

Expenses

The table below compares the expenses for Q4 FY17 and Q4 FY16.

Expense Item Q4 FY17 (Crores) Q4 FY16 (Crores) % Change
Finance costs 161.69 117.94 37.09%
Employee expense 76.54 53.79 42.2%
Other expenses 54.84 31.59 73.59%
Provisions and write-offs 7.17 8.24 -12.9%
  • Overall there has been an increase in expenses in all aspects. As expected there is a spike in Other expenses which can be attributed to the SFB expenses. There is an increase in the employee expenses which could be due to hiring of specialized people for SFB.
  • Finance Costs: What puzzled me was the increase in finance costs. If the revenue growth has been 14% why should there be an increase in finance costs by 37%? Hence finance cost is not in commensurate with the revenue growth. Then I started to wonder if the company borrowed more to fund the SFB expense? Or were the borrowings done to meet the Cash Reserve Ratio (CRR) requirements for the SFB? In the conference call Ms. Sudha clearly mentioned that CRR and SLR requirements forced the company for higher borrowing which led to higher finance costs (interest cost). I hope these are the Birth pangs of SFB that get sorted out by next quarter.
  • Provisions and write-offs: The most reassuring part of this quarter was the provisioning numbers which came in at 7 crores. We saw in Q3 FY17 analysis that the provisioning has spiked to 54 crores on the back of demonetization. Hence, to me, the best takeaway from Q4 results is the fact that provisioning has come down! Management informed that, the company sees a loan default risk in accounts worth 70 crores. And it has provisioned about 63 crores till now. The rest needs to be provisioned, but it thinks it can recover some of the loans and hence it did not provide provisioning for these loans in this quarter.

The Net Interest Income (NII) that the company has generated is shown in the table below (The table compares the NII for Q4 FY17 v/s Q3 FY17). Due to falling borrowing rates and additionally the company now being an SFB, its lending rate has come down from 22% to 21.25% the NII for Q4FY17 has come down.

Q4 FY17 (Crores) Q3 FY17 (Crores)
Net Interest Income (NII) 128 199

For the entire year the NII looks as below. From a full year perspective the numbers look pretty good even though the Q3 and Q4 were disappointing for the company.

FY17 (Crores) FY17 (Crores) % Change
Net Interest Income (NII) 687.41 510 34.8%

Other Numbers

  • Cost-to-Income: Year-on-year for Q4 the numbers are quite staggering. I believe SFB related expenses were the major contributors here.
Q4 FY17 Q4 FY16 Q3 FY17
Cost-to-Income 76.6% 48.77% 49.33%

The cost-to-income for entire FY17 stands at 53% which was roughly 51% in FY16. Management had warned in previous quarters that the numbers will hit close to 61% before it starts to come down. However in Q4 the company updated that it expects the cost-to-income to be 70% for FY18. The coming quarters need to be watched closely as all the MFI branches turn to SFB branches leading to higher operational costs and hence higher cost-to-income.

  • Net Interest Margin: The NIM for Q4 F are given below. The numbers have dropped substantially compared to Q4 FY16!
Q4 FY17 Q4 FY16 Q3 FY17
NIM 8.61% 12.65% 13.22%

The NIM numbers for FY17 and FY16 are given in the table below:

FY17 FY16 Q3 FY17
NIM 12.57 12.23 13.22%

The NIM numbers for SFBs and MFIs always amaze me. When regular banks struggle to keep NIMs around 3-4%, the SFBs show more than 12%! No wonder, in good days their PAT keeps growing at the rates they do and no wonder the market participants love MFIs and SFBs.

  • Gross Non performing (GNPA) The GNPA was a bouncer this time. In Q3 FY17 Ujjivan management has not used the 90 day grace period option. But in Q4 the company revealed that they had opted for the 90 day grace period option (dispensation) due to demonetization. Without the grace period or dispensation the GNPA stands at 3.7% whereas with the grace period the GNPA stands at 0.28%. I was clearly not satisfied with this disclosure. Why did Ujjivan decide to take the dispensation option now and not in Q3 FY17.
  • At the end of Q4 FY17, the employee strength stands at 10,167. At the end of Q3 FY17 it was 9,593 and in Q2 FY17 the strength was 8800. Increase in employee strength clearly shows that business is growing and the company foresees more business in future.
  • The disbursements for Q4 FY17 stood at 1407 crores. The average disbursement are generally about 600 crores. Hence, ideally the disbursement should have been around 1800 crore or thereabouts. This clearly shows that the company has not come back to its pre-Demonetization disbursement rate. No wonder the revenue growth was mere 14%.
  • The gross loan book stood at 6379 crores and net loan book stood at: 5871 crores. The difference between the two should be the securitized loan book.
  • The customer base for the company stands at 3.6 million.

Borrowing Profile

  • Borrowing profile describes the various sources of borrowings for Ujjivan and the composition of these instruments in the overall borrowing mix. Term loan still occupies a major chunk of borrowing. This is a high interest loan from banks. In absolute number terms it has been increasing every quarter. Refinancing facility (from institutes like NABARD, Mudhra etc.) has seen a substantial jump in Q4. I believe the interest cost for refinancing should be cheaper compared to term loans. Securitization has remained more or less consistent (in absolute number terms). Similar observation for Non-Convertible Debentures (NCD).
Type of Lender As on Q4 FY17 (Crores) As a % of Total As on Q3 FY17 (Crores) As a % of Total As of Q2 FY17 (Crores) As a % of Total
Term Loan 3934.15 63% 3687.28 64% 3562.30 69%
Refinancing Facility 1023.93 16% 519.67 9% 342.67 7%
Securitization 508.32 8% 541.54 9% 485.74 9%
NCD 825 13% 843.75 15% 508.75 10%
Sub-Debt 50 1% 50 1%
Commercial Paper 100 2% 225 4%
Total Outstanding Amount 6291.40 5742.23 5174.46

Loan Book Analysis

Type of Loans:

Table below shows the ratio of disbursement for repeat customers v/s fresh customers. There is a clear bias towards existing customers. Ujjivan was conservative this quarter and lent predominantly to existing customer. Even quarter-on-quarter the inclination towards safety is clearly visible.

Type of Loan Q4 FY17 Q4 FY16 Q3 FY17
Repeat 79.03% 64.48% 72.77%
Fresh 20.97% 35.52% 27.33%

In the same breath let us look at the customer retention ratio. The company managed to retain 86.4% of its customers. Year-on-year the number has remained constant. This shows customer stickiness which is a very important factor for any company.

Q4 FY17 Q4 FY16
Customer retention 86.4% 86.3%

Rejection of Customers loan application:

Ujjivan frequently rejects loan requests of its customers. Below are some of the major reasons why Ujjivan rejected loan applications. As expected, in Q4 FY17, many customers were overdue and they still came for new loans and their applications were rejected. Quarter-on-quarter this number has jumped from 11% to 26%.

Rejection Reason Rejection Rate in Q4 FY17 Rejection Rate in Q3 FY17
Customers already had 3 MFI loans 40.9% 48%
The customers are overdue on their existing loans 26.6% 11%
Customers have existing loans > 60,000 17.4% 23%
Customers already had 3 MFI Loans or existing loans > 60,000 10% 12%

Loan Book Composition:

Let us look at loan book composition. The company has rejigged its loan book disclosure format. Previously the company used to disclose the loans as: Micro-finance, MSE, Hosuing and Agri. But from Q4 the loan book is disclosed in four different segments, namely, micro-finance, micro individual loan, MSE and housing. The year-on-year numbers are given below. Ujjivan is living up to its claim of spreading its business to MSE and housing sector. Percentage wise the Y-o-Y growth is phenomenal.  Overall year-on-year growth is about 18.39%

Loan Book Composition Up to Q4 FY17 (Crores) Up to Q4 FY16 (Crores) Y-o-Y Growth (%)
Micro-finance 5416 4694.79 15.35%
Micro Individual Loans 808.62 666.38 21.34%
Micro-Small Enterprise 56.35 6.54 761.6%
Housing 98.56 20.89 371.80%
Total 6379 5388 18.39%

Loan book growth is one aspect of lending which shows new loan growth, however one must keep an eye on the loan disbursement as well. It gives a picture on the lending done by Ujjivan. The table below shows the Y-o-Y loan disbursement for Ujjivan.  On the same lines as loan growth, loan disbursements have seen similar behavior. MSE and housing both have seen higher disbursements. The disbursement growth for micro-finance and micro individual loans was below par and well below my expectation. Ujjivan was very cautious in Q4 lest it causes higher NPA.

Loans Disbursed Q4 FY17 (Crores) Q4 FY16 (Crores) Y-o-Y Growth (%)
Micro-finance 6290.59 5919.01 6.27%
Micro Individual Loans 704.80 673.08 4.71%
Micro-Small Enterprise 54.15 6.34 754%
Housing 82.73 20.81 297.54%
Total 7132.28 6619.23 7.75%

Small Finance Bank

  • As of April end the number of SFB branches stands at 26 As of June 15th the number of branches increased to 42. The company plans to open, in all, 171 branches by end of FY18.
  • Subsequently in two years the company plans to convert all its 457 MFI asset centers into SFB branches.

Regarding Sorepoint from Q3 Results

In Q3 FY17 analysis (Click Here), I had mentioned that only 1/5th of the housing loans were secured. Rest 4/5th were unsecure. In Q3, I was disappointed with this because you cannot have majority of home loan product without a collateral. As if taking a cue from this statement, this time, the company restructured their reporting of lending portfolio. Now all secured lending is categorized as home loan and non-securitized lending is treated as individual loans. Ok, now this is what I infer from the management’s statement above, let us assume that a customer comes to the bank and says I need a “home improvement loan” to paint my house and I need a loan between 50,000 to 1,50,000. The bank now says, ok I give you the loan, I will not take a collateral as it is just an improvement loan. But when I report to the world I will disclose this loan as Individual loan and not categorize it as home loan.

Summary

It would be appropriate to summarize the above discussion as described below:

  • Overall this was not a very subdued quarter for me. The revenues were down, expenses and cost-to-income shot up, profits and NIM tanked.
  • I could see two reasons for the lackluster quarter
    • Demonetization: After effects of demonetization, with repayments still seeing headwinds. On top of that, the company, as a prudent measure went for a low customer acquisition and a very dismal disbursement rate leading to lower revenue growth.
    • Banking Provisions: SLR and CRR provisioning meant that Ujjivan had to do more borrowing for non-business expenses, leading to higher expenses (i.e. finance cost) and hence a significant drop in EBITDA and PAT. To me somehow this point seemed more of a damper than effect of demonetization.
  • From what I read, SLR and CRR impacts seems to have been absorbed in Q4 FY17. In coming quarters, hopefully, there should not be an additional impact due to these two.
  • Provisioning: The management made bulk of the provisioning in Q3 and going forward I expect the provisioning to return to the normal levels. This was a positive point for me.
  • Borrowing costs: With the liability accounts coming in, the borrowing costs should come down hence leading to better and stable yields. This needs to be watched carefully.
  • Outlook for FY18: Management believes that microfinance will grow at 15%. MSE and housing will grow at a relatively faster rate. Hence, overall, Ujjivan will see a growth in the range of 20-25%. After a burst of growth over the years, Ujjivan seems to be taking a breather in FY18.
  • Risks: Some risks one must look out for, in the coming quarters are: loan waivers by govt, drought due to lack of rain, defaults due to non-payment as an aftereffect of demonetization.

Reference

[1] Q4 FY17 Results

[2] Q4 FY17 Investor presentation and Conference Call

[3] http://www.livemint.com/Companies/mkfXqbkNdXoNXtLdkFKv4M/Demonetisation-impaired-Ujjivan-Banks-asset-quality-CEO-Sa.html

[4] http://www.dnaindia.com/money/report-ujjivan-bank-sees-usp-in-rs-200-insurance-premiums-small-ticket-loans-2424410

[5] http://timesofindia.indiatimes.com/business/india-business/ujjivan-sfb-to-focus-deposit-base-growth-initially/articleshow/58523077.cms

[6] http://www.thehindubusinessline.com/money-and-banking/ujjivan-smal-finance-bank/article9683062.ece

[7] http://www.deccanherald.com/content/617926/mfis-yet-recover-demonetisation-impact.html

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.