Wishing you a very happy and prosperous new year 2017. As we step into 2017, let me start off with the Q2 FY17 results for Ujjivan. Results were announced sometime in November 2016 and we are almost at the verge of the Q3 earnings being announced by most of the companies. So before we get bombarded with Q3, let me quickly summarize Q2 results. Before we go through the Q2 results, I strongly suggest you to read my article on Ujjivan (in case you have not gone through it before). You can find the details in the link below:

Financial Analysis:

The table below shows the financial performance of Ujjivan finance for Q2 of FY17. We compare year-on-year results with Q2 of FY16

Q2 FY17 (Crores) Q2 FY16 (Crores) % change As a % of revenue for Q2 FY17
Revenue 356.99 243.4 46.67%
Expenses 244.36 183.43 33.22% 68.4%
Profit before taxes 112.63 59.97 87.81% 31.54%
Tax 39.62 21.48 84.43% 35.17% (as a % of PBT)
Profit after taxes 73.01 38.49 89.69% 20.45%

As seen clearly from the table the revenue grew at a very healthy rate of 46.67%. However the expenses have grown at a slower rate of 33% which indicates that the company has been able to bring-in some amount of efficiency in reducing the expenses I can think of two reasons for the reduction in expenses:

  • Loan book per employee has grown from 53 lakhs to 73 lakhs. Hence fewer employees were needed for corresponding growth in loan book. This clearly results in lesser expenses.
  • The borrowing profile for Ujjivan has now moved away from pure term loans to refinancing, securitization and commercial paper. These new borrowing options reduce the finance costs and hence the expenses. Please look at the borrowing profile section for more details.

The profit before taxes has grown at 87.81%. The tax rate for the company stands at about 35.17%. I am not sure if there is a way to reduce the tax rate. So the tax outgo growth was 84.43 percent which is in-line with profit before tax growth. The profit after tax has grown at the rate of 89.69% which is slightly higher than PBT, but more or less in-line with PBT. 89% growth in profits is amazing ! I am not aware of many companies that can show this kind of secular rise in profits (i.e. without any exceptional items or one-off payoffs etc).

Expenses:

Let us also look at what type of expenses does Ujjivan incur. The table below shows some of the major expenses for Ujjivan.

Expense Item Q2 FY17 (Crores) Q2 FY16 (Crores) % Change
Finance costs 127.43 100.02 27.4%
Employee expense 64.48 48.86 31.97%
Other expenses 42.97 25.05 71.56%
  • From the numbers we notice that finance costs have grown at a slower pace. I am guessing this could be because of using other modes of financing like refinancing, securitization and commercial paper.
  • Employee expenses would have grown because of increase in salary as well as increase in headcount.
  • The notable point about expenses is the “other expenses” which has grown by 71.56%. Other expenses is an opaque item as there is no split given for the other expenses. I am guessing a major portion of the increase in “other expenses” is due to the expenses associated with Small Finance Bank.

Other Numbers:

  • Cost-to-Income: Cost to income stands at 46.95%. But it is expected to go up once SFB activity picks up in Q3 and Q4 FY17. Due to CAPEX planned in Q4 FY17, it should hit 63%. I think it might stabilize there for some time as the OPEX would subsequently start to kick in. Later on the cost-to-income should come down. There is one interesting twist to this story. Apparently this CAPEX requirement was factored in by the company due to RBI guidelines that certain number of branches need to be in Unbranched Rural Centers (URC). However, very recently, RBI has come out with a different set of guidelines due to which 60 branches of Ujjivan qualify as URC branches. Hence CAPEX on URC branch requirements would be less. Hence the cost-to-income might be less than the expected 63%. This is good news!
    • Regarding URC requirement from RBI, out of all the branches and offices that a company has, 25% should be either in the unbanked rural areas and/or in the north-east region.
    • Since Ujjivan has 469 branches (and it might open new branches), it has to ensure that 25% of them are in unbanked URC or notheast. Ujjivan already has 63 branches/centers in north east. So to some extent it meets the criteria, and hence the supposedly lesser than expected necessity of CAPEX leading to lesser than 63% of cost-to-income ratio being projected.
  • Net Interest Margin: Net Interest Margin (NIM) for Q2 stands at 13.02% . However the company will not be able to maintain these NIMs. Once Ujjivan becomes a bank and its cost of funds go down it might bring lending rates further down to pass on the benefit. This might impact the NIM. Moreover the company is focusing more on secured loans. Once the loans are secured with collateral (ex: Housing loans), the company may not have a justification for higher rates as the defaults can be made good using the collateral. Hence lending rates are bound to come down. And hence the NIMs are going to get impacted in future.
  • Gross Non-performing Assets (GNPA) stand at 0.17% whereas Net NPA (NNPA) stands at 0.04%.
  • Technology Expenses: For the next five years the company plans to spend RS 300 crores on CAPEX and OPEX put together for IT installation and maintenance. Out of this 300 crores, 150 crores would be CAPEX and 150 crores would be the OPEX. Most of this CAPEX would get over by the end of FY17. Beginning Q1 FY18 the OPEX would kick in as the bank branches start becoming functional. The OPEX per branch is expected to be around Rs. 6 Lakhs per month in many states.
  • The company has 8800 employees and the attrition level is about 18.76%. In Q1 of FY17 the company had 7700 employees with an attrition rate of 23.26%. The decrease in attrition levels clearly indicates that employees are happy working for Ujjivan. This is definitely a good sign. Happy staff leads to a better company. No wonder Ujjivan is one of the Great places to work (GPTW) in India!

Borrowing Profile

In order to lend to its customers, Ujjivan has to borrow money from different lenders. The table below shows the borrowing profile from different types of lenders.

Type of Lender As of Q2 FY17 As a Percentage of Total As of Q2 FY16 As a Percentage of Total
Term Loan 3562.30 69% 2768.95 78%
Refinancing Facility 342.67 7% 183.33 5%
Securitization 485.74 9% 8.44 0%
NCD 508.75 10% 546.25 15%
Sub-Debt 50 1% 50.00 1%
Commercial Paper 225 4% – 0%
Total Outstanding Amount 5174.46 3556.97
  • As expected, the Term loan makes up a major chunk of borrowings. This is an expensive option as it is taken from banks and other similar lenders. However the point to note is the fact that this Term loan has reduced from 78% to 69% of its total borrowing profile, which means Ujjivan has found out some other sources of borrowing. Let us look at these.
  • In absolute terms the refinancing facility has more than doubled from 183 crores to 342 crores. These are lower cost loans taken possibly from various government agencies that have been mandated to finance activities of certain nature (ex: rural lending etc).
  • An interesting aspect of the borrowing is Securitization. In Q2 FY16, the contribution of Securitization was next to zero. As of Q2 FY17, it forms 9% of the borrowing profile amounting to 485 crores. And as per the CFO, they are looking at 1000 crores of new securitization. That is a huge amount for securitization. I am wondering what all debt is being packaged together for securitization! Mortgage Backed Securities always gives me a very uneasy feeling aka 2008 crisis!
  • Contribution of non-convertible debentures has come down from 546 crores to about 508 crores. Care and ICRA have given an A+ rating for its NCD up to 565 crores.
  • Another new thing as a part of the borrowing profile is the Commercial Paper. In Q2 FY15, the company had not issued any commercial paper. As of Q2 FY17 the company has issued 225 crores of commercial paper. The company has received an ICRA rating of A1+ for 100 crores and A1+ rating from CRISIL for 250 crores of commercial paper.
  • So the drop in term loan is being compensated by Refinancing, securitization and commercial paper. Probably that is the reason why the cost-to-income has come down and the NIM for the company is improving.

 

Loan Book Analysis:

Type of Loans:

Type of Loan Q2 FY17 Q2 FY16
Repeat 68.77 72.5
Fresh 31.23 27.5

Ujjivan predominantly has repeat customers compared to fresh customers. This leads to two important observations:

  • Repeat customers clearly indicates that credit is like blood for their customers. They cannot function without this for their business needs. From a company’s perspective it shows that there is scope for business. Compare this with an Auto loan. How many times would you buy a car in say 15 years. Probably twice. But if you are taking small credit, your chances of coming back multiple times is higher.
  • Repeat customers gives a hint on the customer preference towards Ujjivan. They are ready to come back to Ujjivan for their future needs. That is a good thing.

Samit also mentioned that they had to reject some of their repeat customers because when these customers came back for a repeat loan, Ujjivan found out that they already had two loans. As per MFIN’s guidelines a customer cannot be given a loan if they already have two loans. So the following might have happened with respect such customers: When the customer took look from Ujjivan he probably hit his limit of 2 loans. Then some third NBFC decided to give this guy a loan. So the Customer had three loans. Then the customer finished his Ujjivan loan and he was now down to two loans and when he went back to Ujjivan for a loan, Ujjivan saw that he already has 2 loans and hence he cannot be given a loan. This could mean that he somehow managed to get a 3rd loan from some NBFC! Ujjivan seems to be cognizant of this fact and might be taking up this matter with relevant people.

Loan Book growth branch-wise and employee-wise:

The table below shows the loan book per branch and loan book per employee. Interesting statistics. The part that interested me was the loan book per employee. In the past one year the company would have hired many people, in spite of that, the loan book per employee has grown from Rs. 53 lakhs to Rs. 73 lakhs. This shows that all the employees have been able to do much more business!

Q2 FY17 (Crores) Q2 FY16 (Crores) Y-o-Y Change
Loan book per branch 13.83 8.72 58.60%
Loan book per employee 0.73 0.53 37.73%


Loan book composition:

The table below summarizes the loan book composition comparison on a year-on-year basis. As you can see micro-finance forms a huge chunk of the total business (Close to 86% of the business). MSE, housing and Agri together contribute to about 13% of the business.

Type of Product Q2 FY17 (Crores) Q2 FY16 (Crores) Y-o-Y growth (%)
Micro-finance 5603 3602 55.5%
Micro-Small Enterprise 316.51 219.55 44.16%
Housing 325.38 219.55 48.20%
Agri & Animal Husbandry 233.1 92.06 153.2%
Total 6485 (includes misc loans) 4088 (includes misc loans) 58.65%

The above table shows the loan-book composition but what about the actual lending that happened during the quarter. The table below shows the lending pattern based on the type of product. From the table it is clear that the actual lending/disbursement has been lower. So the loan book is growing faster but the actual lending is a bit slower. I am not sure if it is seasonal. I will have to monitor this for few more quarters to check this.

Type of Product Q2 FY17 (Crores) Q2 FY16 (Crores) Y-o-Y growth (%)
Micro-finance 1942 1490 30.33%
Micro-Small Enterprise 80.94 74.09 9.24%
Housing 86.01 49.09 75.2%
Agri & Animal Husbandry 71.09 30.66 131.8%
Total 2183 (includes misc loans) 1648 (includes misc loans) 32.4%

Ujjivan charges the following interest rate on the loans:

Type of product Rate of Interest
Micro-finance 21.25%
Micro-Small Enterprise 18-19%
Housing 15-16%
Agri & Animal Husbandry Not known for Q2 FY17


Small Finance Bank (SFB):

Ujjivan received the SFB approval from RBI and is technically an SFB now. Ujjivan plans to start as an SFB from sometime around March 2017. So it would start accepting deposits from customers from that time. The SFB would operate as a subsidiary called Ujjivan Small Finance Bank. So Ujjivan in-turn may eventually turn itself into a holding company. Hiring of senior people for operations like liabilities (CASA), treasury, risk management seems to be complete. Initially few branches (about four) would be rolled out to test the entire process. Subsequently the model would be rolled out in other branches. Q2 FY 17 saw an expense of 13 crores towards the SFB. If Ujjivan is able to garner larger share of CASA accounts, it stands a chance to reduce its borrowing costs and hence offset it with the impending reduction in the lending costs.

Recollection Cycle:

Ujjivan collects money on a monthly basis from its customers.

Branch Spread:

The table below shows the branch spread and the loan-book details across the different regions as of Q2 FY17. There is a tilt towards South and West. Four states, namely, Karnataka (16%), West Bengal(14.41%), Tamil Nadu (13.72%) and Maharashtra (11.47%) make up more than 55% of the branches for Ujjivan.  The Loan book i.e. AUM follows a similar pattern as can be seen from the table below. No single state within these regions contributes more than 16% of the AUM.

Region Branch Count Gross Loan book (Rs Crores)
North 118 1321
South 131 2130
East 128 1934
West 92 1100


Customer Spread:

Q2 FY17 (Lakhs) Q2 FY16 (Lakhs) Q1 FY17 (Lakhs) Y-o-Y Change (in Lakhs) Q-o-Q Change (Lakhs)
Number of Customers 34.80 25.97 32.79 8.83 (i.e. ~34%) 2.02 (i.e. ~6.1%)
  • Close to 75% of the customers are in Urban and Semi-Urban areas. The rest one-third of the customers would be in Rural and Metropolitan areas.
  • 70% of Ujjivan’s customers are self-employed. Generally in the family there are multiple source of income, the husband and wife would be earning. The average annual income of the customers range between 1.5 – 2 lakhs.
  • In this quarter the company added about 2 lakh new customers. Out of them about 4000-5000 would be the MSE/Housing loan customers. Rest of them would be microfinance customers.
  • Customer repayment rate is about 99.78%. This one thing that most of the people watching microfinance are worried about. There is a feeling that since these people do not have a regular stream of income they might turn out to be delinquent. However the repayment rate clearly shows the other way round!
  • At the end of Q2 Customer retention ratio stands at 86%.

Demonetization:

  • Something that hit the company hard post the Q2 results was the demonetization process that led to the withdrawal of 500 and 1000 rupee notes. Soon after the announcement, the company decided not to accept old currency notes and relaxed the repayment dates by 7-10 days for the customers. This led to a collection drop in the first few days. Subsequently, things started to look better. Ujjivan has also been able to lend at an equally brisk rate.
  • Samit mentioned that during his interactions with people, he felt people were apologetic of the delays and seemed more than eager to pay back upon receiving the money from the ATMs or banks. He also mentioned that compared to peers (who, like ujjivan, are allowed to collect only new notes), Ujjivan’s collection was better for November.
  • People in semi-urban and urban areas are showing excellent repayment. However repayment from people living in Rural areas and in Metropolitan areas is showing a strain.
  • The MSE and Individual loans are disbursed and collected in cashless fashion. So the impact of demonetization should be less for these set of customers. However these form a very small part of the entire loan book.
  • Ujjivan also believes that customers who have been with them for years may not switch to other MFIs because of any delays in disbursements to them for future loans or because of non-acceptance of old 500-1000 notes.
  • Close to 60% of disbursement of loans to customers happens via account transfer (digital). But when it comes to repayment of EMIs by customers, only 5% is via onine/digital means. Rest 95% is via cash.
  • With respect to repayment obligations for Ujjivan to its lenders, Ujjivan had sufficient money for repayment for November (December details are not known yet). So they seem to be comfortable with respect to their debt obligations.

PS:

Before we wrap up, this is what Ujjivan said in their press release on December 5th after the tumultuous month of demonetization:

Bengaluru, December 5 2016: Ujjivan Financial Services Ltd. [BSE: 539874; NSE: UJJIVAN], has recorded robust collection rate of 91% in November 2016, even when the cash dominated microfinance sector was reeling under the stress of demonetization

In one of the toughest phases of the company’s recent past, it was able to maintain business-as-usual for 91% of the time! That gives a very comforting feeling for any investor!

Summary

  • Revenue is increasing at a very healthy pace. Even the profits have grown at an amazing rate!
  • Borrowing profile is shifting to lower cost sources of funds.
  • NIM has been consistently growing. It may come down as it becomes a bank.
  • Cost-to-income has come down to 46%. It might go back to 60 odd percent once the SFB branches start to become operational.
  • Company seems to be on-track to increase its loan accounts towards Individual loan products (like MSE and Housing).
  • The company seems to have had a soft landing as far as demonetization is concerned.
  • Overall it seemed like a good quarter and I hope Ujjivan is able to replicate this for many more quarters.

References:

[1] Q2 FY17 Results

[2] Q2 FY17 Investor call and presentation

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.