Ujjivan announced its Q3 FY 17 results in the month of January. Let us have a look at how Ujjivan fared in the final eventful quarter of the calendar year 2016. But before we go through the results, I would recommend you to look at the following links in case you have not gone through them

Financial Analysis:

The table below shows the financial performance of Ujjivan finance for Q3 of FY17. We compare the results with Q3 of FY16

Q3 FY17 (Crores) Q3 FY16 (Crores) % change As a % of revenue for Q3 FY17
Revenue 371.32 267.37 38.88%
Expenses 304.92 192.56 58.35% 82.11%
Profit before taxes 66.40 74.81 -11.24% 17.88%
Tax 22.45 26.23 -14.40 33.88(as a % of PBT)
Profit after taxes 43.94 48.58 -9.54% 11.83%

The revenue has grown at a very decent pace of close to 39%. But what came as a surprise was the growth in expense which grew at a much higher rate at 58.8%. As a percentage of revenue, the expenses formed a whopping 82%. PBT came in at 66.4 crores. There was a decline of 11% in profit before taxes. The PAT came in at 43.94 crores with a decline of 9.54%. I was expecting a relatively muted quarter but that should have reflected in revenues not at the level of expenses resulting in lower PAT! So something was amiss at the expense side for Q3.

Let us try to look at the expenses incurred.

Expenses:

The table below compares the expenses for Q3 FY17 and Q3 FY16.

Expense Item Q3 FY17 (Crores) Q3 FY16 (Crores) % Change
Finance costs 133.19 109.31 21.84%
Employee expense 70.72 49.50 42.86%
Other expenses 43.51 25.53 70.41%
Provisions and write-offs 54.75 6.12 794.19%

The finance cost grew at 21.84% which is in-line with (in fact lower than) revenue growth. Employee expense grew at a little higher rate of 42.86%. This could be because of specialized hiring for SFB. Other expenses grew by a huge 70.41%. Again I guess this is because of the expenses due to SFB. What came as a big burden was the provisions and write-offs. Compared to Q3 FY16, there was a 794% increase in provisioning. This was the reason for the humongous rise in expenses.

When asked about this [3], Sudha Suresh, the CFO informed that they are seeing repayments from customers with a lag. People are paying their EMI with one month delay. Hence November dues are being paid in December and in some cases the payments are being received in January. RBI has relaxed repayment time by 90 days. So technically, Ujjivan could have used this 90 day window and not provide any contingency/provision for non-payments. But, to be on the safer side, the company made provisions for non-payment in Q3 for the accounts it feels there could be delayed payments.

Provisions drag down and mask the performance for the company for this quarter. So for the sake of argument let us try to remove the provisions for Q3 FY17 and Q3 FY16 and try to judge the company’s performance sans provisions. The results would have looked as below:

Q3 FY17 (Crores) Q3 FY16 (Crores) % change
Revenue 371.32 267.37 38.88%
Expenses 250.17 186.44 34.18%
Profit before taxes 121.15 80.93 49.69%
Tax (at 35%) 42.40 28.32 49.7%
Profit after taxes 78.75 52.61 49.68%

When the provisions are removed from the expenses, we notice that the growth in expense is inline with the growth in revenue. The PBT growth Y-o-Y is close to 50%. At a constant tax rate of 35%, the PAT growth would also be close to 50% Y-o-Y! This is indeed a very healthy growth rate!

Note: I have simply purged the provisions. I did not do a write-back as I was not sure if that is the way accounting is done. If we write back the provisions as revenue in the above P&L and consider an effective tax rate of 35% the PAT growth would have been close to 102%!!

Another way of looking at this is the Net Interest Income (NII) that the company has generated. The table below shows the details. We notice that the NII growth Y-o-Y is about 44% which is also in-line with the above numbers.

Q3 FY17 (Crores) Q3 FY16 (Crores) % change
Net Interest Income (NII) 199.01 138.27 43.92%

Other Numbers:

  • Cost-to-Income: The cost-to-income stands at 49.33%. It has gone up Y-o-Y as well as Q-o-Q. This was expected due to the expenses incurred towards SFB.
  • Net Interest Margin: The NIM numbers are given in the table below:
Q3 FY17 Q3 FY16 Q2 FY17
NIM 13.22% 12.83% 13.02%

Ujjivan is able to stretch the NIM to 13.22%. Even Q-o-Q There is a 0.2% increase in the NIM! I am delighted to see the NIM at 13% and growing every quarter. Note that the company is not raising the lending rates and yet it is able to increase its NIM. This clearly shows that its borrowing costs are coming down. We shall analyze the reason for the decline in the borrowing costs when we look at the borrowing profile in the next section. It would be interesting to closely monitor this number as the other banks start reducing their lending rates. Moreover with Ujjivan turning into an SFB, I have a feeling its NIMs will come down.

  • Gross Non performing (GNPA) assets stand at 0.25% whereas Net NPA (NNPA) stands at 0.05%. In Q2 the GNPA numbers were 0.17% and NNPA was at 0.04%. Demonetization seems to have had an impact on the GNPA numbers for Q3. However the NNPA numbers are very encouraging. But then the impact of demonetization has to be judged over the next couple of quarters. These are just the initial numbers.
  • The OPEX for Q3 was about 120 crores. Because of SFB activities, the OPEX for Q4 may be around 160 crores.
  • The employee strength stands at 9,593. In Q2 the employee strength was 8800. Ujjivan added close to 800 people in one quarter.
  • The disbursement for November was 553 crores and for December it was 415 crores. In previous months the average disbursement was about 600 crores. Hence there has been a noticeable decrease in the disbursements in November and December.

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 on Q3 FY17 As a percentage of Total As of Q2 FY17 As a Percentage of Total
Term Loan 3687.28 64% 3562.30 69%
Refinancing Facility 519.67 9% 342.67 7%
Securitization 541.54 9% 485.74 9%
NCD 843.75 15% 508.75 10%
Sub-Debt 50 1% 50 1%
Commercial Paper 100 2% 225 4%
Total Outstanding Amount 5742.23 5174.46

As desired, the term-loan’s contribution has come down to 64% in Q3 compared to previous quarter’s 69%. The finance costs of term loans are generally higher. Hence it is in the interest of Ujjivan to have other modes of borrowing. The decrease in the contribution of term loan has been compensated by other borrowing options like Refinancing facility (from institutes like NABARD, Mudhra), securitization and NCD. These options have lower borrowing rates. This is one of the reasons for higher NIM for Ujjivan.

Even in case of Term loan, going ahead, the costs could come down as banks have started to reduce their lending rates.

Loan Book Analysis:

Let us try to analyze Ujjivan’s loan book.

Type of Loans:

Type of Loan Q3 FY17 Q3 FY16
Repeat 72.77% 66.83%
Fresh 27.33% 33.17%

A lending agency should have an optimal mixture of repeat customers as well as fresh customer. Having a loan book with mere repeat customers will limit the growth of a company. On the other hand, a company always catering to fresh customers could indicate potential unhappiness of existing customers. Ujjivan has a healthy mix of repeat and fresh customer. Compared to Q3 of FY16 there has been an increase in repeat customers. Ms. Sudha mentioned that [3] the company was very conservative in Q3 FY17 and limited its lending to existing customers. As the overhang of demonetization ebbs over the next couple of quarters, the company may open-up more to new customers. In-spite of this, the company added about 1.03 lakh customers this quarter (i.e. in October and first week of November).

Ujjivan would invariably reject few customers. There are various reasons why it would reject customers. The below table gives the top reasons for rejection.

Rejection Reason Rejection Rate
Customers already had 2 MFI loans 48%
The customers are overdue on their existing loans 11%
Customers have existing loans > 60,000 23%
Customers already had 2 MFI Loans or existing loans > 60,000 12%

You will notice that among all the reasons, the one concern that impacts the company is the overdue customers as they are existing customers who have not paid their past dues. The number of such rejected customers is 11% which, I believe is a low number compared to the other three which do not directly impact Ujjivan’s health.

Loan Book growth branch-wise and employee-wise:

I could not find these numbers for Q3 FY17.

Loan book composition:

The table below summarizes the loan book composition comparison on a Y-o-Y basis. As expected micro-finance makes up a major chunk of the loan book. In absolute number terms as well as percentage growth terms, micro-finance is growing at a very healthy rate. MSE has also seen a steady growth of 33%. Hosing has seen a very robust growth of 77%. But then I have a big grouse about the housing growth which I will describe in further sections. Growth in Agri and Animal husbandry has seen phenomenal growth of 108% (of course this is on a lower base of Q3 FY16, but nevertheless substantial growth).

Loan Book Composition Q3 FY17 (Crores) Q3 FY16 (Crores) Y-o-Y Growth (%)
Micro-finance 5649 4018.16 40.58%
Micro-Small Enterprise 320.49 240.67 33.16%
Housing 359.45 202.39 77.60%
Agri & Animal Husbandry 251.51 120.47 108.77%
Total 6587 (includes misc loans) 4589.42 (includes misc loans)

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. Year-on-Year numbers are definitely disappointing. The major contributor, i.e. Micro-finance, saw a decline in disbursement by 1.9%. Even MSE loan disbursements had a decline of 12.9%. Housing and Agri saw a healthy Y-o-Y growth.

Loans Disbursed Q3 FY17 (Crores) Q3 FY16 (Crores) Y-o-Y Growth (%)
Micro-finance 1463.43 1492.67 -1.9%
Micro-Small Enterprise 60.86 69.93 -12.9%
Housing 82.82 62.42 32.68%
Agri & Animal Husbandry 54.79 44.89 22.05%
Total 1662.84 1672.14

To understand the true impact of Demonetization we should look at the Q-o-Q disbursements. So let us look at the disbursement numbers for Q3 FY17 and Q2 FY17, side-by-side.

Loans Disbursed Q3 FY17 (Crores) Q2 FY17 (Crores) Q-o-Q Growth (%)
Micro-finance 1463.43 1942.78 -24.67%
Micro-Small Enterprise 60.86 80.94 -24.80%
Housing 82.82 86.01 -3.7%
Agri & Animal Husbandry 54.79 71.79 -23.6%
Total 1662.84 2183.80 -23.8%

I guess the numbers tell it all. There has been a drop in business by close to 25% this quarter compared to last quarter. This is uniformly seen across all product categories (except housing). This would mean the following:

  • The company did not disburse loan to fresh customers.
  • Existing customers hesitated to take-up fresh loans this quarter.
  • Loan applications for existing customer and new customers were rejected due to reasons mentioned in “Rejection reason table”.

Ms. Sudha Suresh mentioned (in [3]) that they have not taken up fresh customers at the same pace as before due to the impact of Demonetization. They would want the situation to stabilize before taking on new customers. This partly explains the drop in disbursements. We would never know the reason for existing customers not opting for fresh loans. We have also seen in “Rejection Reason” table the reasons for rejecting loans. This could have impacted the disbursements as well.

Sore-Point:

As I was mentioning above, I have a big grouse on the lending. I have captured my observations in the below table. It shows the break-up of secured v/s unsecured loans.

Secured v/s unsecured loans Amount (crores) Percentage of Loan book
Unsecured Loans (MF and Individual Loans) 6500 98.68%
MSE Secured 14.49 0.22%
Housing Secured 72.45 1.1%

You will notice that 98.68% of the gross loan book is unsecured ! Which means out of 6587 crore loan book, 6500 crores is unsecured (without a collateral). What is even more glaring is the portion of “housing secured”. If you look at the composition of Housing in the Gross loan book, it is 359.45 crores. Out of this only 72.45 crores is secured. It means only 1/5th of the housing loans are secured! To me this was completely unexpected. This indicates that most of the housing loan portfolio could be home improvement loans rather than loans taken for construction or purchase of homes. If this is true then I am clearly disappointed. A similar observation could be made for MSE loans. In the gross loan book, MSE makes up about 320 crores. But out of this only 14.49 crores is secured! WoW!

Small Finance Bank (SFB):

Q3 FY17 saw Ujjivan receiving the SFB license. Ujjivan has commenced banking operation with effect from Feb 1st 2017. As a pilot, five branches shall be opened in Bengaluru. Subsequently the roll-out shall be done in phased manner over the next six to seven months. Hiring, Technology, distribution Infrastructure (i.e. Branches, ATM, phone banking) are in place.

Recollection Rate:

To further understand the impact of demonetization on the recollection, let us look at the table below. The table shows how people paid back their dues. We will limit ourselves to EMIs/payments that were due in November and December. From the table it is clear that repayments of loans are being made but with a time lag. The loans that were due in November are still being paid in January.

Loans disbursement Month Repayment received by Nov 2016 (%) Repayment received by Dec 2016 (%) Repayment received by Jan 2017 (%)
Nov 2016 90.6% 93.7% 95.4%
Dec 2016 88.2% 91.1%

Branch Spread:

As we noted in Q2 FY17, RBI has mandated that 25% of the branches have to be in rural regions. In case of Ujjivan this would have meant that it will have to open 150 branches. However RBI issued revised guidelines and as per those guidelines, Ujjivan may end up needing only 63-64 branches to be added in unbanked regions. Hence in FY18, Ujjivan does not have any inclination to open new branches other than to satisfy the RBI guidelines of opening 25% branches in rural areas.

The table below shows the branch spread across the different regions.

Region Branch Count Gross Loan book (Rs Crores)
North 124 1372
South 131 2163
East 128 1971
West 86 1082

Compared to Q2 FY17, Ujjivan seems to have added 6 new branches in north and reduced 6 branches in the west. In Southern and Eastern regions there has been no change.

Summary:

Q3 FY17 was an interesting quarter for two reasons:

  1. Ujjivan readied itself for the transition to become a bank. This will be a landmark event in its journey.
  2. Demonetization came in as a stress test, not just for Ujjivan but for the entire concept of micro lending. Ujjivan’s entire process including its customers were put to a test and it looks like they have almost passed the test.

Numbers wise this was an interesting quarter as well.

  • Revenue has grown at a robust pace of 38.8% which is a healthy sign.
  • The net profit declined by 9.5% predominantly due to provisioning for possible defaults and expenses related to SFB. If we remove the provisioning part the net profits due to business activities for Q3 FY17 grew at a very healthy pace.
  • The borrowing profile is steadily moving away from high-cost term loan and gravitating towards lower cost options like refinancing, NCD and commercial paper. Ujjivan is pursuing Securitization as well.
  • Quarter-on-Quarter there is a 25% drop in loan disbursement. Demonetization has had an effect on the business of the company. However repayments have been fairly healthy (with a time lag though). Ujjivan froze acquisition of new customers starting from the date of demonetization. This is a prudent measure which shall lead to a healthier loan book and stable customer profile.
  • Out of the gross loan book of 6587 crores, about 6500 crores is unsecured which translates to 98.68% of the loan book. Even in case of housing loan portfolio, out of 360 crores worth of loan book, only 72 crores is secured. This is my biggest worry with respect to Ujjivan. Even a product like housing loan which is generally backed by collaterals is predominantly unsecure! Let alone other categories of lending! It does make me a little uneasy and I hope it does to the management as well.
  • Going forward, Q4 will hopefully see the culmination of “after effects” of demonetization. In Q4 we will also get a glimpse of Ujjivan the SFB! Q4 shall be an eventful quarter to look forward to.

References:

[1] Q3 FY17 Results

[2] Q3 FY17 Investor presentation and Conference Call

[3] http://www.moneycontrol.com/news/results-boardroom/customers-willing-to-pay-buta-time-lag-ujjivan-financial_8303101.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.