Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

Ujjivan Small Finance Bank’s road to dilution set to begin on a good note

  • At the upper end of the issue price, the shares will be at a multiple of 2.5 times the bank’s book value for FY19
  • According to analysts, this is modest compared with immediate peer AU Small Finance Bank, which trades at 7.5 times its FY19 book value

The success of any share sale, more so for an initial public offering (IPO), is the pricing of the share. In that, Ujjivan Small Finance Bank may have hit a sweet spot.

Through the three-day IPO, which opens on Monday, 203 million shares will be offered to the public. The IPO price band has been fixed at 36-37 per share, which translates into a post-issue valuation of around 6,400 crore for Ujjivan.

At the upper end of the issue price, the shares will be at a multiple of 2.5 times the bank’s book value for FY19. According to analysts, this is modest compared with immediate peer AU Small Finance Bank, which trades at 7.5 times its FY19 book value.

One of the reasons for the relatively low valuation is that the IPO is only the first step in bringing down promoter holdings. Ujjivan will have to do much more to comply with the regulatory norms.

“Post-IPO, promoter (Ujjivan Financial Services) stake will fall to ~84%, which will have to be pruned further to 40% by Jan 2022, 30% by Jan 2027 and eventually to 15% by Jan 2032, calling for continued dilution," analysts at Emkay Global Financial Services Ltd said in a note.

With the sword of further dilution hanging, it’s understandable that investors will be a tad wary.

But Ujjivan may well end up using this handicap to its advantage. Trading in the grey market suggests the stock may list at a 50% premium.

This so-called pop on listing can leave good memories for investors, and help when it’s time for dilution in the future.

Of course, the key question is, what will the investors gain with this IPO?

Small finance banks have done well ever since the Reserve Bank of India allowed them to be set up with a clear mandate to offer banking services to unbanked areas.

Most are erstwhile microfinance companies and even Ujjivan Small Finance Bank has nearly 80% of its loan book consisting of microloans. The lender scores well in terms of asset quality with a relatively low gross bad loan ratio.

But the operating environment for small finance banks is becoming challenging. The prolonged economic slowdown has begun to impact the health of small businesses, to which these lenders extend loans.

In the case of Ujjivan Small Finance Bank, the management said unsecured loans to small businesses have been avoided to keep its asset quality intact. Even so, investors should take note of this emerging risk, as loan growth could get affected due to the slowdown.

While shareholders of the small bank operations need to grapple with these concerns, investors in the holding company (Ujjivan Financial Services) have to also worry about the impact of regular dilution on the valuation of their shares.

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