Valuation hurdle for Ujjivan and Equitas SFBs; stocks fall over 1%

Analysts say the holding company discount could exceed 50 per cent considering their shareholding structure

Ending nearly a year’s speculation on whether Ujjivan Financial Services, the holding company of Ujjivan Small Finance Bank (SFB), would receive any grace from the regulator on listing its SFB, last weekend the former announced that it would do through an initial public offer (IPO) by January next year. The listing is a part of the SFB licensing mandate, where the bank has to be listed within three years from date of commencement of operations. While Equitas Holding’s plan in this regard isn’t known yet, the company has time till early September to list its SFB, though it has sought for an extension.

Stocks of Ujjivan and Equitas fell over a per cent on Monday. The reason being that if the SFB must be listed, what lies ahead for those already invested in Ujjivan or Equitas. Factoring this fear, their shares prices have corrected by 18 – 20 per cent in a year and analysts at Nomura and Equirus say the holding company (Holdco) discount for these stocks could be 50 – 60 per cent going forward.

Holdcos usually get valued at a discount of 20 – 30 per cent, depending on their shareholding in subsidiaries. Ujjivan and Equitas currently hold 100 per cent stake in their SFBs, hence leading to a higher discount. This implies more downside risk for their investors. What also needs to be seen is the willingness of the Street to shell grand bucks for stocks of SFBs.

Ujjivan SFB appears to be at a back foot compared to Equitas in terms of diversifying into non-microfinance loans. With about 80 per cent dependence on microfinance loans, Ujjivan is just making in-roads into segments such as housing finance, small business loans and vehicle loans. For Equitas, these loans account for over 70 per cent of its book. However, if asset quality is a parameter to consider, Equitas with over three per cent gross non-performing assets (NPA) in June quarter doesn’t paint a convincing picture, against Ujjivan’s less than a per cent gross NPA ratio. But to be fair, neither SFBs have seen a full-blown asset quality cycle and it may be early to comment on the quality of both books.

Also, both SFBs are still testing the waters with respect to loan book and liability profile (mainly deposits). Therefore, costs on all fronts, including deposits would be significantly high, vis-à-vis an ICICI Bank or Axis Bank.

In other words, demanding the valuations (2.5x – 3x book) that Ujjivan and Equitas did while listing their Holdco in 2016 could be tough when their SFBs que up for IPO. Pricing will hence hold key if the IPOs must invoke the right investor interest.