Reasonable IPO pricing makes it attractive among peers though pre-issue bloom in profit may advise caution.

 

UTKARSH SMALL OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Fresh Issue	Rs 500 Cr (20,00,00,000 equity shares)
Offer for Sale	NIL
Face Value	Rs 10
Price Band	Rs 23 – 25
Mkt/Bid Lot	600 Nos
Implied M-Cap	Rs 2,740 Cr
Implied Eq-Cap	Rs 1096 Cr
Implied Free Float	30.72 %
Lead Manager	ICICI Securities and Kotak Mahindra Capital
Registrar	KFin Technologies
Listing At	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening         :12-Jul-2023	Closing       :14-Jul-2021
Allotment       :19-Jul-2023	Refunding  :20-Jul-2023
Demat Credit :21-Jul-2023	Trading      :24-Jul-2023

 

The Offer

Varanasi-headquartered Utkarsh Small Finance Bank Ltd is entering the capital market with a public issue of Rs 500 Cr. The IPO is a fresh issue of 20 crore equity shares (at the cap price) from the company. The offer is being made through the book-building route with a price band of Rs 23-25 for Rs 10 paid-up share.

Applicants should bid for a minimum lot of 600 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Monday, July 24, 2023. ICICI Securities and Kotak Mahindra Capital are acting as managers to the offer while Karvy’s new avatar, Kfin Technologies, plays the role of registrar to the issue. The bidding opens on Wednesday, July12 and closes on Friday, July 14, 2023. The bank proposes to utilize the net proceeds towards augmentation of its Tier-I capital base to meet future capital requirements and for IPO expenses.

Lineage

On October 7, 2015, Utkarsh CoreInvest Ltd (UCL) received the `RBI In-Principle Approval’ to establish a Small Finance Bank (SFB), following which it incorporated Utkarsh Small Finance Bank Ltd (USFBL) as a wholly-owned subsidiary on April 30, 2016. Subsequent to USFBL obtaining the RBI Licence on November 25, 2016, to establish and carry-on business as an SFB, UCL transferred its business of providing microfinance, as a going concern to USFBL, which commenced its operations from January 23, 2017. The bank was included in the second schedule to the RBI Act in October 2017.

The professionally-managed UCL is backed by a number of institutional investors. UCL was originally incorporated in Tamil Nadu in the year 1990 as Shre Pathrakali Finance Company Ltd. Subsequently, the name underwent several changes and was last changed to Utkarsh CoreInvest Ltd in October 2018. UCL, under its erstwhile name Utkarsh Micro Finance Private Ltd was registered as a non-banking financial institution (without accepting public deposits).

Coming to people behind UCL, there is no identifiable promoter. UCL has an equity capital of Rs 98.44 Cr and the single largest shareholder of UCL is British International Investment PLC (formerly known as CDC Group PLC) with 13.94%. This is followed by RBL Bank 9.86%,  NMI Frontier Fund KS 7.82%, Faering Capital India Evolving FUND II 7.78%, Hero Enterprise Partner Ventures 4.92%,  responsAbility Participations Mauritius 4.92%, Shriram Life Insurance Company 4.90%, Small Industries Development Bank of India (SIDBI) 4.32%, ICICI Prudential Life Insurance Company 4.22%, Aavishkaar Goodwell India Microfinance Development Company 4.07%, Jhelum Investment FUND 3.25%, HDFC Life Insurance Company 3.16%, Sarva Capital LLC 3.01%, RAAG Family Private Trust 2.93%, International Finance Corporation 2.83%, Triodos SICAV II – Triodos Microfinance Fund (formerly, Sustainability–Finance–Real Economies SICAV –SIF) 2.23%, Faering Capital India Evolving FUND III 2.08%, Lok Capital Growth Fund 1.91%, Aavishkaar Bharat Fund 1.60%, HDFC Ergo General Insurance Company 1.49% and others.

Key Management

Parveen Kumar Gupta (63) is a part time non–executive chairman and Independent Director of USFBL. Prior to joining USFBL, he was associated with State Bank of India as their managing director (retail & digital banking) till his retirement on superannuation and Bank of Baroda as its senior advisor.

Govind Singh (58) is the Managing Director and chief executive officer of the Bank. He was previously the assistant general manager at ICICI Bank. Earlier, he was the managing director and chief executive officer of UCL. He has also been associated with Surya Fincap, UTI Bank (Axis Bank), Allahabad Bank, State Bank of Patiala and Bank Internasional Indonesia.

Stakeholders

As per the Banking Regulation Act notification DBR.PSBD No. 1084/16.13.100/2016-17 dated July 21, 2016 no shareholder can exercise voting rights in excess of 26% of the total share capital of a bank.  In terms of shareholding, promoter company UCL along with its nominees hold 759,272,222 equity shares (84.75% of the paid-up equity share capital of the bank) at a cost of Rs 10.50 a share.

Among the existing public shareholders, Olympus ACF Pte Ltd holds 37,037,037 shares (4.13%) followed by Bharti AXA Life Insurance Company 23,584,905 shares (2.63%), Triodos Sicav II – Triodos Microfinance Fund 21,117,684 shares (2.36%), responsAbility Participations Mauritius 13,444,444 shares (1.5%), Aavishkaar Bharat Fund 12,962,962 shares (1.45%) and Growth Catalyst Partners LLC 11,683,722 shares (1.3%). The average cost of acquisition for the non-promoter shareholders is between Rs 14 and Rs 31.80.

Business Model

Promoter UCL commenced its operations as a NBFC in fiscal 2010 and had focused on providing microfinance to unserved and underserved segments and in particular in the states of Uttar Pradesh and Bihar. Having headquartered in Varanasi, Uttar Pradesh, USFBL have over the years expanded its SFB operations strategically in states where it has been able to leverage the prior microfinance experience of the promoter company.

USFBL claims to have recorded the third fastest Gross Loan Portfolio growth between fiscal 2019 and 2023 among SFBs with Gross Loan Portfolio of more than Rs 6,000 Cr.

USFBL’s operations are spread across India in 26 States and Union Territories with 830 Banking Outlets and 15,424 employees. As of March 31, 2023, 27.35% of its branches were located in Unbanked Rural Centres (URCs) as against the regulatory requirement of 25% of banking outlets of SFBs to be located in URCs.

As of March 31, 2023, it had 3.59 million customers (both deposit and credit) majorly located in rural and semi-urban areas primarily in the states of Bihar and Uttar Pradesh which constituted 30.88% and 25.98% of the bank’s total Gross Loan Portfolio. The bank is now in the process of strengthening its presence in newer geographies by entering into arrangements with business correspondents and direct selling agents.

Financial Track

USFBL’s gross income has consistently grown during the last five fiscals. From Rs 545 Cr in March 2018, it has steadily increased to Rs 2,804 Cr in March 2023. Nonetheless, the bank’s net profit has widely fluctuated during this period. From a loss of Rs 77 Cr in fiscal 2018, profit rose to Rs 111 Cr in fiscal 2019. But, profit nosedived from Rs 187 Cr in fiscal 2020 to Rs 112 Cr in fiscal 2021 and to Rs 61 Cr in fiscal 2022 as provisions shot up from Rs 163 Cr in fiscal 2020 to Rs 307 Cr in fiscal 2021 and further to Rs 450 Cr in fiscal 2022. On the eve of the public issue, income has surged by Rs 770 Cr but provisions were deceased by Rs 16 Cr which boosted the bottom line by Rs 344 Cr!

Utkarsh Small Financials (in Cr)
Year Ended	Mar-23	Mar-22	Mar-21	Mar-20	Mar-19	Mar-18
Interest Earned	2505	1849	1581	1308	900	501
Other Income	299	185	125	98	58	44
Total Income	2804	2034	1706	1406	958	545
Interest Expended	976	788	742	579	383	250
Operating Expenses	570	430	326	262	187	127
Provisions/Contingencies	434	450	307	163	136	139
Net Profit	405	61	112	187	111	-77
Equity (Implied)	1096	896	848	759	737	470
Reserves (Implied)	1404	677	520	260	36	-75
Deposits	13710	10074	7508	5235	3791	2194
Borrowing	2349	2572	2608	2675	1430	1789
Other Liabilities	1058	845	654	475	245	116
Cash & balances with RBI	1192	1798	1105	192	158	206
Balances with Banks	1324	74	65	1422	359	363
Investments	2859	2348	2314	1192	862	661
Advances	13069	10228	8217	6282	4668	3102
Fixed Assets	303	287	181	131	90	76
Other Assets	370	330	256	185	102	86

Valuation

If one were to compare USFBL with its listed peers in terms of Price-Earnings and Price-Book Value, certainly the IPO price looks attractive. USFBL’s P/E multiple of 5.5 and P/BV of 1.1 are indeed the cheapest among its peers. If the bank maintains its fiscal 2023 profitability (which was unusually high compared to the previous years) in the current year, IPO investors can expect decent returns. But, if the fiscal 2023 profitability turned out to be a pre-issue bloom, then the valuation may go haywire which could doom the share prospects.

How Utkarsh compares with its listed peers (in Cr)
Issuer Name	Utkarsh	Bandhan	AU Small	Ujjivan	Equitas	Suryo
Year Ended	Mar-23	Mar-23	Mar-23	Mar-23	Mar-23	Mar-23
Interest Earned	2505	15905	8205	4165	4162	1184
Other Income	299	2469	1034	589	670	97
Total Income	2804	18373	9240	4754	4831	1281
Interest Expended	976	6645	3780	1467	1617	437
Employee Cost	570	2715	1793	920	1097	242
Other Expenses	420	1922	1647	882	942	264
Provisions	434	4198	155	18	407	237
Net Profit	405	2195	1428	1100	574	78
Equity (Implied)	896	1611	667	1955	1111	106
Reserves (Implied)	1104	17973	10311	2003	4047	1479
Deposits	13710	108069	69365	25538	25381	5167
Borrowing	2349	24711	6299	2641	2974	2765
Other Liabilities	1058	3406	3575	929	1446	344
Balances with RBI	1192	7327	8916	2305	1174	784
Balances with Banks	1324	923	509	178	70	49
Investments	2859	32366	20072	8510	6665	2570
Advances	13069	104757	58422	21290	25799	6015
Fixed Assets	303	855	740	283	379	164
Other Assets	370	9543	1557	750	872	278
Current Price (Rs)	25	230	761	42	94	172
Face Value (Rs)	10	10	10	10	10	10
Book Value	22.33	121.58	164.64	20.25	46.44	149.28
Price/Book Value	1.1	1.9	4.6	2.1	2.0	1.2
Earnings Per Share	4.52	13.62	21.42	5.63	5.16	7.32
Price/Earnings	5.5	16.9	35.5	7.4	18.2	23.5