Edelweiss has a positive business outlook on Ujjivan Small Finance Bank (USFB), but said the listing of USFB will mean dilution & holding company discount for existing shareholder
Shares of Ujjivan Financial Services fell nearly 8 percent intraday on August 19 after the company’s decision to launch IPO of Ujjivan Small Finance Bank. Analysts feel the listing of bank is negative for shareholders of microfinance lender.
The stock was quoting at Rs 272.55, down Rs 11.55, or 4.07 percent on the BSE at 0917 hours IST.
Ujjivan Small Finance Bank is planning an initial public offering to raise Rs 1,200 crore. The company on August 16 filed a draft red herring prospectus with SEBI.
“Ujjivan Small Finance Bank is proposing to undertake an initial public offering of equity shares of face value of Rs 10 each, comprising a fresh issue of equity shares by bank aggregating up to around Rs 1,200 crore,” Ujjivan Financial Services said in its BSE filing on August 16.
“After evaluating various options, Ujjivan’s Small Finance Bank (SFB) board has narrowed in on listing the SFB through the IPO route, with a likely dilution of 10 percent. While the core business of SFB has shown commendable growth in Q1FY20 (AUM/PAT up 51 percent/105 percent), we feel SFB listing via an IPO is negative for Ujjivan’s existing shareholders,” Equirus said.
“This is because they would end up owing only holding company shares with lack of clarity on a potential reverse merger (to which we assign a reasonable probability), which will be subject to RBI approval and on which clarity would emerge only two years hence. Therefore, Ujjivan could trade with a considerable holding company discount,” it added.
This leads Equirus to downgrade its rating to short (from add) with a revised Sep’20 target price of Rs 200 (Rs 375 earlier) after assigning a 60 percent holding company discount to SFB’s Sep’20 target price of Rs 561 (2.3x 1-year forward adjusted book value (ABV) on considering around Rs 450 crore of fresh equity). The brokerage has not built in capital raise in its financial projections.
Post issue multiple of 1.8x FY21E ABV & holding company discount of 40 percent, company’s share price is at Rs 260, said Edelweiss which has put the stock under review and advised investors to hold on to stock till clarity on USFB IPO pricing emerges.
Edelweiss has a positive business outlook on Ujjivan Small Finance Bank (USFB) but said the listing of USFB will mean dilution and holding company discount for the existing shareholder.
Dilution would be up to 18 percent but this is contingent on the IPO book building price, it added.
Japanese brokerage firm Nomura said it has applied 50 percent holding company discount to the listed entity. “In our base case, assume 40 percent holding company discount to arrive at Rs 270 per share and we estimate the fair value for the bank at Rs 37-39 per share,” it explained.
Ujjivan Financial Services last week said the price band for the public issue may be determined by bank in consultation with the book running lead managers to the issue.
The bank has appointed Kotak Mahindra Capital Company, IIFL Securities and JM Financial as book running lead managers to the issue.
