Ankit Agarwal of Centrum Capital presented his in-depth investment thesis on Indusind Bank (India: INDUSINDBK) and Ujjivan Financial Services (India: UJJIVAN) at Asian Investing Summit 2019.
Microfinance provides an opportunity to tap the bottom of the pyramid space in India, with the penetration of formal credit in India at 22%. With the emergence of technology and regulatory support from the government, the space is poised to grow by both penetration increase and average ticket sizes going up. The microfinance industry is expected to grow at a CAGR of 23%+ during the period FY19-22E, through banks, small finance banks (SFB), non-banking financial company- Microfinance Institutions (NBFC-MFI).
Indusind Bank is one of the diversified, large players in the banking space, with a USD 25 billion loan book and a high CASA ratio of approximately 44%. From FY09 to FY17 the bank has exceeded all the targets that they have set for themselves across planning cycles. The bank has set a goal for a loan growth of 25-30% CAGR, and Return on Risk Weighted Assets (RoRWA) of higher than 2.4%, during FY18-20E.
The bank acquired Bharat Financial Inclusion, one of the largest NBFC-MFI in the country, with a USD 2.2 billion loan book. Bharat was one of the lowest interest lenders in the world, offering less than a 20% lending rate. The RoA of Bharat Financial was 4%. The RoA for the franchise would go up, as they would have access to low-cost funding from Indusind Bank, in addition to setting aside lower capital once it became a bank. The franchise was valued using the residual income methodology. Ankit assumes a 13.0% cost of equity and a terminal growth rate of 5% to arrive at a fair value of INR 2150 for Indusind, implying a 22% upside from current levels.
Ujjivan Financial Services participates in the microfinance space, with a gross loan book of USD 1.3 billion. Ujjivan has a presence in 24 states, in India. This SFB is expected to grow its loan book by 30-35% CAGR.
Ujjivan has seen a revival in its microfinance disbursements post the demonetization crisis. GNPA that was 6% in Q1FY18 has come down to 1.4%. Moreover, the transition from MFI to SFB has led to upfronting of costs leading to opex to asset ratio rising to as high as 10.6% which would come down to around 6.1% in FY21E and RoA improving from 0.1% to 1.5%.
The company was valued using the residual income (cost of equity of 13.5% and terminal growth rate of 5%) to arrive at a fair value of approximately INR 400 implying an adjusted book value multiple of 2.1x. The fair value implies an upside of 24% from current levels.
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About the instructor:
Ankit Agarwal has a strong academic pedigree with MBA from IIM Bangalore and Btech in computer science from NIT Trichy. He currently works as a Fund Manager for a reputed listed financial services firm. He brings in experience in the investment management industry encompassing fund management, research, covering the equity asset class. Further, he has had diverse set of experiences in the financial services industry encompassing Wealth Management firms (Centrum, Barclays Wealth), hedge fund (D. E. Shaw & Co.), a french investment bank (BNP Paribas) operating in Hong Kong and Wall Street firm (Lehman Brothers) in London. He is very passionate about working in the industry and brings in expertise primarily in equities and derivatives. He often comes on various print and television media to give views on the markets.