Utkarsh Small Finance Bank: For medium to long-term gains

Utkarsh Small Finance Bank Ltd is tapping the capital markets with its fresh issue of Rs500 crore. The price band is Rs23-25. The issue opens on Wednesday (July 12) and closes on Friday (July 14). The company as the name suggests is a small finance bank and is into microfinance and other lending products. Its current business is focused in the Hindi heartland of UP, Bihar and Jharkhand. Utkarsh was one of the 10 entities, which were awarded a license to start an SFB in 2015-2016 and the only one with its roots in UP. The closest to that part of the country, is another entity from the NCR region, Fusion Microfinance.

The banking industry, particularly microlending, was quite badly affected during the Covid years. Post normalisation, the entire industry has rebounded quite strongly and Utkarsh was no exception. It has a loan portfolio of roughly Rs14,000 crore and enjoyed healthy net interest margins of 9.57 per cent. The bank has a healthy asset quality and has gross NPAs of 3.23per cent and Net NPAs of 0.39 per cent. The PCR or provision coverage ratio is 88.29 per cent. This gives a high degree of comfort to any investor looking to invest in the SFB.

The portfolio of the bank is growing fast and the opportunity for the addressable market is huge. Being present in fairly poorly penetrated geographies having huge populations, it throws up multiple opportunities of growing the loan book and also cross selling products and services. Such activities yield higher income for the bank and ensure customer loyalty as he does not have to go to multiple places for getting his financial needs met.

The bank has been able to grow its deposits and liabilities in a calibrated manner and has registered a very healthy cost to income ratio of 54 per cent. The bank is balanced in terms of outlets in rural and semi-urban with 62.89 per cent. Its business mix consists of 56.42 per cent of the portfolio being rural and semi-urban. Joint lending group or microfinance has 92.80 per cent of the portfolio under a fortnightly collection cycle which sees better collection efficiencies and operation of the business. The average ticket size of the micro banking business is Rs40,000.

The company had a micro banking gross loan portfolio at the end of March 23 of Rs 9,215 crore. The company disbursed Rs 9,256 cr in the year 2022-2023. Similarly, in the non-micro banking business, total portfolio size was Rs 4,741 cr, while the disbursement was Rs3,186 cr. The bank is present across channels and has 280 on-site ATMs, 7 off-site ATMs, and 646 micro-ATMs. The bank also offers Domestic and international ATM cum debit cards, and has over 6 lac active cards currently.

The company has an experienced board and senior management team. The bank is owned through the holding company, Utkarsh CoreInvest Ltd, which owns 84.75 per cent of the bank going public. This holding has marquee investors which include FPIs, institutions and some long only financial investors.

The company reported a profit after tax of Rs 404.50 cr for the year ended March 23. The EPS for the year ended March 23 on a fully diluted basis was Rs4.51. The PE band for the issue is 5.10-5.54. The NAV of the bank for the same period is Rs22.33. The issue is being priced slightly higher than the book value and would be at 1.12 times price to book.

The bank fundamentals are extremely attractive and offer good scope for appreciation in the short term and would be a medium to long-term play for investors. The bank compares very favourably with its peer group which consists of names like Equitas SFB, Ujjivan SFB, Credit Access, Spandana Sphoorty and Bandhan Bank.

Readers should apply for the issue.

The attractive fundamentals and decent asking price have ensured that there is a very active grey market present currently. While grey market prices could always change, the current price indicates a very healthy premium, which makes application in the share a necessity and worth waiting for allotment by way of drawings of lots.

The issue looks attractive and would be very well received by investors. Investors looking for listing gains and also those looking for appreciation in the medium to long term must apply for the issue.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)