About the company’s business

It is a Varanasi-based small finance bank (SFB) in India that has achieved the third fastest Gross Loan Portfolio growth among SFBs with over ₹60 billion between Fiscal 2019 and Fiscal 2023. With operations in 26 states and UTs, they have 830 Banking Outlets and employ 15,424 individuals as of March 31, 2023.

As of March 31, 2023, this SFB went beyond regulatory requirements by having 27.35% of its Banking Outlets located in Unbanked Rural Centres (URCs), surpassing the 25% mandate. With a strong presence in rural and semi-urban areas, particularly in Bihar and Uttar Pradesh, these states accounted for 30.88% and 25.98% of their Gross Loan Portfolio respectively (based on location of the banking outlet).

Their products encompass microbanking loans, including joint liability group loans and individual loans. They also provide retail loans, both unsecured (business loans and personal loans) and secured loans (loans against property). Additionally, they offer wholesale lending facilities to SMEs, mid to large corporates, and institutional clients, along with housing loans focused on affordable housing, commercial vehicle/construction equipment loans, and gold loans that were introduced in Fiscal 2022.

They emphasized their focus on expanding into new geographies through partnerships with 13 business correspondents ("BCs") and 321 direct selling agents ("DSAs") as of March 31, 2023.

The table displays the gross non-performing assets (NPAs) for different loan segments as a percentage of the gross advances for each respective year

The below chart is helpful to understand the product-wise loan portfolio allocation.

Industry Overview

As of March 2022, there were about 640,000 villages in India, inhabited by close to 900 million people, comprising about 66% of the country’s population. About 47% of India’s GDP comes from rural areas. But their share in banking credit and deposits is abysmally low with just 8% of total credit and 11% of total deposits coming from rural areas. The massive divergence in the rural areas’ share of India’s GDP and banking credit and deposit services compared with urban areas is an indicator of the extremely low penetration of the banking sector in rural areas.

The number of bank credit accounts in rural areas grew at a CAGR of 4% between the end of Fiscal 2016 and the end of Fiscal 2022 and the number of bank deposit accounts grew at a CAGR of 5% during the same period.

As rural areas in India have lower financial inclusion compared with urban areas and there is less competition for banking services in rural areas compared with urban areas, this presents significant growth opportunities in rural areas. Below chart highlights the bank credit growth in rural, semi urban and urban area.

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Lower presence of banks in the retail space has created an opportunity for NBFCs and NBFCMFIs to penetrate the segment which has also led to greater financial inclusion as NBFCs and NBFC-MFIs also cater to riskier customer profiles with lower income.

IPO Objectives

The augmentation of Bank’s Tier-I capital base to meet Bank’s future capital requirement.

Financials (In crores)

Valuation

The PE and PB ratios of Utkarsh Small Finance are 9.12x and 1.11x respectively, while the PE and PB ratios of the industry are 67.78x and 2.45x respectively, indicating undervaluation.

Key Risks

1. A substantial portion of their advances in the microbanking segment is allocated to customers in the states of Bihar and Uttar Pradesh and any unfavourable changes in the conditions affecting the region can have a negative impact on their business.

2. Non-convertible debentures were listed on BSE and in the past, there were certain inadvertent delays by in making certain disclosures and regulatory filings to BSE under the Listing Regulations.

3. Deposits depend on a limited number of customers and a loss of such customers could materially and adversely affect deposit portfolio, funding sources, financial condition, results of operations and cash flows. Top 5 depositors contributed 9.32% of total deposits. And bulk deposits contributed 48.60% of total term deposits. A partial or complete withdrawal of such deposits by any of customers could adversely affect business.

IPO Details

The IPO subscription period will be from the 12th of July 2023 to the 14^th of July 2023. The issue price will range from Rs. 23 per share to Rs. 25 per share. The total issue is valued at Rs. 500 crores (a complete fresh issue). Individuals are allowed to apply for a maximum of 13 lots, which amounts to Rs. 1,95,000. As of writing this blog, the GMP (Grey Market Premium) stands at 45%.