Usha Financial Services Limited IPO A Comprehensive Review
Usha Financial Services Limited (UFSL), a small Non-Banking Financial Company (NBFC), is all set to enter the stock market with its Initial Public Offering (IPO) scheduled between 24th October and 28th October. With a cut-off price of ₹168 per share and a lot size of 800 shares, investors need ₹34,400 at minimum to participate. The company is looking to raise ₹98 crore, valuing itself at ₹65 crore, which shows it aims to expand while keeping a modest valuation.
Purpose of the IPO
UFSL primarily focuses on providing small loans, but through this IPO, the company plans to strengthen its capital base. Typically, NBFCs borrow money at lower rates and lend at higher interest rates, making a margin on the difference. By raising funds from the public, UFSL hopes to reduce its dependence on external loans and improve its profitability by lending its own money. The promoters of the company currently hold 98% of the shares, and after the IPO, their holding will drop to 72%, reflecting the promoters’ strong confidence in the business.
Business Overview
UFSL primarily lends to NBFCs and corporates, and its total loan book stands at ₹306 crore as of March 2024, growing to ₹300.18 crore by September 2024. While the loan book shows steady growth, the company faces risks. It operates in a sector dominated by giants like Bajaj Finance, Shriram Transport Finance, and Muthoot Finance. UFSL falls into the “others” category, representing a smaller portion of the market.
One major concern is the concentration of loans. With a relatively small number of borrowers (18,997), a single default from a major corporate could significantly impact the company’s financial health. Moreover, the company has filed legal cases against 59 defaulters, raising concerns about credit risk management.
Financial Performance
In terms of its financial performance, UFSL’s gross Non-Performing Asset (NPA) ratio has risen from 3.59% to 3.96% in the last six months. This indicates that nearly 4% of its loans are not being recovered, which is a concerning figure for a small company. For comparison, larger NBFCs like Credit Access Grameen have gross NPAs as low as 1.46%, highlighting the elevated risk UFSL faces.
As for its revenue, UFSL has shown consistent growth, reporting ₹63 crore in revenue in 2024, up from ₹45 crore in 2023. However, its profit after tax has been decreasing, with the company earning ₹1 crore in March 2024, a significant drop from previous years. The company wrote off ₹9 crore of loans in its cash flow statement, reflecting its struggles in recovering from defaulters.
Valuation and Peer Comparison
UFSL has a Price-to-Earnings (P/E) ratio of 36, which, when compared to competitors, places it at a relatively high valuation. Companies like Bajaj Finance and Shriram Finance have P/E ratios of 30 and 16, respectively. This suggests that while UFSL is being valued optimistically, it still faces significant risks due to its small size, high NPAs, and lower growth potential. Additionally, its Price-to-Book (P/B) ratio of 3 is also higher compared to competitors like Credit Access Grameen, which has a P/B ratio of 2.57.
Conclusion
Usha Financial Services Limited’s IPO offers investors a chance to get involved with a growing, yet risk-heavy, NBFC. The company has shown the ability to expand, but faces challenges with rising NPAs, high loan concentration, and relatively low earnings. Investors should weigh these risks carefully and consult with their financial advisors before making any decisions.
In summary, while UFSL is raising funds to bolster its capital base and reduce dependence on external borrowing, potential investors need to evaluate its financial stability, market position, and growth potential in a competitive NBFC landscape.