Rally in Ujjivan, Equitas could hit speed bumps

These two stocks have gained 70-100% over listing prices in 3 months; analysts advise caution in near term

Equitas Holdings and Ujjivan Financial Services, which listed on the bourses as recently as April and May, respectively, have become market favourites with 70-100 per cent gain in less than three months over their IPO price. Apart from being relatively new businesses in the banking domain, foreign institutional investors’ (FIIs) interest in these stocks also helped them deliver stellar returns. Some FIIs who pared their stake during the initial public offerings (IPOs) to meet the regulatory requirements, turned buyers after the IPOs. This apart, the March quarter performance added legs to the rally.

“During IPO, investors were getting familiar with these businesses. Fourth quarter results reinforced the confidence in these stocks,” explains Abhinesh Vijayraj of Spark Capital.

But, with steep returns delivered in a short span, analysts advise investors to approach these stocks with caution. Equitas has exhausted its FII limits (49 per cent) and Ujjivan is nearing the threshold. While the possible tapering of FII interest might cap incremental upside, there are headwinds, too.

  For instance, Equitas will transition into a small finance bank (SFB) from October 1, while Ujjivan will operate as an SFB from January 1, 2017. Currently, both derive a large portion of their business from the microfinance segment. Conversion from microfinance institution (MFI) to SFB could strain their financials and return profiles in the medium-term as the process would entail meeting regulatory norms, providing additional outflows towards expansion of branch operations, and investing in technology and manpower. Consequently, their cost-to-income ratio is anticipated to be elevated in the next two years.

Analysts at Angel Broking peg the cost-to-income ratio of Equitas to swell by 200 basis points in FY17 (from 53 per cent in FY16). While Ujjivan, which draws over 87 per cent of its business MFI operations (and therefore deploy more efforts in the conversion process) might see a steeper rise in costs. According to analysts at HDFC Securities, Ujjivan’s cost-to-income ratio could peak at 64 per cent in FY18 compared to 51 per cent in FY16. Meanwhile, as deposits mobilisation is also a long-drawn process, it might take a while for these financiers to benefit from relatively cheaper sources of funds.

From a long-term perspective, both the analysts affirm the growing preference to Ujjivan and Equitas in the non-banking financing segment given the growth opportunities. However, given the near-term overhangs, Siddharth Purohit of Angel Broking advises investors to wait for reasonable price correction to take fresh exposure to these stocks. Vijayraj of Spark Capital, while agreeing with Purohit, iterates that these stocks are now strictly long-term picks as the near-term gains may be limited.