NEW DELHI: When a subsidiary company comes up with an IPO, usually it boosts the prospect of a stock and unlocks value buying opportunity.

But shares of Ujjivan Financial Services fell nearly 8 per cent in Monday’s trade after its wholly-owned unit Ujjivan Small Finance Bank filed draft papers with Sebi for a Rs 1,200 crore IPO.

Analysts say the IPO will be negative for Ujjivan’s existing shareholders, who would end up owning only holding company shares. They have projected the holding company stock to trade at a 20-80 per cent discount and cut their stick price estimates for the NBFC.

By 10 am on Monday, the scrip had hit a low of Rs 261.70, down 7.88 per cent.

There is a lack of clarity on a potential reverse merger, which will be subject to RBI’s approval and on which clarity would emerge only two years hence, said Equirus Capital. “Ujjivan Financial Services could trade with a considerable hold company discount of 60 per cent or above. This leads us to downgrade our rating for the stock with a revised September 2020 target of Rs 200 against Rs 375 earlier. We have not built in capital raise in our financial projections,” the brokerage said.

Nomura India expects the holding company to attract a holding discount of 20-80 per cent.

“While it is very difficult at this stage to estimate what discount the market is implying currently, we think a 50 per cent hold company discount (on 80 per cent of the firm value) is a fair estimate as a reverse merger is also not an easy task in our view,” it said.

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A 50 per cent discount to the listed entity based on two times multiple for the underlying business implies Rs 220-230 per share target for the stock.

Nomura has a base case of 40 per cent holding company discount to arrive at Rs 270 per share. It estimates the fair value for the bank at 37-39 per share.

On October 7, 2015, the NBFC had received in-principle approval from RBI to set up a small finance bank (SFB), following which it incorporated Ujjivan Small Finance Bank as a wholly-owned subsidiary. On November 11, 2016, the NBFC obtained RBI’s final approval to establish and carry on business as an SFB. It then transferred its business undertaking comprising lending and financing businesses to the bank that commenced operations from February 1, 2017.

On October 24, 2018, RBI told the bank that it must comply with all the requirements of licensing guidelines for small finance banks, which included listing of the bank within three years from the date of commencement of operations i.e. by January 31, 2020.

The promoter must maintain its shareholding in the bank at 40 per cent for at least five years from the date of commencement of business of the bank, i.e. until January 31, 2022.

The bank seeks to raise Rs 1,200 crore, including reservation of equity shares of up to Rs 120 crore for eligible Ujjivan Financial’s shareholders. A separate listing could lead to a 50 per cent holding company discount, Sharekhan said.

“With such a large capital infusion, Ujjivan will have free reserves in the bank to do a scheme of arrangement, similar to Equitas, by issuing bonus shares to the shareholders at the hold company level and get down to 40 per cent promoter holding requirement by FY22,” Nomura India said.

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“With that, the eventual holding company discount may fall but the visibility of that is fairly limited currently. Hence, we would not want to give the benefit of that as the market is not giving that benefit to Equitas currently,” Nomura said while preferring Equitas to Ujjivan.



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