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Robust show enhances visibility of FY23 normalization

Our view

Ujjivan SFB’s Q4 FY22 performance was significantly better than expectation with NII/PPOP beat of 6%/40% and PAT at Rs1.26bn v/s our estimate of a marginal loss. Key swing factors were a) higher NIM (10.1% v/s 9.1% in Q3) on the back of material increase in portfolio yield (calc. 18.9% v/s 18.3% in Q3), b) higher other income (better insurance and misc. income), c) controlled opex despite intense collection efforts and d) sharply lower credit cost (Rs0.44bn v/s Rs1.9bn in Q3) on account of stronger collections and substantial pull-back in asset quality (8-9% decline in stress pool i.e. SMA 1 + SMA 2 + GNPL even adjusted for write-offs). Overall substantial PAR 0 reduction (9.6% from 15% as of Dec) was enabled by strengthened collection team, focused approach towards overdue buckets/stress pool, improvement in NPA collections and reduction/normalization of incremental delinquencies.

Growth in disbursements (up 8% qoq/14% yoy) and loans (up 10% qoq/20% yoy) was largely driven by Microfinance JLG loans, within which there was a sharp increase in disbursement ATS (up 30% qoq to Rs60K) on the back of lower new customer addition (though improved sequentially) and larger share of higher cycle loans. The share of CASA and Retail TD marginally inched-up to 56% notwithstanding a large growth in deposits base sequentially. With income growth robust and controlled opex growth (despite elevated collection cost), the cost/income ratio witnessed a sharp reduction.

Key Management commentary for FY23 was 1) loan growth to be better than 20% of FY22), 2) slippages and credit cost to normalize, 3) reduction in collection cost in H2 FY23 (focus on NPL recoveries in H1), 4) portfolio yield and NIM to improve on further reduction in NPLs and 5) sustained delivery of Q4 FY22 RoA/RoE of 2.3%/18.7% plausible in a stable/normal environment. Absolute PAR and GNPLs have further declined in April, as strong collection momentum has continued.

Bank’s performance on PAR/NPL reduction and credit cost has pleasantly surprised in recent quarters. This coupled with waning Covid uncertainty improves visibility of future growth and profitability. A successful capital raising via the planned QIP (to meet MPS requirement) could act as a positive trigger in the near term as it would buffer capital adequacy by 400-500 bps. We upgrade the stock to ADD from Reduce on expectations of average RoA/RoE delivery of 1.8%/14% (factoring the capital raise). The bank currently trades at an undemanding valuation of 0.8x P/ABV and 6x P/E on FY24 estimates.

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