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Despite a miss on margins, Ujjivan SFB reported a strong beat on PAT at Rs3.1bn (vs our estimate of Rs2.4bn) in 4Q, mainly on higher other income and provision reversal. Credit growth (net) remained strong at 31% YoY/9% QoQ in 4Q, led by healthy traction in MFI. Bank expects growth to remain robust at 25%, with increasing share of secured loans which, coupled with lower credit cost, should keep RoAs high & healthy. Bank has applied to the NCLT and expects reverse merger with the holdco to be completed by Sep-Dec ’23. We revise our earnings upwards and expect the Bank to clock RoE of 21-24% over FY23-26E. Factoring-in the earning upgrades and higher P/ABV at 1.3x, we revise our TP upwards to Rs38/share (vs Rs33), while upgrading the rating to BUY from Hold. We retain hold on the Ujjivan Fin Services with TP of Rs286.

Strong growth, but margins come off Ujjivan logged strong AUM growth at 33% YoY/10% QoQ to Rs241bn, while net loan book grew 31% YoY/9% QoQ to Rs213bn. Growth was mainly driven by the MFI/microindividual loan book, and was supported by retail (affordable housing). Disbursements remain resilient, especially in MFI, as Q4 is a seasonally-strong quarter; this resulted in higher share at 72% of AUM. Deposit growth, too, was strong and outpaced credit growth at 40% YoY/10% QoQ, led by healthy growth in CASA; resultantly, CASA ratio improved by 25bps QoQ to 26.4%. However, NIM contracted by 30bps QoQ to 9.1% due to higher CoF. Bank expects both credit/deposit growths at 25%/30%, respectively, leading to lower LDR; it estimates NIM to clock at >9% in FY24.

Headline asset quality continues to improve due to lower slippages Fresh slippages were miniscule at 0.2bn/0.5% of loans which, coupled with healthy recoveries/write-offs, led to reduction of 76bps QoQ in the GNPA ratio to 2.9%. Given the higher specific PCR, NNPA is virtually nil. The restructured book sharply declined to Rs2.3bn/1.1%, from 1.6% in Q3. Overall collection efficiency remains robust at 100%, which explains the reason for the lower slippages and the continued decline in the PAR book at 3.8% vs 4.9% in Q3 and 9.6% in Q4FY22.

Outlook and Valuations Ujjivan SFB has recovered well from Covid-induced stress in the MFI space as well as from the management saga. Current MD & CEO Ittira Davis’ term is till Jan-2025, but the bank would look for a successor well before his term ends. We revise our earnings upwards and expect the bank to clock RoE of 21-24% over FY23-26E. Factoring-in the earning upgrades and the higher P/ABV at 1.3x, we revise our TP upwards to Rs38/share (vs Rs33), while upgrading the rating to BUY from Hold. We retain hold on the Ujjivan Fin Services with TP of Rs286 Key risks: Higher NPAs in MFI being otherwise vulnerable to asset-quality shock; elevated cost weighing on margins; and management attrition.

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