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Gradually getting back on track

Ujjivan SFB’s 2Q23 results were characterised by a) robust AUM growth (+44% YoY, +8% QoQ), b) strong operating profit (3.9x YoY, +28% QoQ) and c) improvement in asset quality metrics (GNPLs/NNPLs/std restructured pool declined to 5.1%/0.04%/1.0% as of Sep’22 vs 6.5%/0.1%/1.8% as of Jun’22 driven by normalisation of slippages and focus on collections). Disbursements for the quarter remained strong at INR 49bn (+56% YoY, +12.5% QoQ) and management remains confident of closing FY23E with AUM growth of c.30%. Overall deposit growth stood at +45% YoY, +11% QoQ with retail deposits now stand at 61% (+160bps QoQ) and CASA ratio at 26.9%. Management has indicated that FY23E will be a normalised year for USFB with growth and asset quality parameters reverting back to normalised levels. While the stock has run up by 64% in the last 6M, on the back of steadily improving asset quality and return metrics, we believe sustained delivery on this performance along with a gradual improvement in liability franchise are critical for further rerating of the stock. Given cyclical benefit of improving microloan collections/growth, we rate USFB as BUY with a revised TP of INR 34 valuing it at 1.4x FY24E BVPS. Re-emergence of asset quality issues leading to higher credit costs remains a key risk to our call.

* Robust AUM growth; strong operating quarter: AUM stood at INR 209bn (+44% YoY, +8% QoQ) driven by strong disbursements of INR 49bn (+56% YoY, +12.5% QoQ). MFI group loans, individual loans, housing loans and MSE loans grew at 52%/44%/33%/31% YoY. Overall deposit growth stood at +45% YoY, +10.6% QoQ with retail deposits now at 61% (+160bps QoQ) and CASA ratio at 26.9%. NIMs stood at 9.8% (+20bps QoQ) and management expects NIMs to be around 9.6% levels for FY23E. Operating profit stood at INR 3.9bn (3.9x YoY, +28% QoQ) driven by strong NII growth (+70% YoY, +11% QoQ) outpacing opex growth (+16% YoY, flat QoQ). Cost to Income for the quarter stood at 52.5% (vs 58.5% QoQ) and management guided for an increase in opex in 2HFY23. Provisions for the quarter were negligible which resulted into a PAT of INR 2.9bn.

* Asset quality improvement on track: GNPLs/NNPLs/std restructured pool declined to 5.1%/0.04%/1.0% as of Sep’22 vs 6.5%/0.1%/1.8% as of Jun’22 on account of strong recoveries/upgrades (INR 1.5bn) and moderation in slippages (INR 0.75bn). PAR0 also improved to 6.1% as of Sep’22 vs 7.9% as of Jun’22. Collection efficiency for the overall book remains stable at 100% for Sep’22 (vs 99% in Jun’22). Further, collection efficiency for the restructured book continues to be strong at 88%. Management indicated that the asset quality issues are now behind and expect FY23E to be a normalised year. We expect credit costs to normalise going ahead and build in credit costs of 0.9%/1.5% for FY23/24E (in line with management guidance of 100-150bps from FY24E).

* Valuation and view: While the stock has run up by 64% in the last 6M, on the back of steadily improving asset quality and return metrics, we believe sustained delivery on this performance along with a gradual improvement in liability franchise are critical for further rerating of the stock. Given cyclical benefit of improving microloan collections/growth, we rate USFB as BUY with a revised TP of INR 34 valuing it at 1.4x FY24E BVPS.

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