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RoA surpassing 4% with improved visibility on sustaining current profitability

Ujjivan Small Finance Bank’s (Ujjivan) Q2FY23 financial performance reflects the successful execution of revised business strategy post the management change in Sep’21. RoA and RoE now stand at 4.6% and 34.5%, respectively. The improved performance is an outcome of the bank’s 100-day action plan implemented in Oct’21 with three key objectives: i) Rebuild business volumes, ii) improve asset quality, and iii) build and retain a good long-term team. Successful implementation of the 100-day action plan is reflected in 1) strong 8% QoQ growth in AUM with ~38% (15% in Q1FY22) of loans to new customers in microbanking, 2) substantial decline in stressed asset portfolio, and 3) cost/income ratio falling to 53%.

GNPA + restructured book fell to 5.3% vs 7.4% in Q1FY23 and 19.2% in Sep’21 against which Ujjivan carries 5.4% of provision coverage as of Sep’22. SMA pool further reduced to 1.7% vs 2.1% in Q1FY23 and 2.5% in Mar’22 with PAR 61-90 at just 0.2%. Standard restructured pool now stands at only 100% on NPLs in restructured book, curtailed slippages and strong recovery to ensure full year FY23E credit cost remaining within the guided range of <1%. With sustained improvement in core operating performance and visibility on credit cost normalisation, we maintain BUY with target price raised to Rs35 (earlier: Rs25), valuing the stock at 1.5x (1.3x earlier) Sep’23E BVPS.

* Steady improvement in core operating performance led to all-time high PAT of Rs3bn and RoA of 4.6%. Ujjivan SFB delivered its all-time high PAT of Rs3bn driven by strong 11% QoQ NII growth and rationalisation of costs (as reflected in >850bps reduction in cost/income ratio to 52% vs 61% in Q1FY23). Strong 8% QoQ AUM growth and 20bps QoQ NIM expansion led to 11% QoQ growth in NII. Combination of sustained quarterly disbursement at Rs48bn, Rs260m income from bad-debt recovery and Rs150mn towards PSLC income supported other income (18% QoQ). Strong revenue growth and benefits of operating leverage (expenses were flat QoQ) resulted in strong 42% QoQ growth in PPoP. Adequate coverage on GNPL pool and lower slippages led to provisions write-back of Rs99mn in Q2FY23, which we believe is not sustainable and should normalise in coming quarters.

* Concentrated efforts and strengthened workforce, coupled with improved business outlook led to steady improvement in collections. This is seen from reduction in PAR 0 portfolio to 6.1% in Q2FY23 vs 7.9% in Q1FY23 and 9.6% in Q4FY22, 14.9% in Dec’21 and 30.8% in Jun’21. Similarly, collections remained steady at 99% during Sep’22, CE even in restructured book remained robust at 88%.

* Earnings estimates revised upwards as we model lower credit cost and up our credit growth assumption. Given the sustained improvement in collections and substantial reduction in stressed pool, GNPA + restructured book fell to 5.3% in Q2FY23 vs 7.4% in Q1FY23 from 13.2% in Jun’21. We now lower our credit cost assumption to 100% for FY23E and 66% for FY24E.

* Fresh slippages continued to moderate, leading to a steady decline in NPL ratios. Ujjivan’s GNPL fell sharply to 5.1% vs 6.5% in Q1FY23 vs 7.3% in Q4FY22 and NNPL to the pre-covid level of 0.04% vs 0.6% in Q4FY22. The reduction in GNPL ratio was mainly driven by lower slippages at Rs0.75bn in Q2FY23 vs Rs1.6bn (~3% slippage ratio) in Q1FY23 and Rs2.2bn (5%) in Q4FY22. PCR on GNPL portfolio stood at 99%, including floating provision of Rs2.5bn. Total restructured book contracted to Rs4.7bn as on Sep’22 from Rs6.5bn in Q1FY23, with provision cover of 63%. Of the total, ~63% (Rs3bn) has already turned NPL and overall collection efficiency in restructured book stood at 88% in Sep’22

* AUM growth remained robust at 8% QoQ (driven by micro-banking including individual loans). Disbursements during Q2FY23 sustained momentum and remained high at Rs48bn, of which Rs38bn (~79% of total) was towards microbanking and the rest was spread across MSE, AHL, FIG and other retail products. The share of micro-banking increased to 69% from 65% in Q2FY22. Similarly, unsecured products’ contribution also increased to 71% vs 68% in Q2FY22. However, the bank highlighted going forward, it will incrementally focus on scaling up affordable home loans, gold loans, vehicle loans and MSME loans. Deposits grew 11% QoQ to Rs203bn with CASA ratio at 26% and share of retail deposits at 61%.

* Credit cost is likely to normalise going forward. Downward trajectory in quarterly credit cost continued in Q2FY23 as well, with provision write-back of Rs99mn. Recovery/upgrades at Rs1.5bn, outpacing fresh slippages of Rs0.75bn led to provision write-back in Q2FY23. Post management change in Sep’21, the bank conducted a detailed review and assessed the health of outstanding portfolio. After careful assessment, it guided for FY22E credit cost at Rs11bn12bn, and actual credit cost fell within the guided range at Rs11.4bn. In FY23, management is guiding for 1% credit cost.

*Key risks: Higher slippages from restructured portfolio and moderation in loan growth.

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