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Strong performance continues

Ujjivan SFB delivered a 7%/30% beat on our PPOP/PAT expectations driven by a) higher NII, b) measured increase in opex (normalization of collection-related costs), c) higher other income (strong core fee growth + sustained elevated bad debts recovery) and d) NIL credit cost (continued robust collections and NPL recoveries). Management expects a similar operating (earnings) performance in Q4 FY23, and 25% loan growth and 1% credit cost in FY24. With collections-related costs normalizing, the bank hopes to limit the likely increase in cost/income ratio next year owing to lower bad debts recovery and some pressure on NIM. As the granular deposits inflow remains strong, Ujjivan SFB doesn’t see any imminent need to raise deposits pricing. We raise our earnings estimates by 35%/20% for FY23/24 on much stronger-thanexpected operational delivery in Q3 FY23 and encouraging medium-term commentary on asset quality, growth, loans/deposits pricing flexibility and cost metric. While FY23 will be an exceptionally profitable year due to lower-than-usual credit cost and higher-than-usual bad debts recovery, we estimate the bank to deliver 18-20% RoE even under normalized circumstances. Expect stock to re-rate further; we maintain BUY with revised 12m PT of Rs45. Valuation is quite attractive at 5.7x P/E and 1.1x P/ABV on FY24 estimates.

Robust asset quality trends continue?

With sustained strong collections across buckets, the fwd. flows and fresh slippages remained benign. Net slippages were at just Rs140mn during the quarter. PAR (1+ dpd)/GNPA levels further declined to 4.9%/3.4% from 6.1%/4.4% as of Sept, with the 1-90 dpd bucket shrinking from 1.7% to 1.5% (8% qoq absolute decline). Even adjusted for the meaningful write-offs of Rs1.79bn (Rs1.57bn in Q2), the PAR (1+ dpd) pool has declined by 2% qoq in abs. terms. There was a substantial reduction in restructured book (now constitutes 1.4% of loan book), wherein collection efficiency was 98% in December. Bank holds a provision cover of 64% on the restructured loans. Credit cost was near zero in the quarter due to favourable bucket movements and that loans written-off were already significantly provided for.

Secured products contribution to rise; pricing headroom across products

Encouraged by another strong performance in Q2 FY23 and extant growth and collections/recoveries trends. Micro Banking (Group & Individual Loans) loan growth was strong in Q3 FY23 (up 6.6% qoq/43% yoy) underpinned by sustained significant customer additions and some increase in ATS (after having declined in preceding two quarters). Micro Banking disbursements were highest-ever in December. Decline in MSE financing book was attributable to shift in focus on shorter tenor products and more formal customer segments. Strong traction in affordable housing continued with incremental focus on semi-formal customer segment in Tier 2 and Tier 3 towns. NBFC funding portfolio is being scaled-up as there are Nil delinquencies. The bank would be significantly scaling-up vehicle finance in FY24 and would launch gold loans in targeted 50 locations. Management aspires for 50% loan book contribution of the secured products in 5-6 years. Ujjivan SFB has taken limited lending rate hikes across products when compared to competition - 50 bps in Micro Banking and 90-100 bps in Affordable Housing. While comfortable with extant pricing currently, the bank would review the rates when required.

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