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Maintaining 25% Growth and 20%+ RoE

In its Analyst/Investor day, Ujjivan SFB exuded confidence about 1) sustaining 25% growth in loan book through FY23-26, 2) shifting of mix towards secured products and towards individual loans within Micro Banking, 3) growing deposits much faster than advances while improving CASA share to 35% by FY26, 4) holding NIMs and Cost/Income in a closer band while making necessary franchise investments in products, digital channels, distribution, people and branding, 5) experiencing moderate credit cost (100-150 bps) underpinned by strong credit & collections, marginal SMA buckets and nearly full provisions on NPLs, 6) extracting reasonable recoveries from written-off pool in current year (Rs1.05bn in FY23), and 7) delivering 20%+ RoE through FY23-26 which will be the best amongst SFBs.

The merger with the Holdco. would likely get consummated in Q3 FY24 and is estimated to add ~Rs2 (8-9%) to the BV of the bank. Besides sustaining the current strong growth and profitability in Micro Banking (both in Group & Individual Loans) supported by borrower addition/migration, pricing flexibility and robust collections, the reorientation and consequent operational improvements in Affordable Housing and MSE Financing portfolios would aid in delivering 20%+ RoE despite the planned franchise investments. With regards to succession after the end of Mr. Davis’ current term in Dec’24, the Board would be evaluating both internal and external candidates for appointment much ahead of time. Recently RBI withdrew its nominee director from the Board, thus expressing confidence on operations of the bank

Notwithstanding the recent run-up in stock price, Ujjivan SFB’s valuation remains undemanding at 6x P/E and 1.1x P/ABV on FY25 estimates. Rising conviction on the above-mentioned growth and RoE delivery and BV benefit from reverse merger would further re-rate the stock over the coming 6-12 months. We retain estimates, BUY rating and raise 12m PT to Rs50.

Key takeaways from Investor Day are as follows:

Micro Banking

* More than 2/3rd of customers been associated with the bank for 3+ years.

* Most diversified Micro Banking portfolio with no state contributing >16%.

* First to adopt household level income and credit assessment in Microfinance.

* The bank has dedicated credit team and bucket/NPL focused collections team at branches.

* Ujjivan SFBs GNPA/PAR 0 incl. technical write-off much lower than NBFC MFIs and SFBs as of Mar’23.

* The bank is growing faster than industry – its industry/SFB market share has increased from 4%/23.3% as of Mar’22 to 4.5%/26.7% as of Mar’23.

* Industry to grow at 18-20% pa and Ujjivan SFB targets to grow at 20-25% pa over the medium term.

* One of the pioneers in unsecured Individual Loans for Business, Livestock, House improvement, etc. – currently 18% of bank’s Micro Banking portfolio.

* Individual Loans (pricing at 25%) are higher yielding than Group Loans (23%) and the portfolio performed much better during Covid – the share of Individual Loans to keep increasing, albeit at a slower pace now.

* About 10% of Individual Loans from open market customers (but known to existing customers) - such customers’ share will increase in future.

* Also looking to build secured products portfolio with Micro Banking customers with comprehensive product suite (M-LAP, 2W Loan and Gold Loan) to cater to aspiring borrowers.

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