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Credit cost guidance reflects improving asset quality outlook

Ujjivan SFB (Ujjivan) published Aug’21 business update on (September 24, 2021) and the key takeaways include – i) gradually approaching normalcy on most business parameters, ii) increased focus on containing incremental stress, 100- day plan for each vertical with focus on PAR reduction & NPA recovery, and iii) credit cost guidance of Rs11-12bn vs Rs4.7bn in Q1FY22 reflects improving asset quality trend. Taking cognisance of improving collections, it is focusing on re-building volumes cautiously and in select products.

Notably, amid asset quality challenge and change in top management, on-ground execution remains strong as reflected in >100% growth in monthly disbursement since June’21 level and retail deposit increasing to 51.3% (47.6% in June’21) with CASA ratio improving to 21.2% (20.3% in June’21). While collections in non-overdue book at 99% reflect abating asset quality challenge, incremental restructuring of ~Rs8bn since June’21, taking the total restructured book to Rs14bn (of which Rs3.8bn is already recognised as GNPL), and fear of third wave pose risk to asset quality. Maintain HOLD.

* Collection efficiency continued to trend well; credit cost guidance at Rs11- 12bn in FY22e is lower than Q1FY22 annualised run rate. Increased focus on collections with implementation of special 100-day action plan and strengthened collection team coupled with easing of restrictions across states helped it improve CE to 95% in Aug’21 vs 93% in July’21. Collections across segments, except for unsecured MSE book, showed improving trend. Non-overdue collection efficiency remained strong at 99% in Aug’21, while collections in restructured book remained at 91%. With improving collections and better visibility on asset quality outlook, management estimates full year FY22e credit cost at Rs11-12bn, lower than Q1FY22 annualised run rate.

* GNPL increased to 11.9%, but PAR portfolio across buckets continued to reduce substantially. PAR 0 fell to 21.7% by Aug’21 (30.8% in June’21), a reduction of Rs7.25bn during Jul’21-Aug’21, primarily led by improved collections. PAR 1-30, PAR 31-60 and PAR 61-90 improved substantially to 5.1%, 3.1% and 1.5%, respectively, in Aug’21 vs 9.8%, 8.6% and 2.6%, respectively, in Jun’21. GNPA and NNPA increased to 11.9% / 5.5% as of Aug’21 vs 9.8% / 2.7%, respectively, as of Jun’21. Total restructuring stood at Rs14.05bn (9.8% of gross advances) as of Aug’21.

* Action plan laid-down to contain incremental stress asset formation. Ujjivan SFB laid out focused action plan targeted towards better asset quality management going ahead. Action plan is - i) formalising 100-day plan for each business vertical with focus on PAR reduction and NPA recovery through periodic monitoring, ii) focusing on initial buckets and vintage accounts for reducing PAR flow to higher buckets, iii) strengthening collection team, and iv) increasing focus on legal recovery for MSE/ affordable housing segments.

* Earning revision – We trim our earnings estimate for FY22e – factoring Rs11bn credit cost (lower end of guidance) vs Rs8bn earlier, we estimate loss of Rs956mn vs profit of Rs825mn earlier.

* Key risks. Upside risk – lower-than-anticipated provisions in FY22e (guided for Rs11-12bn of provision) and downside risk - delay in the appointment of MD and CEO could impact strategy execution of the SFB.

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