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‘Further pull‐back in asset quality key’   

Our view

Ujjivan SFB delivered a strong PPOP performance (24% above estimate) driven by NIM expansion and higher processing fees, that were utilized to augment provisions even post a 1.2% portfolio write‐off. With disbursements galloping 54% qoq/120% yoy, the bank’s AUM growth came in higher‐than‐expectations at 13% qoq/21% yoy and it was broad‐based (10%+ qoq growth in Microfinance, Affordable Housing, MSE loans and NBFC lending). With collection efficiency improving through the quarter (Dec CE w/o additional collections at 97% v/s 95% in Sep), the PAR 0 portfolio declined from 18.9% as of Sep to 14.9%. PAR 1‐90 declined to 5% from 7%, with SMA 1 & 2 at only 2.3% now. GNPA/NNPA corrected to 9.8%/1.7% from 11.8%/3.3% as of Sept. Restructured book stood at 7.5% of gross advances with provision coverage of 44%; of this pool, 37% is GNPA and 16% is PAR 1‐90 dpd. Overall stock of provisions increased from Rs15bn as of Sept to at Rs15.5bn (GNPL coverage raised to 85% incl. Rs2.5bn Covid provisions), despite the write‐off of Rs1.5bn loans

Collections continue to improve in January notwithstanding the third wave. Absolute guidance for FY22 credit cost maintained at around Rs12bn without factoring any utilization of the Covid provision.  GLP growth guidance for the year also maintained at 15‐20%, with management hopeful of delivering the higher end. For complying with SEBI’s minimum public shareholding norm, the Board has announced a QIP of Rs6bn (would augment capital adequacy by ~500 bps). Completion of reverse merger process is likely to take 12‐15 months in managements’ estimate. There was a growth in employee base in Q3 FY22, and the co. strengthened/replenished its leadership team.

We maintain Reduce rating while being cognizant that successful capital raising and further pull‐back in asset quality could act as positive triggers. In an improving business/collections scenario, the credit cost and earnings visibility should crystalize over next couple of quarters. We would like to see the above‐mentioned triggers playing out before upgrading the stock, which currently trades at 1x FY24 P/ABV for a potential RoE delivery of 14‐15% (post factoring the capital raise)

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