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Aggressive growth stance amid higher stress levels is a concern

* Ujjivan SFB reported a lower-than-expected loss of Rs0.3bn (est. loss: Rs2.1bn) in Q3, thanks to accelerated credit growth, better margins and lower provisions. The bank has reaccelerated growth with historically high disbursements of Rs48bn, mainly in MFI, which remains the dominant portfolio in its book at 67%, thus raising a concern.

* The GNPA ratio declined by 200bps qoq to 9.8%, while the restructured pool decreased by 270bps to 7.5% of AUM. Collection efficiency in MSE/PL remained sub-par at 86%/88%, while the recovery in MFI delinquent pool remained low at 40%. The PAR >0 DPD pool was down to 14.9% (19% in Q2) due to recognition, but still remained elevated.

* The bank has appointed an old hand, Mr. Ittira Davis, as MD & CEO after the exit of Mr. Nitin Chugh. Ujjivan has applied to the regulators for a reverse merger and will be raising capital through a QIP of Rs6bn to meet the minimum shareholding norms for the merger, leading to further RoE dilution.

* Though we believe management issues seem to be settled for now with the appointment of an internal candidate as MD & CEO, the bank will require transformational leadership to become a new-age universal bank. MFI dominance, weak asset quality, and sub-par liability/return profiles remain key concerns. Retain Sell on Ujjivan SFB with a revised TP of Rs13, based on 1x (1.3x earlier) Dec’23E ABV. We maintain Sell on the holdco Ujjivan Fin Services as well, with a lower TP of Rs123, applying a 20% holdco discount.

Aggressive growth stance amid continued stress:

AUM grew 21% yoy/13% qoq to Rs165bn, aided by strong growth in the MFI, housing and the MSE book. Overall disbursements stood at a historical high of Rs48bn, up 120% yoy/54% qoq. The dependency on MFI still remains high (67%), making it vulnerable to asset-quality shocks, and thus the bank should look at diversifying its product portfolio toward secured loans. Deposits grew at a healthy 34% yoy to Rs156bn, with a surprisingly sharp surge in SA leading to higher CASA at 26.5% (22.5% in Q2FY22). But this is still sub-par compared to peers (Equitas >50%). Better growth, lower interest reversal on NPAs and better CoF led to a 100bps qoq improvement in NIMs to 9.1%. However, we believe that the interest rate upcycle and asset diversification away from MFI will weigh on NIMs in the long run.

Sequential moderation in stress – but still elevated:

Fresh slippages moderated to Rs2.9bn/9% of loans, and were set off by higher recoveries/write-offs, leading to a 200bps fall in the GNPA ratio to 9.8%. The restructured pool came down to Rs12.4bn, or 7.5% of gross loans. However, restructured MFI increased to Rs11.2bn/6.8% of loans in Q3. Overall collection efficiency improved to 97% in Dec’21 from 95% in Sep’21, which, in addition to accelerated recognition, led to a decline in the portfolio-at-risk (PAR> 0dpd) to 14.9% from 18.9% in Q2FY22. Even then, these are relatively higher levels.

Outlook and valuations:

Though we cut our FY22E estimates by 11%, factoring in better growth and some moderation in stress, we raise FY23/24 earnings estimates by 17%/12%. The management issues seem to be settled for now with the appointment of an internal candidate as MD & CEO, but the bank will require transformational leadership to become a new-age universal bank. MFI dominance, weak asset quality, and sub-par liability/return profiles remain key concerns. Retain Sell on Ujjivan SFB with a revised TP of Rs13, based on 1x (1.3x earlier) Dec’23E ABV. We maintain Sell on the holdco Ujjivan Fin Services as well, with a lower TP of Rs123, applying a 20% holdco discount. Key risks to our call: better thanexpected asset-quality experience and liability scale-up leading to better margins.

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