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Poor performance; awaiting top management appointments

* Ujjivan SFB reported a higher-than-expected loss of Rs2.7bn (est. loss of Rs1.2bn) in Q2 due to slower credit growth, higher opex and elevated provisions (post an external audit). Unlike peers, the GNPA ratio shot up 200bps qoq to 11.8%, while the restructured pool increased by 510bps to 10.8% of AUM.

* Business momentum has improved, but sub-par collections and continued asset quality pressure may keep growth in check. PAR > 0 dpd pool reduced to 18.9% (30% in Q1) due to recognition, but remains elevated, and thus a concern. We expect LLP to remain elevated, and accordingly we cut our earnings estimates meaningfully over FY22-24.

* Post the exit of Mr Nitin Chugh as MD & CEO, the board has referred two candidates to the RBI and is also trying to fill other vacant leadership positions, including CFO, CRO and others. We believe the bank will have to onboard credible executives, who could help it diversify the asset portfolio, scale-up liability similar to Equitas and manage asset quality as well as internal influences from old leadership.

* We retain Sell on Ujjivan SFB and reduce the TP to Rs15 from Rs17 as we lower earnings estimates and reduce the multiple to 1.3x Dec’23E ABV. On Ujjivan Fin Services (holdco), we retain Sell with a lower TP of Rs141, applying a 20% holding company discount.

Sub-par growth, weak CASA profile and interest reversals continue to hurt NIMs: AUM grew 5% yoy/3%yoy to Rs145bn, aided by growth in the housing, SME and micro-individual segments. Overall disbursements sharply rose by 114% yoy/138% qoq to Rs31bn, driven by the festive uptick in the underlying segments (albeit on a lower base). Dependency on MFI remains high, with the non-MFI portfolio contributing only 34% of the total portfolio (32% in Q1), making it vulnerable to growth/asset quality shocks. Deposit growth was healthy at 31% yoy to Rs141bn. However, the CASA ratio of 22.5% is still lower (20% in Q1FY22) vs. peers. Lower CoF led to a 10bps qoq improvement in NIMs to 8.1% but it was well below its trend. We believe that sub-par CASA and asset diversification away from MFI should weigh on NIMs in the long run.

Elevated NPA formation to keep provisions high: Fresh slippages were elevated at Rs6.6bn, leading to a 200bps rise in the GNPA ratio to 11.8%. The restructured pool too was elevated at Rs14.8bn, 10.8% of loans, due to accelerated restructuring in MFI in Q2 (Rs9.1bn). Restructured MFI loans are now 10.1% of loans (5.9% in Q1FY22). Collection efficiency improved to 95% in Sep’21 (vs. 78% in Jun’21), which, in addition to accelerated recognition, led to a decline in the portfolio-at-risk (PAR> 0dpd) to 18.9% from 30% in Q1FY22. As of Sep’21, the overlap of the restructured book with PAR is Rs5.7bn and with GNPA, it is Rs4bn. We believe the elevated stress would call for higher credit costs in H2 and should keep earnings under stress in FY22E.

Outlook and valuations: We believe the bank will have to onboard credible executives who could help it diversify the asset portfolio, scale-up liability similar to Equitas and manage asset quality as well as internal influences from old leadership. Retain Sell on Ujjivan SFB and reduce the TP to Rs15 from Rs17 as we lower earnings estimates and reduce the multiple to 1.3x Dec’23E ABV. On Ujjivan Fin Services (holdco), we retain Sell with a lower TP of Rs141, applying a 20% holding company discount. Key risks to our call: better than-expected assetquality experience and liability scale-up leading to better margins.

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