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Buy Ujjivan Small Finance Bank Ltd For Target Rs.40

Larger stress and upfront provisioning drives a big loss in Q3 FY21

USFB reported a big loss in Q3 FY21 with the bank opting to address the entire stress (including what may come) at one go ‐ credit cost was Rs5.8bn and provisioning buffer was substantially raised to 8% of overall portfolio.

While upfront provisioning is well appreciated, the quantum was a shocker considering that Management was not so perturbed about the credit cost outcome till the preceding quarter. Bulk of the provisions were built for the Microfinance portfolio (Group + Individual + Rural Finance is 75% of Bank’s advances), where the cover was increased to 9%+. Provisions carried on the non‐MFI portfolio (MSE + Affordable Housing + Other Retail Assets + FIG) was around 3%. Proforma Gross NPLs stood at 4.8%, PAR 0 was high at 16%+, and the bank restructured 8.5% of its Microfinance book.

The large provisioning in the quarter was triggered by a high PAR 0 figure and uncertainty around Assam portfolio (2.7% of advances ‐ collections dropped in January after passage of the MFI Bill). On growth front, Q3 FY21 was encouraging with disbursements in all businesses posting a substantial jump qoq and surpassing even pre‐Covid levels in December. Traction in loan book is likely to accelerate from Q4 FY21 and growth would be sharper in non‐Microfinance segments. Bank believes that it has fully provided for the stress and that credit cost should revert to normal levels.

There are encouraging indications in the stressed portfolio ‐ 73% collection efficiency in restructured microfinance book in January (with repayments from many customers who were non‐paying till December) and improving recoveries/roll‐backs across SMA buckets. USFB has augmented its collection effort by onboarding many people who will only look after collections.

We are changing our rating from BUY to ADD with significant downward revisions (6‐ 7%) in FY21‐23 ABV estimates and with a view that valuation multiple will get impacted with the large negative surprise of Q3 FY21 (Management did not guide well). The stock currently trades at 1.7x FY23 P/ABV.

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