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H2 FY25 to be weaker

H2 FY25 to be much weaker; credit cost, growth and margin outlook sees a downgrade

Ujjivan SFB’s soft performance in Q2 FY25 was on the expected lines but second half of the year is likely to be even weaker with somber outlook on credit cost, loan growth and margins. The medium-term outlook is hazy at present given not much improvement seen in collection trends of group micro loans. Bank expects a revival in micro banking from Q4 FY25 at the earliest and hence has guided for an overall credit cost of 2.3- 2.5% for the year (earlier 1.7%) and sustained degrowth in group loans portfolio in remaining two quarters. NIM would get impacted despite stabilization of funding cost due to significant shift in loan portfolio mix towards the secured products (Affordable Housing, MSE loans and others) and elevated NPL addition in micro banking. Augmentation of collection strength would keep the opex run-rate high, pressurizing the cost/income ratio and PPOP margins. Before an inevitable recovery in FY26, the return ratios would suppress further in H2 FY25. Improvement in NDA/Regular bucket collection efficiency would be a lead indicator of the situation improving in micro banking.

Growth driven by secured products and granular liabilities; dip in collections increase PAR buckets

Overall loan growth was just 1% qoq, characterized by 6% decline in group loans and 11%/7%/13% growth in Affordable Housing, MSE Financing and FIG Lending. Individual micro banking loans portfolio grew by 2% qoq with much better asset quality trends than group loans. CASA and Retail TD growth continues to run faster than loan growth at 6% qoq/26% yoy and 2% qoq/35% yoy respectively. NIM witnessed a marginal decline on 10 bps on qoq basis to 9.2% on the back of fall in blended portfolio yield due to significant shift in asset mix away from micro banking over the past two quarters. Micro banking collection efficiency (incl. arrears) dipped by 1 ppt in Aug and Sept to 97% and the NDA/Regular bucket collections stood at 99.23% for the month of Sept. Overall PAR and SMA bucket increased to 5.1% and 2.6% respectively from 4.2% and 1.9% respectively as of June. This increase was driven by the Micro Banking portfolio as collections across secured products was stable. Higher NPL addition of Rs2.4bn and higher write-offs of Rs1.4bn (included Rs0.5bn Assam portfolio) underpinned the increase in credit cost to 2%.

Substantial cuts in earnings; downgrade to ADD and await stabilization of asset quality   

We lower earnings estimates by 29%/18% for FY25/26 on adverse adjustments in credit cost, growth and margin assumptions. We expect Ujjivan SFB to deliver 14%/17% RoE in FY25/26. While the stock has fallen significantly in the recent months, we see possibility of some incremental price correction and a time-wise consolidation till one sees sustained pick-up in collection trends. Downgrade rating to ADD with lowered 12m PT of Rs44.

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