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2025-05-25 10:01:56 am | Source: Axis Securities Ltd
Buy Ujjivan Small Finance Bank Ltd For Target Rs. 49 - Axis Securities Ltd
Buy Ujjivan Small Finance Bank Ltd For Target Rs. 49 - Axis Securities Ltd

Est. Vs. Actual for Q4FY25: NII – MISS; PPOP –  MISS; PAT – MISS

Changes in Estimates post Q4FY25

FY26E/27E (in %): NII: +1.7/+3.9; PPOP: +0.3/+1.4; PAT: +5.6/+3.7

Recommendation Rationale

Growth outlook in MFI improves; Secured portfolio growth visibility strong: The mix of the secured products improved from 30% in FY24 to ~44% in FY25, led by robust growth of 56% YoY. This growth was led by continued growth in the Affordable housing book and a pick-up in the MSME segment. The management expects growth in the secured portfolio to continue, primarily driven by Affordable Housing, MSME, with support from Micro-mortgage, Gold and Vehicle segments. Amongst the new businesses, UJSFB intends to ramp up the gold loans to ~2-3% of the portfolio by FY26. The vehicle business will also continue to scale up to ~Rs 1,500 Cr over the next 2-3 years. Furthermore, green shoots are visible in most geographies in the MFI segment. However, the bank will continue to exercise caution while pursuing growth, given the uncertainty in Karnataka (KA) and Tamil Nadu (TN) and await better clarity on the impact of the MFIN guardrails 2.0. UJSFB’s focus in the MFI portfolio will remain on scaling the Individual Loans (IL) portfolio. We pencil down an improved credit growth of 19% CAGR over FY25-27E, mainly led by the secured products (improving mix to 50% as guided earlier)

Some respite on Asset quality stress in MFI: In Q4FY25, UJSFB saw a meaningful improvement in X-bucket collection efficiency (CE) across most geographies except KA. The bank has seen a similar trend in Apr’25 and expects to end the quarter on an improved CE trajectory. The management believes that PAR has peaked in Dec’24 (at 5.4% and improved to 4.5% in Q4FY25), and improvement should be visible in the coming quarters. However, the bank will continue to monitor the evolving situation in KA and TN and the definite impact of the guardrails. The situation in KA is gradually improving, and stress is visible, particularly in certain districts, which is expected to settle over the next 2-3 months. Management has indicated that MFI credit costs will taper, though H1FY26 credit costs will be higher than H2FY26. So far, there have been no meaningful on-ground changes in TN, and the management does not foresee any major challenges. We believe credit costs will gradually moderate over FY26E, thereby supporting RoA for the bank.

Sector Outlook : Positive

Company Guidance: The bank has performed better than its peers in the current MFI downcycle owing to its proactive approach to cut growth and diversified geographical presence. UJSFB’s X-bucket CE has improved meaningfully across geographies, and the trend is expected to continue going ahead. This should drive down credit costs over FY26. The secured portfolio's growth momentum will remain strong, driving healthy credit growth for the bank. Deposit growth is expected to mirror credit growth as the bank intends to maintain LDR at ~88% on a steady-state basis. Portfolio mix shift should exert pressure on yields. However, the bank has identified levers to limit the impact of margin compression. We expect UJSFB’s RoA/RoE to improve to 1.9-2.1%/15-18% over FY26-27E.

Current Valuation: 1.2x FY27E ABV;  Earlier Valuation: 1.0x Sep’26E ABV

Current TP: Rs 49/share;  Earlier TP: Rs 39/share

Recommendation: We maintain our BUY recommendation on the stock

Alternative BUY Ideas from our Sector Coverage:

AU SFB (TP – Rs 755/share); Equitas SFB (TP – Rs 76/share)

 

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