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Guidance cut on expected lines

Ujjivan SFB (Ujjivan) posted numbers for 2QFY25 which were lower than our expectations primarily poor asset quality. NII for the quarter came in at Rs9.4bn (up around 15%/flat YoY/QoQ) which was in line with our expectations. Cost/assets continued its upward trajectory 6.16% vs. 6.1%/5.7% in 1QFY25/2QFY24. Slippages for the quarter came in at 3.2% vs. 2.6% in 1QFY25. Resultantly, credit cost spiked to 1.72% vs. 1.47% in 1QFY25. RoA/RoE for the quarter were lower at 2.2%/15.8%. Further, given the QoQ spike of 90bps in PAR to 5.1% we expect huge jump in credit cost in 2HFY25. Management has revised its loan book growth guidance for FY25, prioritizing the containment of slippages and aligning with the MFIN guardrails. With three challenging quarters already behind us, much of the strain is reflected in the stock’s significant de-rating, with a >35% decline YTD. Also, the management has started to observe early signs of improvement in CE. Against this backdrop, we maintain our BUY rating on the stock but lower the target multiple from 1.8x to 1.5x to reflect the reduced growth outlook and moderated return profile. Despite factoring in higher credit costs for the second half, we still expect Ujjivan to achieve a 12% RoE in FY25. If the MFI cycle improves as anticipated, the bank is well-positioned to deliver an 18% RoE by FY26. Our revised TP stands at Rs58 (1.5x1HFY27).

Financial performance below expectations

NII came in at Rs9.4bn, (15% YoY /flat QoQ) was in line with our expectations. NIMs (calc) for the quarter came in at 10.2% a sequential decline of 47bps. CTI for the quarter was sequentially higher at 60.0% vs. 55.2% in 1QFY25. Opex to asset also increased by 30bps to 6.4%. PPoP came at Rs4.6bn (down 5% YoY /down 10% QoQ). Provision for the quarter surge up to Rs1.51bn (221% YoY/ 37%QoQ). The PAT came in at Rs2.3bn, showing a decline of 28.9%/22.6% YoY/QoQ. Annualized gross slippages were 3.2% of AUM (up 59bps sequentially) and bank did a write off of Rs1400mn during the quarter.

Gross loan book (up 1% QoQ) and Deposits (up 4.8% QoQ) – comfortable LDR of 86%

Gross loan book at Rs303bn up 14%/1% Y-o-Y/Q-o-Q with Non-MFI (secured) book forming 69% of the book. Secured book increased sequentially by 100bps. Disbursements were at Rs53.8bn which were up 2% QoQ. Sequentially, the ATS in JLG/IL exhibited an increase of 3.2%/0.1%, respectively. Total Deposits stands at Rs341bn, up by 17% YoY and 4.8% QoQ. CASA has been sequentially flattish and stands at 25.9% vs. 25.6% in 1QFY25.

Management withdraws growth and RoE guidance amid MFI challenges

Management has withdrawn its loan book growth guidance (previously 20%) due to uncertainties in the MFI segment. However, they provided an outlook on other segments: 1) Secured book is projected to grow by over 40%, shifting the AUM composition from 36:64 (secured: unsecured) to 40:60. IL book is expected to grow around 17% for the year. NIM guidance has been revised down from ~9% to ~8.6%, reflecting the shrinking MFI portfolio and anticipated interest income reversals. Additionally, the credit cost forecast has been raised from 1.7% to 2.3%-2.5%, as recent slippages in the MFI segment are likely to impact asset quality. As a result, management has also withdrawn its earlier RoE guidance of 20% for the year.

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