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PAT beat from opex decline and lower-than-estimated credit cost  

Ujjivan SFB delivered a beat of 10% on our PAT estimate for the quarter, despite a 4% miss on NIM, on the back of 3% qoq decline in opex (essentially on lower non-employee cost) and better-than-expected credit cost (GNPL coverage was maintained though). The moderated loan growth performance (gross loan book up 1% qoq/18.7% yoy) was underpinned by cautious disbursement/new customer acquisition approach in Micro Banking (GL/IL disbursement down 21-23% qoq) and transitory impact on affordable housing disbursements (down 39% qoq) due to alignment with RBI’s April-end circular. Bank’s deposit growth was healthy (3.3% qoq/22% yoy) aided by sustained robust traction in Retail TD (substantial wholesale deposits were redeemed in the quarter). CASA deposits were maintained in absolute terms despite challenging market conditions and no change in SA rate structure.  

NIM declined by 10 bps qoq to 9.3% but was higher by 50 bps over Q3 FY24 level. Notably, there was a 17-bps one-time benefit in CoF of Q4 FY24 due to interest reversal on holding company term deposit post the reverse merger. Q1 FY25 CoF was similar to Q3 FY24 on comparable basis highlighting 1) CASA stability, 2) controlled aggression on pricing of Retail TDs and c) benefits from augmentation of branches and branding. Micro Banking PAR/GNPLs rose by 90 bps/20 bps on sequential basis to 3.9%/2.3% due to heatwave, elections, and isolated pockets of stress in various states (PB, HR, RJ, GJ, KL, OR and TN). There was mild increase in PAR/GNPLs in other products too (AHL, MSE, etc.), but largely related to seasonality. The deterioration in asset quality caused an increase in credit cost to 1.5% (it was already normalizing in the preceding quarters). 

Management remains confident of delivering 20% loan growth and 20% RoE   

Fresh PAR creation has stabilized in June-July with NDA (non-delinquent accounts) collection efficiency (CE) near 99.5% (improving from 99% for Q1 FY25). Resolutions/collections in initial delinquent buckets have also improved with strengthening of collection team. Consequently, slippages in Micro Banking are expected to be stable in the current quarter. Given encouraging incremental asset quality trends, the bank intends to push significant business volumes in H2 FY25. Within Micro Banking, the growth emphasis would be more on Individual Loans than Group Loans as the former portfolio has been relatively resilient. The impact of recent MFIN guardrails is likely to be mitigated by augmenting repeat loans and managing customer attrition. The growth in AHL would come back as operations have been aligned with RBI’s April-end circular and there is no structural loss of business run-rate. MSE finance portfolio is expected to grow better on reoriented strategy, and the newer products of Gold Loans and Vehicle Loans are scaling up rapidly.  NIM will receive support from peaking of CoF and expected residual pricing benefits in Micro Banking portfolio. As PAR has started to stabilize and GNPLs are likely to peak out in Q2/Q3, the credit cost guidance has been maintained at 1.7% for the year. The bank is confident of managing the Cost/Income ratio around 55-56% mark with reasonable control over costs. Hence, the 20% RoE guidance for the year has been retained.  

Remain positive; key monitorable would be PAR movement  

Our earnings adjustment looks large as revisions are on Q4 FY24 update. Even in the current challenging/tough set-up, Ujjivan SFB has been delivering well on NIM, Cost/Income, Asset Quality and RoE. We believe Bank can sustain 18-20% RoE in the coming years under a stable operating environment. A less-volatile delivery on growth and profitability is likely to re-rate the stock which is trading at inexpensive multiples of 6x PE and 1x PABV on FY26 basis. We maintain positive stance and with 12m PT of Rs65.  

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