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Sustained strong show with delivery of 3.6%/28% RoA/RoE

Ujjivan’s Q2 FY24 PAT was 7% ahead of expectations, driven by 8% beat on PPOP. NII came in-line notwithstanding marginal spread compression and increased investments/liquidity on the BS. Overall non-interest income was higher than estimate with continuance of encouraging trends in core fees and bad debts recovery and a significant jump in insurance distribution income (largely sustainable due to increase of commissions). Opex growth remains restrained despite investments being made for growth of granular deposits (branches, resources, marketing, products, relationship management, etc.). Notably, the bank has been witnessing much better-than-industry growth trends in CASA without increasing the blended cost of these deposits. Robust collection trends across buckets continue to improve PAR/GNPLs and underpin modest credit cost.

Firmly on track to achieve guidance

The bank has retained guidance of 25%+ loan growth, 30%+/35%+ deposits/CASA growth, 9%+ NIM, <100 bps credit cost and 22%+ RoE for the current fiscal. Management also remains confident about delivering healthy loan/deposit growth and 20%+ RoE in FY25/26. The drivers of loan growth would be a) persistent strong volume-led growth in Micro Banking (Individual Loans would continue to grow faster than Group Loans), b) continuation of momentum in Affordable HL and FIG Lending and c) growth revival in MSE Finance and scale-up of new products like 2w loans and gold loans. Differential pricing of SA/TD, augmentation of branch network and many other initiatives would support deposits momentum.

NIM to improve from Q4 FY24; credit cost to normalize gradually

While NIM declined by 40 bps qoq in Q2 FY24 to 8.8%, the bank expects some recovery in H2 FY24 as TD re-pricing is largely complete while gradual asset re-pricing would continue to play out. About 53% of Micro Banking portfolio is yet to re-price fully; 28% to reprice by 50 bps and remaining 25% to reprice by 100 bps over the next 2-4 quarters. Slippages (ann. 2% run-rate) continue to be under control and NPA recoveries remain healthy. Loan write-off was moderate at Rs0.6bn. Credit cost was low on account of strong collections. Non-delinquent accounts collection in Micro Banking has been at 99.5%+ for past 18-20 months. The new (post-Covid) book in Affordable Housing is performing much better than peers/industry with lower 30+ dpd and GNPLs

Raise earnings by 4-5%; maintain Buy with increased price target of Rs66

Even with normalized credit cost and bad debts recoveries, we see the bank delivering an impressive RoA/RoE of 2.5%+/20%+. Sturdy growth in Micro Banking (both in Group & Individual Loans), pricing flexibility, moderate net slippages, and operational improvements in Affordable Housing and MSE Financing portfolios would aid in delivering high RoEs despite the franchise investments. Notwithstanding the run-up in stock price, Ujjivan SFB’s valuation remains undemanding at 8x P/E and 1.6x P/ABV on FY25 estimates. Rising conviction on sustenance of strong RoEs and the BV benefit from reverse merger would further re-rate the stock. The merger with Holdco. Is likely to get consummated in Q4 FY24 and is estimated to add ~Rs2.4 (10%) to current BV. With regards to succession after the end of Mr. Davis’ current term in Dec’24, the Board would be evaluating both internal and external candidates for appointment much ahead of time.

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