Buy Ujjivan Small Finance Bank Ltd for the Target Rs 85 by Emkay Global Financial Services Ltd
Ujjivan SFB reported strong PAT of Rs3.17bn (up 207% yoy/12% qoq) with ROA of 2.2%, ahead of our/consensus estimates by 4/13%. AUM growth accelerated to 29% yoy, while margins were stable qoq at 8.5% and credit cost moderated to 1.34% (-25bps qoq). Credit growth continues to be driven by MSME and mortgages, while MFI growth has gained momentum (17% yoy, 3% qoq). The MFI group PAR 0+, 30+, and 60+ DPD continue to trend downward by 10bps/30bps/30bps qoq to 4.1%/3.7%/3.4%, respectively. The management raised its FY27 ROA guidance to 1.8–2.0% from 1.6% and lowered its credit cost guidance to 0.9–1.0% of ATA from 1.4-1.5%, while reaffirming ~25% loan growth and a secured loan mix of over 56% by FY27-end. We believe Ujjivan remains a strong play on the MFI recovery story and should drive ROA up to 1.6-1.9% over FY27-29E, from 1.3% in FY26. We retain BUY and raise our TP by ~6% to Rs85 (from Rs80), on rolling forward to 1.7x Jun-28E PABV.
Broad-based AUM momentum continues with stable NIM
Ujjivan delivered strong AUM growth, continuing its momentum of ~29% yoy/5.5% qoq (vs ~27%/22% yoy in 4Q/3Q), driven by broad-based expansion across segments. Group loans grew 17.2% yoy/3.3% qoq, while individual loans grew 16% yoy/2.9% qoq. Secured segments such as retail and MSME continue to gain traction, lifting the share of secured loans to 50% (vs 49% in 4QFY26/43.5% in FY25). NIM was stable at 8.5% qoq, with the management expecting margins to broadly remain at current levels, barring any increase in funding costs. We expect NIM to gradually settle at a lower level as the secured portfolio mix continues to increase.
Asset quality continues to improve; credit cost guidance revised downward
Asset quality improved further, with gross slippage declining to Rs1.7bn (1.6% of loans) and GNPA/NNPA improving to 2.16%/0.34% vs 2.27%/0.4% in FY25. The improvement was led by sustained normalization in the unsecured portfolio, with group/individual loan GNPAs declining to 3.1%/2.8% vs 3.4%/2.7%, respectively. Collection efficiency remained robust at 99.7%, prompting the management to lower FY27 credit cost guidance to 0.9–1.0% of ATA from 1.4-1.5% of gross loans. The MFI group PAR 0+, 30+, and 60+ DPD trend lower by 10bps/30bps/30bps qoq to 4.1%/3.7%/3.4%, respectively. The seasonal uptick in delinquencies across select secured segments is expected to normalize as the portfolio seasons.
We retain BUY on Ujjivan SFB
Notwithstanding the near-term setback of the Universal Banking license rejection, we believe Ujjivan remains a strong play on the MFI recovery story and should drive ROA up to 1.6-1.9% over FY27-29E, from 1.3% in FY26. Thus, we retain BUY and raise TP by ~6% to Rs85 (from Rs80), on rolling forward to 1.7x Jun-28E PABV. Key risks: macro and micro disruption leading to slower-than-expected growth and higher NPAs; KMP attrition.
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