Ujjivan SFB (small finance bank) recently held an analyst meet to present its business strategy and future plans. During the event, the heads of various divisions, including asset businesses, liabilities, credit and collections, and technology, were showcased. The management of Ujjivan SFB emphasised its goal of building a mass-market bank with a specific focus on the aspiring middle class. They outlined their intention to diversify into secured product segments while expressing confidence in the growth prospects of their micro-banking business. Furthermore, the management highlighted the favourable macroeconomic conditions that are expected to support the bank’s healthy return ratios. This suggests that the bank is well-positioned to take advantage of the current economic environment. Based on these factors, the recommendation given is to retain a Buy position on Ujjivan SFB. The fair value is stated as `42 (previously `36). Additionally, it is mentioned that holding the bank’s holding company (holdco) may be preferred due to a discount of around 17% compared to the bank itself.
Ujjivan SFB reported robust credit growth of 33% y-o-y in FY2023, led by the micro-banking segment. Management indicated that overall credit growth is likely to stay robust, with a guidance of >25% growth for FY2024-26E. However, secured segments should drive growth, with a special focus on the affordable housing book. Management expects the share of secured loans to increase to 40% by FY2026E. The bank will also focus on gold loans, 2-wheeler loans and micro-LAP as it looks to service the lifecycle needs of its customer base.
Ujjivan’s overall stress loans (GNPL, PAR 1-90) have declined meaningfully from peak levels. The bank holds a 99% cover on NPLs and another provision buffer of 100 bps of AUM. While growth in the unsecured micro-banking portfolio has been high in the past few quarters, we are not too worried as of now. Borrower cashflows have recovered, and the overall macro-environment seems favourable. Management’s confidence also stems from the conviction in the collection infrastructure built by the bank in micro-banking recently. Within micro-banking, the share of individual loans has been increasing, as the bank is graduating internal customers with satisfactory performance to this product.
Our channel checks indicate that the bank is increasingly using this product as a tool to attract customers from competitors. We will continue to monitor the growth in this segment for any potential concerns.
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FY2023 was an exceptional year for the bank with RoA/RoE of 3.9%/33% because credit costs were negligible. We are likely to see a normalisation of credit costs in FY2024E, resulting in some declines in return ratios. The shift in the loan mix should also drive a change in the composition of return ratios, but we expect the impact to be limited in the medium term.
Retain Buy with a revised FV of `42 (`36 earlier) We have kept our estimates for FY2024-25 unchanged. At our FV of `42 (`36 earlier), we value the bank at 1.4X March 2025E book and 7X earnings for medium-term RoEs of 20-23%. The risk-reward remains more attractive at the holdco with 17% HoldCo discount.