Buy Ujjivan Small Finance Bank; target of Rs 50: YES Securities

YES Securities' research report on Ujjivan Small Finance Bank

In its Analyst/Investor day, Ujjivan SFB exuded confidence about 1) sustaining 25% growth in loan book through FY23-26, 2) shifting of mix towards secured products and towards individual loans within Micro Banking, 3) growing deposits much faster than advances while improving CASA share to 35% by FY26, 4) holding NIMs and Cost/Income in a closer band while making necessary franchise investments in products, digital channels, distribution, people and branding, 5) experiencing moderate credit cost (100-150 bps) underpinned by strong credit & collections, marginal SMA buckets and nearly full provisions on NPLs, 6) extracting reasonable recoveries from written-off pool in current year (Rs1.05bn in FY23), and 7) delivering 20%+ RoE through FY23-26 which will be the best amongst SFBs. The merger with the Holdco. would likely get consummated in Q3 FY24 and is estimated to add ~Rs2 (8-9%) to the BV of the bank. Besides sustaining the current strong growth and profitability in Micro Banking (both in Group & Individual Loans) supported by borrower addition/migration, pricing flexibility and robust collections, the reorientation and consequent operational improvements in Affordable Housing and MSE Financing portfolios would aid in delivering 20%+ RoE despite the planned franchise investments. 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. Recently RBI withdrew its nominee director from the Board, thus expressing confidence on operations of the bank.

Outlook

Notwithstanding the recent run-up in stock price, Ujjivan SFB’s valuation remains undemanding at 6x P/E and 1.1x P/ABV on FY25 estimates. Rising conviction on the above-mentioned growth and RoE delivery and BV benefit from reverse merger would further re-rate the stock over the coming 6-12 months. We retain estimates, BUY rating and raise 12m PT to Rs50.

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