Its pan-India presence with no single state contributing >20% of AUM as at Mar’21, coupled with an evolving product portfolio, would enable it to outpace systemic credit growth once the macro turns conducive.
Ujjivan Small Finance Bank’s (Ujjivan) core philosophy of driving business by focus on digital capabilities, customer-centricity, and financial inclusion harmonises well with India’s increasing financial penetration, especially in rural areas. Its pan-India presence with no single state contributing >20% of AUM as at Mar’21, coupled with an evolving product portfolio, would enable it to outpace systemic credit growth once the macro turns conducive. While Ujjivan’s journey towards building secured assets is progressing well, its liability franchise is still evolving with retail deposits at 48% of total deposits and CASA ratio at 15%. Subdued RoA in FY21 was an outcome of the bank recognising stress and provisioning for it upfront – ~10% coverage on restructured book and 59% on NPAs. While near-term asset quality concerns persist given it’s high exposure to MFI segment, incremental focus on secured assets, healthy coverage on the existing stress pool, and provision buffer at 1% reinforces our view that Ujjivan would deliver normalised RoA by FY23E. We initiate coverage with an ‘add’ rating and target price of Rs 35, valuing the stock at 1.8 FY23E BV.
Pan-India presence with no single state contributing >20% of AUM: Ujjivan, being in an unsecured lending business (predominately MFI) and taking cognisance of the segment’s vulnerabilities to external events like natural calamities, elections, etc. has built a most diversified presence with no single state contributing >20% of AUM. Its pan-India operations with presence in 24 states /UTs and 248 districts would help navigate credit cycles more effectively than peers. Further, its exposure to diverse geographies much earlier in the journey should help it build a proprietary credit model on the back of its rich and relatively longer experience of working in different regions.
Focus on ‘digital banking’: Under the new leadership team, headed by Nitin Chugh (took charge as MD & CEO in Dec’19), Ujjivan focused on building robust digital capabilities targeted towards improving efficiencies and better customer experience. End-to-end digital liability account opening, ~99% of borrower origination on handheld and paperless mode, reduction in TAT, improvement in productivity (steady decline in cost/income ratio) and increasing adoption of alternative channels, e.g. mobile banking, internet banking, etc. speaks of its digital transformation.