However, we believe Ujjivan should be able to navigate the situation better, given its well-diversified loan mix, comfortable liquidity situation and healthy CAR levels.
We upgrade Ujjivan SFB (UJSFB) to ‘buy’ from ‘sell’ (fair value: Rs 37 from Rs 45 earlier) and maintain our positive view on Ujjivan Financial Services (Ujjivan) with a ‘buy’ (FV: Rs 330 from Rs 490 earlier). The quarter’s performance is less relevant, given the current deterioration in business environment. However, we believe Ujjivan should be able to navigate the situation better, given its well-diversified loan mix, comfortable liquidity situation and healthy CAR levels. The MFI business should be one of the early businesses likely to turn around.
Ujjivan SFB reported a ~30% growth in PBT led by a 125% y-o-y operating profit growth but offset by higher provisions (up ~8X y-o-y, primarily Covid-related at 0.5% of AUM). NII growth remained robust at ~45% y-o-y, led by ~28% AUM growth while NIM expanded ~30 bps q-o-q to 11.2%. Disbursements declined ~20% y-o-y led by Covid-related lockdowns. Cost-income ratio was at 65%. Deposits were flat q-o-q (~45% growth y-o-y); holding up better than certain larger private banks. CASA ratio improved ~200 bps q-o-q to 14%. Asset quality remained stable with GNPL ratio at 1% (flat q-o-q) and NNPL ratio at 0.2% (down ~20 bps q-o-q) while 90% of the loan book (99% by value) is under moratorium.
Ujjivan SFB is reasonably well-placed for the post-Covid era in its segment. UJSFB has a well-diversified portfolio from a geographical standpoint in MFI which should enable the bank to withstand unexpected shocks. As a bank, the access to liabilities is far better. The share of retail deposits is at ~45% currently. The bank has a comfortable CAR of 28% which gives significantly higher headroom to absorb any untoward losses. We would argue Ujjivan, as the situation normalises, should be able to come out of this far better than the rest of the players.
We upgrade Ujjivan SFB with ‘buy’ with an FV of Rs 37, valuing the bank at 2Xbook and 20X March 2022 EPS. We value the holding company’s stake of 83% in the bank for Ujjivan at Rs 330. The holding company is trading at a discount of ~55% of current market price (~120% to our FV). We believe the leakage in value is not as high as anticipated by investors which should result in better returns by owning the parent compared with the bank.