Ujjivan Financial Services Ltd. share price target

Ujjivan Financial Services Ltd is the third largest NBFC microfinance (MFI) in India and is among the first group of companies to procure small finance bank (SFB) license. Ujjivan has a network of 457 branches across 24 states....

Ujjivan reported a loss of Rs 749 mn, much higher than our expectations, due to deterioration in asset quality (GNPA ratio was at 6.16% vs. 0.28% in Q4 and NNPA was at 2.3% vs. 0.03% in Q4). Provisions increased to Rs 1.6 bn (includes Rs 430 mn for NPAs of Nov-Jan period).

Upgrade to BUY with a TP of Rs 360 (2.2x FY19E ABV). Ujjivans 1QFY18 performance was impacted by one-time provisioning for sticky non-paying customers. It reported a loss of Rs 750mn, with provisioning of Rs 1.6bn. Cumulative repayment since demonetisation remained at 96% vs 96.7% in 4QFY17.

Loan book grew 16% YoY (-3%QoQ), lower than expected marred by lower disbursements and client acquisition post demonetisation. Asset quality deteriorated with GNPA moving 344bps QoQ to 3.69% (excluding RBI dispensation for demonetisation). Margins contracted 410 bps YoY on lower loan growth and interest reversals, leading to -65%YoY de-growth in PAT. Transformation to SFB is gaining pace, and has converted 15 branches in FY17 and expects to operate 171 bank branches by FY18....

Loan book grew 16% YoY (-3%QoQ), lower than expected marred by lower disbursements and client acquisition post demonetisation. Asset quality deteriorated with GNPA moving 344bps QoQ to 3.69% (excluding RBI dispensation for demonetisation). Margins contracted 410 bps YoY on lower loan growth and interest reversals, leading to -65%YoY de-growth in PAT. Transformation to SFB is gaining pace, and has converted 15 branches in FY17 and expects to operate 171 bank branches by FY18....

Ujjivan may have to take some write-offs (~3% of loans), but these are transitory issues and will not inflict permanent fracture to microfinance business models. Pain will be sharp, but transient.

Ujjivans 4QFY17 performance continued to be impacted by demonetisation and other external challenges affecting the MFI sector. The cumulative repayment rate remained weak at 96.7% vs 97.9% in 3QFY17.

We expect Ujjivan to clock loan CAGR of ~29% over FY17E-20E and deliver terminal RoA/RoE of 2.5%/16.4% by FY20E. The management's deep understanding of the tricky business segment provides comfort on credit risk; passing the sudden demonetization stress-test is testimony to the management's cali..

Ujjivans 3QFY17 performance was impacted due to demonetisation led challenges. Collection efficiency for the quarter was low at ~93% compared to normal trend of 99% . Disbursements too declined 24% sequentially due to cautious approach and currency shortage. Ujjivan didn?t use RBI dispensaton and provided ~Rs 500 mn as delinquency (30 dpd) increased sharply.

Ujjivan continued to report strong operating performance across the parameters: (1) strong and diversified AUM growth led by strong customer acquisitions, (2) stable asset quality and gains in productivity albeit also supported by stronger growth in high ticket Individual loans. Higher cost income ratio is ascribed to costs towards SFB conversion (expected in Q4FY17).