Ujjivan Small Finance Bank’s (Ujjivan) core philosophy of driving enterprise by focus on digital capabilities, client-centricity, and monetary inclusion harmonises properly with India’s rising monetary penetration, specifically in rural locations. Its pan-India presence with no single state contributing >20% of AUM as at Mar’21, coupled with an evolving item portfolio, would allow it to outpace systemic credit development as soon as the macro turns conducive. While Ujjivan’s journey towards constructing secured assets is progressing properly, its liability franchise is nevertheless 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 strain and provisioning for it upfront – ~10% coverage on restructured book and 59% on NPAs. While close to-term asset high-quality issues persist provided it is higher exposure to MFI segment, incremental focus on secured assets, wholesome coverage on the current strain pool, and provision buffer at 1% reinforces our view that Ujjivan would provide normalised RoA by FY23E. We initiate coverage with an ‘add’ rating and target value of Rs 35, valuing the stock at 1.8 FY23E BV.
Pan-India presence with no single state contributing >20% of AUM: Ujjivan, getting in an unsecured lending enterprise (predominately MFI) and taking cognisance of the segment’s vulnerabilities to external events like all-natural calamities, elections, and so on. has constructed 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 aid navigate credit cycles more successfully than peers. Further, its exposure to diverse geographies substantially earlier in the journey must aid it construct a proprietary credit model on the back of its wealthy and fairly longer knowledge of working in various regions.
Focus on ‘digital banking’: Under the new leadership group, headed by Nitin Chugh (took charge as MD & CEO in Dec’19), Ujjivan focused on constructing robust digital capabilities targeted towards enhancing efficiencies and far better client knowledge. End-to-finish digital liability account opening, ~99% of borrower origination on handheld and paperless mode, reduction in TAT, improvement in productivity (steady decline in expense/earnings ratio) and rising adoption of option channels, e.g. mobile banking, web banking, and so on. speaks of its digital transformation.