Ujjivan Financial Services Ltd – Research Reports By Edelweiss, HDFC Sec & Nirmal Bang

Last Quarter of Pain, Re-rating starts now

Ujjivan Financial Services (UFS) reported Q2FY18 results with the broad takeaway being that this is the last quarter of pain and the the company is now, poised to deliver a materially better (and profitable) H2FY18 compared with a loss-making H1FY18, which will drive upward re-rating for the stock. In Q2FY18, Net Interest Income grew 12% qoq to INR 186 cr, Other Income grew 10% qoq to INR 39 cr whereas Provisions (other than Tax) fell 45% qoq to INR 88 cr. Consequently, net loss on PAT basis narrowed 84% to INR -12 cr.

Asset quality problem firmly in the past. Collection Efficiency, PAR0 clearly indicate there is no fresh accretion of stress

Collection Efficiency of the ‘new book’ created post December, for the 9-month period from Jan to Sep 2017, stands at a superlative 99.7%.

Importantly, 9 months is reasonably long period from the perspective of Microfinance loan tenures. Even on the legacy book, there is no concern regarding fresh delinquent customers as such and provisions have been made largely on customers who were already overdue. In fact, PAR0 has fallen by as much 210 bps from 8.8% in Q1FY18 to 6.7% in Q2FY18, indicating that underlying asset quality has actually improved on the legacy book.

Normalisation of growth an ongoing process with strong traction for Non-MFI businesses. Management maintains guidance

Disbursements have risen 15% qoq with Gross Loan Portfolio (GLP) rising 3.3% qoq and 2.8% yoy to INR 6669 cr. This was driven by 2% yoy growth in JLG MFI loans, which now form 85.2% of GLP. Micro and Small Enterprise loans grew 465% yoy and now form 1.8% of GLP. Affordable Housing loans grew 232% yoy and now form 2.5% of GLP. Management has retained their full year FY18 guidance for loan growth of c.20%.

Liability mix transforming rapidly leading to major Cost of Funds benefit with CoF falling from 11.4% to 9.7% over the course of an year

The proportion of Term Loans in overall funding mix has fallen from 69% in Q2FY17 to 39% in Q2FY18. At the same time, the proportion of Refinance has risen from 7% to 21% and that of Deposits has risen from 0% to 20%. Consequently, Cost of Borrowings and Deposits has fallen from 11.35% in Q2FY17 to 9.65% in Q2FY18. Most of the Deposits are Non-Retail in nature as of now with CD (9.1%) and Insitutional Deposits (9%) dominating Deposits share. This is still however, meaningfully lower
cost than NBFC-style funding and Ujjivan’s Average Cost of Deposits stood at 5.3% in Q2FY18.

Cost to Income Ratio also displaying falling trend and augurs well from the perspective of meeting long-term expectations

Cost to Income Ratio for UFS has fallen from 78% in Q1FY18 to 68.9% in Q2FY18. Apart from normalisation of Total Income, which grew 12% qoq, the fact that all major fixed costs related to bank franchise build had been incurred in Q1FY18 was a contributing factor. UFS prudently relies on low-cost BC outlets to fulfil URC target requirement. Furthermore, the share of Branches in transaction value has fallen from 56% in Q1FY18 to 38% in Q2FY18.

Valuation and Rating: Maintain ‘BUY’ with Price Target of INR 452
At the current price of INR 373, MFL trades at a P/B of 2.2x FY19E book for an FY19E-21E RoE of 13-17%. We maintain ‘BUY’ Rating with Price Target of INR 452.