Ujjivan Financial Services Research Report By IIFL

Ujjivan Financial Services’ (UFSL) advances would be aided by strong growth outlook in MFI (stabilization post demonetization), MSME and Home Loans (low base).

Additionally, comfortable deposit mobilization and declining incremental NPA formation will aid return ratios. Moreover, falling cost of funds due to change in liability profile, improving deposit to advances ratio, declining cost ratios and credit cost would uplift profitability.

While UFSL is expected to report loss (higher upfront provisioning) and negative return ratios in FY18E, RoE and RoA would recover to ~13% and ~1.8% by FY20E (close to pre-demonetization levels).

MFI and non-MFI business growth to contribute to advances

Business volume of microfinance is back to normal post demonetization and is expected to grow decently over FY19-20E. Huge market size and lower penetration would aid the performance of UFSL’s microfinance loan book.

Besides, it has also revamped its MSE and Affordable Housing (non-MFI) segments and the management is aggressively focused on these for overall loan growth.

Contribution from non-MFI businesses to advances is expected to improve from 2.4% to 28.6% over FY17-20E. New product introductions would further diversify the portfolio.

Moreover, rising bank branch network would lead to new customer additions and cross selling opportunities (from existing and new customers). We expect UFSL’s loan book to register ~22% CAGR over FY17-20E to Rs 11,458cr.

Attractive valuations:

We estimate UFSL to register ~12% earnings CAGR over FY17-20E. The stock is available at attractive valuation of 2.0X FY20E P/BV. Taking into consideration the multiple earnings growth levers, we value UFSL at 2.5x FY20E P/BV. We recommend BUY with a target price of Rs 467.