Buy This Small Cap SFB Stock For Target Price Of Rs 31, Gave 63.12% In 3 Months

Ujjivan Small Finance Bank Ltd., gets a buy call from Axis Securities in its recently published report on 19 September 2022. Axis Securities has estimated a Target Price for the stock at Rs. 31. Considering the stock's current market price and the estimated target price, the stock is likely to surge up to 27% in 12 months.

Stock Outlook

The Current Market Price (CMP) of Ujjivan SFB stock is Rs. 24.55 apiece. Its 52-week high level is Rs. 25.80, and its 52-week low range is Rs. 13.50. It is a small-cap banking stock with a market capitalization of around Rs. 4,243.01 crore.

Returns over the past 5 years

In the past 1 week, it has fallen 3.16%, whereas, in the past 1 and 3 months it has gained 18.03% and 63.12%, respectively. In the past 6 months, it has gained 45.7%, and in the past 1 year, its share price has gained by 18.89%.

Ready to Embark on a Growth Journey!

The brokerage said, "We interacted with the team at Ujjivan Small Finance Bank (UJSFB) to understand the business strategy and growth prospects over the medium term as the business stabilizes after facing multiple challenges in the form of top-level management rejig and asset quality concerns owing to COVID-related disruption. Our key takeaways from the discussion have been that the bank's growth appetite remains strong as demand across segments remains buoyant, led by the MFI segment and steady improvement in asset quality continues."

Asset Quality Stress Manageable and Well provided for!

In the past decade, the microfinance industry has faced 2 black-swan events in the form of - (a) Demonetization and (b) COVID-19. As compared to demonetization, COVID-19 had a more disruptive and long-lasting impact on the businesses and livelihood of borrowers, especially the MFI/informal segment. With MFI being a dominant part of the UJSFB's portfolio, the stress was reflected in the sharp increase in the asset quality stress with peak PAR at 30.8% in Jun'21 and peak GNPA+Restructured book at 19.2% (11.2% GNPA, 7% Restructured book) in Sept'21. While the bank remains confident in its underwriting mechanism and its robustness, the most identifiable reason for such sticky stress formation during COVID 1.0 and 2.0 was owing to the lack of a dedicated collections team, in whose absence the sales team was responsible for the collections which lacked the requisite expertise. However, with the bank investing in and beefing up the collections team and unabated focus on collections, UJSFB was successful in improving asset quality metrics and improving it to manageable levels as the bank exit FY22. FY22-exit GNPA+Restructured Book/PAR stood at 9.7/9.6%.

With the informal segment being the worst hit during the pandemic, UJSFB took a conscious call to migrate to the formal and semi-formal customer segment from the informal segment in the secured portfolio. The management in their Q1FY23 commentary stated that in the Affordable Housing segment, the focus remains on improving the share of salaried customers. At the end of Q1FY23, the share of salaried customers stood at 47% vs 38% pre-COVID. Incrementally, ~54-55% of disbursements were to salaried customers. Similarly, in the MSE segment, with 48% of the incremental disbursements to the semi-formal/formal segment borrowers, the share of formal segment borrowers has improved from 8% to 22% over the past 12 months.

Apart from the realignment in the customer segment, the bank has also reduced its dependence on the labour-intensive sectors and shifted its focus on essential services, in a bid to maintain credit quality. "We believe this is a prudent approach, as during COVID-19 the borrowers engaged in essential services business activities showed more resilience and bounced back faster vs borrowers engaged in non-essential businesses. While we believe the shift towards the salaried/formal segment of customers would help the bank maintain the credit quality, it would weigh on the yields/NIMs over the medium term." the brokerage said.

Outlook & Valuation

With concerns around asset quality and management team strengthening addressed, growth will take precedence. With buoyant demand in the secured portfolio segments and MFI segment tailwinds, UJSFB is likely to deliver a healthy CAGR of 25%+ over the medium term. "The recently concluded QIP has initiated the process for the reverse merger and we do not expect any hurdles in the successful completion of the reverse merger, which is expected to be completed in the next 10-12 months. The stock currently trades at attractive valuations of 1.1x FY24 ABV and the improving RoA/RoE profile, strong growth runway, strengthening retail-led liability franchise and stable asset quality makes UJSFB an eligible candidate for re rating. We maintain our BUY recommendation with a revised target price of Rs 31/share (1.4x FY24E ABV), implying an upside of 29% from the CMP," the brokerage said.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.