HDFC Securities Bets On This Small Cap Banking Stock, Sees Strong 54% Potential Gains

Stock Outlook & Returns

On July 29, Friday, the stock of Ujjivan Small Finance Bank opened at Rs 19.30 apiece, currently trading at Rs 18.95 apiece. The previous close was Rs 19.20 apiece, currently trading 1.30% below the previous close. Currently is trading Rs 5.45 above the 52 week low level.

The stock hit the 52-week low on 23 July 2022 at Rs 13.50 apiece and the 52-week high was recorded at Rs 29.30 apiece on 28 July 2021, respectively.

The stocks of the company in the past 1 week gained 12.98% and 27.62% in the past 1 month, respectively. In the past 3 and 6 months, it has given a positive return of 9.74% and 0.26%, respectively. However, over the past 1 year, its share has fallen massively around 33.62

AUM picks up pace; limited impact of RBI circular

Q1FY23 marked the highest-ever Q1 disbursals at Rs 43bn, with surprisingly little impact of the RBI's regulatory diktat on MFI disbursals. The time-to-normalisation on the MFI portfolio is particularly surprising, given the dislocation faced by other peers, including larger banks. 

Improved optics around stress pool

GNPA/NNPA improved to 6.5%/0.1% (Q4FY22: 7.3%/0.6%), with higher organic upgrades and recoveries offsetting 4.2% annualised gross slippages. The ahead-of-expectations normalisation in asset quality demonstrates Ujjivan's singularly-focused approach towards resolving each of the specific stress buckets using different strategies.

Concerns largely addressed; upgrade to ADD

According to the brokerage, "With the stability of the leadership team and a clear strategic path in sight for growth and expansion, the management appears optimistic of delivering on its business guidance. Having cleaned up its back book and starting on a relatively cleaner slate, we believe incremental growth will be NIM-dilutive but RoA accretive."

Ahead-of-time portfolio stability calls for upgrade Ujjivan SFB's earnings surprised positively with strong loan growth (+24% YoY) and near-zero credit costs. On the back of a healthy PCR at ~98%, NNPA sharply reduced to 0.1% (Q4FY22: 0.6%), supported by healthy recoveries and upgrades.

The brokerage has said, "Strong business momentum and healthy collections led a 170bps QoQ decline in the aggregate stress pool (PAR>0), alleviating our earlier concerns around asset quality. The significant ground covered on asset quality is now reflecting in a confident 30% loan growth guidance funded by an even stronger deposit growth. We believe that acceleration in deposit growth is likely to be NIM-dilutive in the current competitive environment where even larger peers are finding it difficult to sustain/build market share gains. On the back of increasing visibility on lower NPA accretion calling for lower credit costs, we raise our FY23/24 estimates by 6/36%. We upgrade Ujjivan SFB to ADD (from REDUCE) with a revised Target Price of Rs 29."