This Small Cap Banking Stock Grew 56.6% In 3 Months, Buy For Rs 27 Target Price: Axis Securities

Axis Securities recommended a BUY rating on the Ujjivan Small Finance Bank (SFB) with a Target Price of Rs 27 apiece, implying an upside of 9% from its current level. Ujjivan SFB is a small-cap hotel chain having a market cap of Rs 4,866.72 crore.

Ujjivan SFB transitioned from an NBFC (Ujjivan Financial Services Ltd.) in Feb'17 and has a diversified portfolio spread across Microfinance, Affordable Housing, MSME Loans, and FIG Lending. The bank primarily caters to low and middle-income individuals and businesses in the metro and urban areas that have limited or no access to formal banking and finance channels.

CMP, 52-Week Low & High, and Returns On Investments

The current market price (CMP) of the stock is Rs 24.90 apiece on NSE. The stock is currently trading near its 52-week high. Its 52-week high is Rs 26.45 and its 52-week low is Rs 13.50, respectively. 
It was listed on the exchange in December 2019. Since its listing, it has given 55.5% negative returns. In the past 1 & 3 months, the stock has given 3.53% and a massive 56.6%, respectively In the past 1 year, it gave 6.64% positive return.

Portfolio diversification towards secured book

Ujjivan SFB reported a robust growth of 44/8% YoY/QoQ in the Q2FY23 provisional update with growth driven by the MFI segment (+51% YoY, +9% QoQ). As the bank looks to transition from the informal to the formal segment in the secured portfolio, overall portfolio growth in the near term is likely to be driven by the MFI segment. However, over the medium term, we expect the secured portfolio mix to improve to ~42-43% by FY25E from the current 31%, implying growth of ~29% CAGR.

Asset Quality improvement underway

Ujjivan SFB has been witnessing a significant improvement in asset quality over the past few quarters, mainly aided by the write-offs. At the end of Q1FY23, GNPA improved to 6.5% from its peak of 11.8% in Sep'21. In Q2FY23 (provisional), the bank witnessed further improvement to 4.4%. The restructured book continues to tread downwards with collections holding up well. UJSFB's stressed pool is well provided for and with encouraging asset quality trends, we expect a sharp decline in credit cost from FY23 onwards. On a steady state basis, UJSFB's credit costs are expected to hover between 100-150 bps.

Levers for RoA expansion in place

Ujjivan SFB's portfolio shift towards the secured products along with a shift in the borrower profile, is likely to put pressure on yields and margins. However, the margin compression will be taken care of by improving fee income, improving cost ratios and moderating credit costs. "We expect the bank to deliver RoA/RoE of 2-2.1%/17-18% over the medium term," 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.