Ujjivan’s Q4 was operationally weak, with a Rs 750 million interest reversal impacting PPOP (-22% q-o-q), which was significantly below our expectations. Ujjivan managed to remain barely profitable for FY21, with no provisions in Q4 (Rs 250 million reversal) despite a Covid-19 wave-2 impact as well as relatively large wave-1 residual stress, and through cost cuts (partly unsustainable). We were particularly negatively surprised by large NPAs across all segments (GNPA: MSE – 10.3%, affordable housing – 3.6% and MFI 7.8%), which highlights that problem is not restricted only to MFI.
Overall stress levels remain high with 1) PAR 30-90 of 4.4%, 2) non-NPA restructured book in MFI of 6.6% (some overlap in PAR), 3) Net NPA still elevated at 2.9% (PCR of only 60%). Further, the wave-2 impact will be large given the intensity/spread and lack of support measures given earlier – collection efficiency has seen 300-600 bps declines across segments in Apr-21. We hence think Ujjivan is clearly not out of the woods yet and lower PPOP/AUMs of ~4% will restrict its ability to absorb such a large impact.
We expect ROEs of 4% in FY22F with credit cost of 425 bps (525 bps including Rs 1.7 billion of provision buffer). We cut our PAT estimates for FY22F/23F by 65%/15% driven by lower growth and higher credit cost. We downgrade Ujjivan to Neutral with a reduced TP of Rs 240 (1.3x FY23 BVPS vs 1.5x previously) with downside in opco (fair value of Rs 26 for bank) and adjusting for a 20% holdco discount.
Asset quality – still not out of the woods: GNPA% inched up to 7.1% (4.8% in 3Q), with GNPAs in MFI/ MSE/ housing at 7.8%/ 10.3%/3.6%. 60% PCR remains low (65% in MFI) especially given that ~7% of MFI book is restructured and PAR 30-90 is 4.4% (overall). Stress remains elevated across segments with PAR>0 at 16%/23%/10% for MFI/MSE/ Housing.
Further, collections in April indicate 300-600 bps declines across portfolios, with MFI declining to 88% from 94% in Mar-21, and May will possibly see a further decline.
Surprisingly, collections in MSE (secured) are lower than in MFI, giving much less comfort on the new segments into which Ujjivan has entered.
Further, with only INR1.7bn of provision buffer, we think FY22F will be another 4-5% credit cost year.