Emkay Global has issued a BUY recommendation on Ujjivan Small Finance Bank (SFB) with a revised target price of Rs 45, suggesting a 23% potential upside from the current price of Rs 36.6. This revision follows a decline in quarterly performance, attributed to lower non-interest income and rising provisions in its microfinance institution (MFI) segment. The bank's strategic shift towards secured lending and enhanced cost efficiency is aimed at mitigating current challenges. However, elevated slippage and moderated growth projections led to a reduction in Emkay’s earnings estimates.

Financial Performance Highlights

Net Profit and Revenue: Ujjivan SFB reported a PAT of Rs 2.3 billion, a 24% miss on Emkay's expectations, mainly due to lower income and higher provisioning. Despite moderate growth in assets under management (AUM), revenue faced pressure from a conservative growth strategy in the MFI sector.

Loan Growth and Asset Under Management (AUM): The bank’s AUM grew by 14% YoY, indicating its cautious stance in the MFI segment. Nevertheless, secured loans increased significantly, comprising 35% of the gross advances by Q2FY25, up from 31% in Q1.

Impact of Strategic Shift Towards Secured Lending

Secured Portfolio Growth: The bank's transition towards secured lending has reduced exposure to MFI stress. The secured loan book, including segments like affordable housing, mortgage loans, vehicle finance, and small enterprise loans, now comprises a more substantial part of its advances.

Margin Compression: With the secured portfolio's growth, net interest margins (NIMs) slipped by 10 basis points QoQ to 9.2%, owing to generally lower yields from secured loans relative to MFI.

Asset Quality and Provisions

Slippages and Gross NPA: Elevated slippages, particularly in the MFI segment, resulted in Rs 2.4 billion of fresh slippages, keeping the gross NPA ratio stable at 2.5% due to write-offs.

Provisioning and Coverage Ratio: Provision Coverage Ratio (PCR) decreased to 78% from 84% in Q1, with floating provisions maintained at Rs 2.5 billion. Despite these challenges, the bank projects a credit cost between 2.3-2.5% for FY25.

Outlook and Target Price

Emkay revised its target price for Ujjivan SFB to Rs 45, valuing it at 1.1x its September 2026 expected adjusted book value (ABV). The revised target factors in a cautious approach to MFI growth, expectations of asset quality stabilization, and potential earnings normalization by FY27.