Ujjivan Small Finance Bank ADD - images.assettype.com

Please refer to important disclosures at the end of this report

Market Cap Rs54.6bn/US$731mn Year to March 2020 2021 2022E 2023E Bloomberg UJJIVANS IN NII (Rs mn) 16,336 17,286 19,212 22,338 Shares Outstanding (mn) 1,728.3 Net Profit (Rs mn) 3,499 83 825 4,338 52-week Range (Rs) 43/27 EPS (Rs) 1.8 0.0 0.4 2.2 Free Float (%) 16.7 % Chg YoY 75.6 -97.6 894.3 425.7 FII (%) 6.8 P/E (x) 17.7 745.8 75.0 14.3 Daily Volume (US$/'000) 1,916 P/BV (x) 1.9 1.9 1.9 1.7 Absolute Return 3m (%) 2.3 BVPS (Rs) 16.5 16.7 17.1 19.4 Absolute Return 12m (%) (14.5) Net NPA (%) 0.2 2.9 3.3 0.8 Sensex Return 3m (%) 7.3 RoA (%) 2.2 0.0 0.4 1.8 Sensex Return 12m (%) 46.3 RoE (%) 14.0 0.3 2.5 12.3

Equity Research July 8, 2021 BSE Sensex: 53055 ICICI Securities Limited is the author and distributor of this report

FINANCIALS Target price Rs35 Shareholding pattern

Sep ‘20

Dec ‘20

Mar ‘21

Promoters 83.3 83.3 83.3 Institutional investors 9.3 9.4 7.5 MFs and others 0.8 1.1 0.7 FIs/Banks 0.0 0.0 0.0 FIIs 8.5 8.3 6.8 Others 7.4 7.3 9.2

Price chart

10203040506070

Dec

-19

Apr-2

0

Jul-2

0

Nov

-20

Feb-

21

Jun-

21

(Rs)

Ujjivan Small Finance Bank ADD Most diversified presence; asset mix shifting towards more stable secured loans in retail Rs32

Research Analysts:

Renish Bhuva [email protected] +91 22 6637 7465 Kunal Shah [email protected] +91 22 6637 7572 Chintan Shah [email protected] +91 22 6637 7658 Piyush Kherdikar [email protected] +91 22 6637 7465

Ujjivan Small Finance Bank’s (Ujjivan) core philosophy of driving business by focus on digital capabilities, customer-centricity, and financial inclusion harmonises well with India’s increasing financial penetration, especially in rural areas. Its pan-India presence with no single state contributing >20% of AUM as at Mar’21, coupled with an evolving product portfolio, would enable it to outpace systemic credit growth once the macro turns conducive. While Ujjivan’s journey towards building secured assets is progressing well, its liability franchise is still evolving with retail deposits at 48% of total deposits and CASA ratio at 15%. Subdued RoA in FY21 was an outcome of the bank recognising stress and provisioning for it upfront – ~10% coverage on restructured book and 59% on NPAs. While near-term asset quality concerns persist given it’s high exposure to MFI segment, incremental focus on secured assets, healthy coverage on the existing stress pool, and provision buffer at 1% reinforces our view that Ujjivan would deliver normalised RoA by FY23E. We initiate coverage with an ADD rating and target price of Rs35, valuing the stock at 1.8 FY23E BV. Pan-India presence with no single state contributing >20% of AUM. Ujjivan,

being in an unsecured lending business (predominately MFI) and taking cognisance of the segment’s vulnerabilities to external events like natural calamities, elections, etc. has built a most diversified presence with no single state contributing >20% of AUM. Its pan-India operations with presence in 24 states/UTs and 248 districts would help navigate credit cycles more effectively than peers. Further, its exposure to diverse geographies much earlier in the journey should help it build a proprietary credit model on the back of its rich and relatively longer experience of working in different regions. The same blends well with its long-term goal of providing banking services to the underserved rural market across India in a cost-effective manner.

Focus on ‘digital banking’. Under the new leadership team, headed by Mr. Nitin Chugh (took charge as MD & CEO in Dec’19), Ujjivan focused on building robust digital capabilities targeted towards improving efficiencies and better customer experience. End-to-end digital liability account opening, ~99% of borrower origination on handheld and paperless mode, reduction in TAT, improvement in productivity (steady decline in cost/income ratio) and increasing adoption of alternative channels, e.g. mobile banking, internet banking, etc. speaks of its digital transformation. Additionally, Ujjivan has implemented Open Banking, an API gateway to empower customers to meet all their business requirements on a single platform and develop new business opportunities by integration.

Margin moderation to be offset by normalisation of credit cost and operating leverage. Changing asset mix in favour of the formal segment and secured products is likely to result in lower NIMs going forward. However, continuity of improving operational efficiency (C/I ratio fell to 60% in FY21 vs 67% in FY18) and gradual normalisation of credit cost from 5.5% in FY21 to 2.5% in FY23E, is likely to drive RoA to 1.8% by the end of the next fiscal. Key risks: A) higher slippages from restructured book, and B) delay in loan growth recovery.

INDIA

Ujjivan Small Finance Bank, July 8, 2021 ICICI Securities

2

TABLE OF CONTENTS What stands out for Ujjivan SFB .................................................................................... 3

Asset strategy – Gradually focuses on formal segment ........................................... 19

Key initiatives ................................................................................................................ 27

Valuations appear reasonable in relation to peers .................................................... 28

Financial outlook ........................................................................................................... 30

Pan-India presence, comprehensive product offerings, and vast untapped opportunity to drive >15% AUM CAGR over FY21-23E ...................................................................... 30

Changing asset mix in favour of secured products will weigh on NIMs; improving liability profile to partially offset adverse impact ........................................................................ 30

Enhanced digital capabilities to drive productivity improvement................................... 31

Near-term asset quality concerns persist, but increasing share of secured assets to help lower credit cost in FY23E ............................................................................................ 32

RoA likely to cross 1.5% threshold by FY23E .............................................................. 32

Summary financials ....................................................................................................... 34

Annexure: Index of Tables and Charts ........................................................................ 37


3

What stands out for Ujjivan SFB Most diversified geographical presence enabled Ujjivan to navigate MFI-related challenges resulting from the covid-induced disruption better than peers.

Historical events and its implication on MFI business, both in terms of asset quality and growth, suggests that building a diversified portfolio and presence is of utmost importance. Most players, having higher exposure in their respective home states, have understood this and are in the process of diversifying operations. Ujjivan is way ahead in building a diversified portfolio and, since the inception of MFI business in 2005, it has successfully built the most diversified portfolio within SFB space as at Mar’21. It serves >5mn customers with 575 branches (including 144 URCs) spread across 24 states / Union Territories covering 244 districts.

Within the four listed SFBs, Ujjivan has the most diversified operations (geographically) and portfolio. Its top-3 states’ contribution in total AUM stands at the lowest for Ujjivan at <50%, while that of top-3 states in total AUM is much higher at >70% for other SFBs.

Table 1: Ujjivan has the geographically most diversified portfolio… As of Mar'21 Ujjivan Equitas AU Suryoday Top-3 state contribution 43.5 78.0 70.0 72.0 Tamil Nadu 15.8 54.0 22.8 West Bengal 13.3 Karnataka 14.4 11.0 7.2 Maharashtra 9.7 13.0 13.0 34.2 Gujarat 8.3 4.0 10.0 8.8 Rajasthan 4.2 4.0 40.0 Odisha 2.7 15.0 MP 1.5 3.0 17.0 6.4 Bihar 6.1 Haryana 4.8 2.0 Assam 2.3 Uttar Pradesh 4.4 Punjab 2.4 5.0 Jharkhand 2.1 Kerala 1.6 Delhi 3.0 8.0 Tripura 1.1 Others 2.3 3.0 5.6 Source: Company data, I-Sec research

Chart 1: …with share of its top-3 states in total AUM lowest at <45%

78.072.0 70.0

43.5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Equitas Suryoday AU Ujjivan

Top-3 state's share in AUM as at March'21

Source: Company data, I-Sec research


4

Table 2: Pan-India focus with higher share from loans from South at 33% and deposits from North at 35%… As at Mar'21 South North East West Total Loans (Rs bn) 49 33 42 27 151 % of total loans 33% 21% 28% 18% Deposits (Rs bn) 35 46 20 30 131 % of total loans 27% 35% 15% 23% Employees 4,788 3,844 5,331 2,608 16,571 Loans per employee (Rs mn) 10.3 8.5 7.9 10.4 Deposits per employee (Rs mn) 7.4 12.0 3.7 11.6 Source: Company data, I-Sec research

Deep penetration via its distribution network across 24 states / UTs covering 248 districts has enabled Ujjivan to develop expertise to understand and differentiate customers on the basis of their specific requirements. Its established distribution network and relationships with customers helped it offer customised products that include a wide range of asset and liability products. It also distributes third-party insurance products from various insurance companies to customers. We believe Ujjivan’s diversified operations and understanding of customer requirements would help it establish a strong liability franchise and navigate challenging events (in any state-specific disruptions in MFI collections) better than peers.

Chart 2: …with equal focus on ex-rural markets

Metro, 31%

Urban, 34%

Semi-urban, 28%

Rural, 7%


Chart 3: Ujjivan successfully navigated state-specific issues – diversified operations came to rescue

3.7

6.2

5.0

4.2

3.6

2.7

1.9

1.4

0.9

0.8 0.9

0.9

1.0

1.0

1.0

1.0

7.1

0.0

2.3

1.4

1.0

0.7

0.3

0.3

0.3

0.3

0.3

0.3 0.4

0.2

0.2

0.1

0.1

2.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(%)

Asset quality Ratios

GNPL NNPL

Kerala flood Odisha flood Assam bill



5

Incrementally focuses on digital channels and partnerships to expand reach

Ujjivan, under the new leadership of Mr. Nitin Chugh, in FY20 laid down its detailed strategy to build robust alternative delivery channels to cater to the underserved population in a most efficient and effective manner. Hence, by the time covid hit came, it was ready to combat the business challenges with digital services.

Adoption of alternative delivery channels at a broader customer base remained untested and was increasing at a meagre pace. Lack of internet connectivity, limited alternative delivery channel options, lack of customer intent to switch to alternate channels were key reasons behind the lower adoption. However, with an increased adoption of the digital platform for various banking transactions due to the covid-induced nationwide lockdown, we believe that this is a good opportunity for Ujjivan to expand its digital initiatives and increase adoption of the digital channels.

Chart 4: Robust alternative channel platforms


The covid crisis has forced incumbents to reimagine their business model in light of changing customer behaviour. Since the onset of the pandemic, the pace of digital service adoption suggests that digital banking will be a key driver of business in the post-covid era. Ujjivan has already initiated a series of strategic initiatives to remain ahead of the curve in the digital journey. It has developed contactless lending products, completely digital processes for better efficiencies and greater customer convenience. Ujjivan’s end-to-end digital processes for loans and deposits, robust mobile and internet banking platform, digital loan repayments, UPI QR code and fintech partnerships, will help it cater to the underserved population in a remote area most efficiently.

Strategic initiative to improve adoption of alternative channels to expand reach and deliver value to customers

To promote alternative delivery channels, and encourage cashless transactions and adoption of digital platforms, Ujjivan intends to set up a network of e-kiosks that would provide 24x7 access to its customers in their own neighborhoods.

Multiple delivery channels

Personal & Business Internet banking

Web-based, can be accessed from any system

High volume bulk upload facility

Customizable client centric approval matrix

ATMs 491 ATMs including 53

ACR* machines Customer alerts for

each incorrect PIN entry

Green PIN facility 24/7 for OIN change

Empowering customers to block/unblock debit card & set transaction limits through ATMs

12 regional languages

Web/ Tablet Based Origination

Liability customer acquisition from anywhere using website

Tablet-based customer acquisition for loan products

Chatbot Aria to improve user experience

Door-step service; faster, easier, better TAT

Phone 24x7 phone banking

helpline Loan on Phone for

repeat GL customers Ability to service

customers in 13 Languages

Missed call and SMS banking services

Mobile App High customer rating of

4.4/5 on Google Playstore as of Mar’21 – Highest among SFBs

Nine languages option – English, Hindi, Kannada, Tamil, Bengali, Marathi, Gujarati, Punjabi and Odiya

Working on voice and video enabled customer interface

Active users exceed 0.68mn as of Mar’21.


6

Upscale and improve the digital offerings to attract target ‘new-to-bank’ customers. Intend to explore strategic partnerships with fintechs to increase customer

acquisition, reduce processing and onboarding costs, reduce turnaround time, and improve overall customer experience.

Chart 5: The number of transactions increased 2x since the covid-led disruption; share of digital transactions stands at 57% as in Mar’21

14.3 9.1 14.5 19.9 26.0

27%32% 33% 35%

56% 56% 59% 57%

0%

10%

20%

30%

40%

50%

60%

70%

0

5

10

15

20

25

30

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(%)

(mn)

Total transactions Digital transactions (RHS)


Increasing share of retail (secured) portfolio to ensure long-term sustainable loan growth with better asset quality

Ujjivan’s transformation from erstwhile NBFC to its current SFB avatar, was relatively more challenging operationally as well as execution-wise. Post commencing SFB operations in CY17, unlike Equitas and AU (who were already having diversified asset mix), Ujjivan had to focus on building its secured book simultaneously with liability franchise and managing costs. The share of secured loans improving to 27% by Mar’21 from almost nil in Mar’17, complemented by pristine asset quality (~90% collections in vehicle, affordable housing, secured MSE and institutional lending in Apr’21), speaks of Ujjivan’s superior execution of asset diversification strategy.

Chart 6: The share of secured loans increased to 27% by Mar’21…

5%

14%

22%

27%

0%

5%

10%

15%

20%

25%

30%

FY18 FY19 FY20 FY21

Secured loans % of total loans



7

Ujjivan started its lending business as a single product company in CY05 – with the focus to provide a full range of financial services to the financially unserved and underserved segments in India, not having access to formal financing and other banking services. While it forayed into MSE financing (unsecured) to leverage MFI customer base prior to SFB conversion, it began asset transformation journey immediately after getting SFB license in CY17.

Since CY17, with a customer-centric approach and ability to offer multi-products under its SFB avatar, Ujjivan has been incrementally focusing on diversifying its asset mix in favour of secured loans. Strategically, to leverage its deep geographical reach with presence in 248 districts across India, expertise in underwriting small-ticket loans in remote areas and existing customer base, it focused on building tailor-made secured loan products suitable to its catchment areas.

Over the past 4 years, Ujjivan launched a series of secured products, e.g. SME loans, affordable housing, vehicle loans – two-wheeler (2W) and E-3-wheeler (E-3W), etc. – complementing its product offering to mass underserved market. While it continued to grow the MFI book, it adopted a calibrated approach in incremental growth and stayed away from geographies where stress was building up. Most of its secured products are end-to-end digitally enabled, which makes its product offerings more competitive and easily accessible in remote areas.

Chart 7: Evolution of asset products – focus on building a secured asset portfolio Source: Company data, I-Sec research

Chart 8: Since FY18, Ujjivan incrementally focused on building non-MFI biz

85 84 7666 59

13 98

1011

1 35

78

2 4 811 14

0 0 0 0 10 0 0 0 10 0 0 1 1

0%

20%

40%

60%

80%

100%

FY17 FY18 FY19 FY20 FY21

Microfinance - Group loans Microfinance - Individual loans MSEHousing Agri FIGGold loan Personal loans Vehicle FinancingOthers


2005

2005

2005

2012

2015-16

Aug’18

Sep’18

Oct’18

Oct’20

Microfinance - Group loans Agri MSE Personal

loans Gold loan

Microfinance - Individual

loans

Housing Financial Institutions

Group

Vehicle Financing


8

Chart 9: Over past 3 years, incremental growth was largely driven by secured loans…

Chart 10: …disbursement trend suggests strong traction in secured loans is likely to continue

17%

210%

140%

70% 57% 48% 38% 3%0%

50%

100%

150%

200%

250%To

tal A

uM Agri

Pers

onal

Loa

n,Ve

hicl

e lo

an, S

taff…

FIG

Hou

sing

MSE

Mic

rofin

ance

-In

divi

dual

loan

s

Mic

rofin

ance

- G

roup

loan

s

FY19-21 loan cagr

92%

87%

83%

81%

78% 83

%

84%

80%

76%

74%

76%

8% 13%

17%

19%

22%

17%

16%

20%

24%

26%

24%

0%

20%

40%

60%

80%

100%

Q4F

Y18

Q3F

Y19

Q4F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

Disbursement trend

Microbanking disbursements Non - Microbanking disbursements Source: Industry data, I-Sec research Source: Industry data, I-Sec research *Microbanking includes group loans and Individual loans – mostly unsecured. *Non-microbanking includes MSE, gold loans, vehicle, affordable housing, agri loans, FIG etc. – mostly secured.

Digital transformation – Key driver to efficiency and productivity improvement going forward

Ujjivan reimagined its entire business model (right from customer onboarding to transaction) under the new leadership of Mr. Nitin Chugh (took charge as MD & CEO in Dec’19). It penned down a detailed strategy to emerge as a complete digitally enabled ‘new-age SFB’. In the process of building robust digital banking and analytics platform, it focuses on the optimal use of advanced, cost-effective technology in every banking process and further intends to strategically invest in technology to offer a convenient and secured banking experience to its customers.

To make the partnership model more effective and cost-efficient, Ujjivan has set up an innovation centre, to explore potential tie-ups with new-age fintechs. All potential collaborations undergo an evaluation through a PoC (Proof of Concept). The collaboration becomes live only after successful completion of the PoC and necessary clearances. We believe, the PoC model will help the bank emerge as a leading partner for fintechs, thereby ensuring steady growth for both.

Key strategies:

To build a user-friendly digital interface to extend the bank’s reach and offer a strong banking platform and focus on user adoption with programs like Digibuddies-led digitisation initiatives at branches, which are helping customers embrace various digital platforms.

Invest in API platform, innovations, and fintech partnerships to widen and deepen product offerings / banking services to the mass market.

Invest strategically to integrate technology into operations to empower customers, reduce costs and increase efficiencies.

Adopt robotic processes to automate operational processes to the extent possible. Data analytics to be used to offer customised solutions and improve cross-sell /

upsell. Establish Ujjivan as a modern technology-enabled bank.


9

Table 3: Highlights of key digital initiatives Segment Digital capabilities

Assets Collaborated with Rupee Power — a leading credit origination platform (CreditOn) —which will enable end-to-end digital customer acquisition, credit assessment, KYC and loan processing across its products.

I. Microbanking Tie-up with Airtel Payments Bank and PayNearby to facilitate cashless repayments.

II. Affordable Housing Digital on-boarding system live across branches Digital & Hub based disbursements – adapting to the new normal assuring business continuity; 30% reduction in

disbursal TAT III. MSE LOS Mobile sourcing solution piloted in Q4 across 5 locations, with full-fledged launch planned for Q1-FY22

IV. Personal loans Fintech tie-up went live in Mar’21 and May’21 End-to-end digital product: Using tech service provider, focus on making whole flow digital and contactless

V. Vehicle Launched digital LOS for two-wheeler products; FY22 to see increased adoption Liability Launched digital SA / FD – providing an end-to-end un-assisted digital journey to onboard new customers. Third-Party

I. Insurance Digital Insurance distribution project in final phase of IT development for 1st phase plan. Revamped Hospi-Cash product in Aug’20 – complete digital product – onboarding, payment and policy delivery.

Proposal accepted by IRDA to digitise Hospi-Cash claims. Deployment in progress. II. Mutual Funds Evaluating tech vendors in progress for digitising solutions for mutual funds and Atal Pension Yojana.

Process & Customer service

I. Collections

Digital collections remain stable contributing an average of 18% of microbanking and rural banking collections for FY21

Expansion of collection points through fintechs (PayNearby, SETU) and payments bank (Airtel) has contributed to 40% of overall collections in Q4FY21; >10,000 fintech partner outlets activated pan-India.

Self-repayment modes like BBPS* have seen substantial uptick with MoM growth of 15% overtaking direct cash deposits at collection points.

II. API Banking & Fintech partnership

Ujjivan offers 159 API’s, which cover most of banking transactions and requirements such as customer onboarding for liabilities & assets, service requests, and all types of payment services

Seven APIs listed on NPCI’s API Aggregator portal – nfinite.in (among the first 2 banks whose APIs are listed here).

Six fintech partnerships live – 3 for loan repayments and 3 for digital lending to personal loans and MSE customers.

III. Robotic Process Automation

Q4-FY21: Twelve processes across business verticals are completely automated, leading to substantial savings. As per internal analysis, 99% accuracy has been achieved for most processes. Fifteen processes to be automated by Q1FY22, with targeted automation of 15 processes every quarter. Limited

human contact in loan processing (repeat microbanking loans via phone, mobile app and ATM among others, remodelling housing/MSE processes and prioritising video KYC programme).

IV. Enhancing customer life cycle value

For ‘Existing to Bank’ customers, Automated Customer Engagement (ACE) platform has been implemented for improved customer engagement and enriching Customer Life-Time Value (CLTV).

Machine learning based customer segmentation models have helped identify and target potential customers for cross-sell and upsell opportunities


Process automations: Ujjivan intends to automate most operational processes for better efficiency by adopting robotic inputs and limiting human intervention to the extent possible. It plans to leverage data analytics for customer segmentation and targeted offerings tailored to customer needs, targeted marketing, faster and better credit decisions and proactive risk management. It also intends to shift from providing personalised services to more self-assisted services using handheld devices and phone / internet banking services.

Bank is now live with an end-to-end digital account opening solution for all customers.

A dedicated team for Robotic Process Automation (RPA) has been created for a focused approach towards exploring areas where technology can help reduce TAT, resource consumption, etc. Reconciliation is one of the activities currently enjoying the benefits of RPA.

Ujjivan has enabled paperless and handheld device-based loan origination and cashless disbursements with remittances directly credited to customers’ accounts.


10

It collaborated with Rupee Power — a leading credit origination platform (CreditOn) — which will enable end-to-end digital process for customer acquisition, credit assessment, KYC and loan processing across products. The platform helps in real-time credit decision-making, fraud detection and digital KYC with sales underwriting workflows, while exposing these services to lenders’ sales, digital and banking channels through APIs, mobile apps and microsites. The loan origination system (LOS) comes with various features such as data entry of customers, eligibility check, real-time credit decisioning, disbursements and tracking case documents. It offers its relationship officers an easier way of doing business.

Ujjivan implemented Open Banking, an API gateway that provides its partners with an opportunity to collaborate with Ujjivan. This empowers customers to meet all their business requirements on a single platform and develop new business opportunities by integration.

Chart 11: Improved turnaround time (TAT) since the implementation of tablet-based loan origination system

4.2

6.9

19.5

24.0

2.94.9

21.5 22.5

0.0

5.0

10.0

15.0

20.0

25.0

Group loan Individual loans MSE loan Affordable Housing

TAT in days

2018-19 2019-20 Source: Company data, I-Sec research

Improved adoption of digital services

All branches of Ujjivan are optimally equipped in terms of personnel, infrastructure and products. It intends to offer a standardised experience across all branches to its customers. It encourages and empowers customers via Digibuddy at branches, who assist customers in conducting banking operations through secure digital channels, including internet, phone and mobile banking. Further, to enhance adoption of digital channels among the underserved segment, it has undertaken measures to improve mobile application by activating voice-enabled and gesture-enabled interfaces in regional languages.

Concentrated efforts on customer awareness about its enhanced digital platform, and covid accelerated the pace of digital banking adoption.


11

Chart 12: Increasing share of digital transactions

14.3 9.1 14.5 19.9 26.0

27%32% 33% 35%

56% 56% 59% 57%

0%

10%

20%

30%

40%

50%

60%

70%

0

5

10

15

20

25

30

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(%)

(mn)

Total transactions Digital transactions (RHS)


Chart 13: Active customer base using internet & mobile banking platform jumped 1.6x over past one year

Chart 14: Enhanced net banking platform resulted in high adoption by SMEs

48 59 66 72 78

474532

603685

774

0

100

200

300

400

500

600

700

800

Mar'20 June'20 Sep'20 Dec'20 Mar'21

Trend in active users

Internet Banking active users ('000)Mobile Banking active users ('000)

1,164 1,416 1,638 1,775 2,045

5.63.5

7.4

10.3

14.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0

500

1,000

1,500

2,000

2,500

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(Rs

bn)

Business Net Banking

Active customers Value (RHS) Source: Industry data, I-Sec research Source: Industry data, I-Sec research

Chart 15: UPI transaction value jumped 3.5x over past one year

Chart 16: Increasing customer engagement as reflected in 30% YoY growth in average ticket-size since covid onset

3,12,1653,77,162

4,59,097

5,57,743

6,80,321

6.1 5.2

10.9

16.6

21.1

0.0

5.0

10.0

15.0

20.0

25.0

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

7,00,000

8,00,000

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(Rs

bn)

UPI transaction

Active customers Value (RHS)

1.4

1.0

1.2

1.4

1.5

1.4

1.0

1.6

1.8

2.0

986 1,020

1,2661,338 1,325

500

700

900

1,100

1,300

1,500

0.0

0.5

1.0

1.5

2.0

2.5

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

(Rs)

(Rs

bn)

POS transaction trend

POS Transactions (nos mn) ValuesAverage ticket size (RHS)

Source: Industry data, I-Sec research Source: Industry data, I-Sec research


12

Asset quality – Managed well but ‘high touch’ model poses risk of higher stress in near term Redefined business model with higher focus on secured loans and calibrated approach in growing MFI book, post demonetisation, complemented with diversified operations helped Ujjivan maintain best-in-class asset quality in recent years. Since CY17, GNPL has steadily declined and normalised to sub-1% between FY19-FY20 and, similarly, credit cost too remained sub-1% during the same period. Robust repayment rate and stable asset quality pre-covid is also an outcome of its stringent credit risk monitoring policies like account monitoring designed to identify and facilitate corrective action for weak accounts, portfolio monitoring aimed at identifying credit stress in specific sectors and geographies ahead of industry, etc.

Key learnings from demonetisation: Focus on customer services rather than on collections in crisis time.

Stand with customers in challenging times and, if needed, extend small credit line to help them come out of the crisis. Most likely, customers will settle all repayments once they start generating cashflow from business. Ujjivan recovered Rs1bn during past 4 years from demonetisation-related total written-off portfolio of Rs3bn.

Calibrated and prudent lending: When times are good, don’t rush for growth, but first test the market, understand the customer’s need and credit behavior, and then expand AUM in a calibrated manner.

Chart 17: There was steady improvement in asset quality post-demonetisation, but covid onset resulted in GNPL reaching historical peak

0.2

3.7 3.6

0.9 1.0 1.0 1.2

4.8

7.1

0.0 0.00.7

0.3 0.2 0.2 0.3

2.1

2.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY16 FY17 FY18 FY19 FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

(%)

Asset quality

GNPL NNPL

Post Demonetisation Covid impact

Q2FY21 & Q3FY21 asset quality ratios are on proforma basis. Source: Industry data, I-Sec research


13

Chart 18: MSE segment appears most vulnerable; unsecured MSE loans contributed to asset quality woes

0.6 0.2 0.1

2.8

1.7

0.3 0.10.5 0.9 1.1

6.4

0.1 0.4 0.4

2.2

0

1

2

3

4

5

6

7

FY18 FY19 FY20 FY21

Segment-wise NNPL

Group Loan Micro Individual Loan MSE Housing In FY21, NNPL is reported on consolidated basis for Group Loan & Micro Individual Loan Source: Industry data, I-Sec research

Chart 19: Maharashtra and Assam witnessing lowest collections at 74% and 66% respectively in Apr’21

92%

87%

84%

80%

92%

88%

87%

72%

90%

87%

85%

74%

94%

89%

87%

78%

89%

87%

74%

66%

0%10%20%30%40%50%60%70%80%90%

100%

West Bengal Punjab Maharashtra Assam

MicroBanking collection trend

Dec'20 Jan'21 Feb'21 Mar'21 Apr'21 Source: Industry data, I-Sec research

Covid onset in early FY21 impacted asset quality, specifically in MFI portfolio given its ‘high touch’ collection model. Considering the highly uncertainty around cashflow generation and inability to meet customers due to nationwide lockdown, MFI borrowers were granted a complete payment holiday (morat 1.0) for almost 3 months.

Ujjivan adopted a differentiated approach during the pandemic to improve collections once moratorium is lifted, which includes: Focused approach on collections with a strengthened collection team. Continued

touch with regular and non-paying customers. Remodelling processes to suit post-covid business arena: limited human contact in

loan processing, prioritising video KYC program in housing / MSE loans. Repeat microbanking loans via phone, mobile app, ATM MSE pre-qualified loan program based on track record ‘Loan against rent receivables’ is being launched to target Ujjivan premise owners.


14

Partnering with fintechs and startups operating in payments, collections, lead generation, lending, etc. to expand reach inorganically.

Redefining internal workflow, identifying areas and piloting projects for automation and productivity improvement.

Rolled-out moratorium 2.0 on an ‘Opt-in’ basis and focus plan for customers for who have availed of moratorium.

Tie-up with Airtel Payments Bank and business correspondents to increase reach; to give flexible and multiple modes of collections apart from traditional centre meetings / door-to-door collections.

Renewed thrust on enabling EMI repayments through online payment platforms like ECS, e-wallets, UPI / QR, etc. and drive higher usage.

Chart 20: PAR peaked out at 16.8% in Q2FY21, but near-term concerns persist due to resurgence of covid

Chart 21: ‘Portfolio at risk’ is highest in MSE book, but it contributes only 8% of AuM as at Mar’21

1.8 1.6 2.1 2.0 1.8

16.8 16.214.9

0

2

4

6

8

10

12

14

16

18

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

Portfolio At Risk

23.3

15.8

10.3

0.7

8.4

8.0

72.0

14.0

4.0 2.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0

5.0

10.0

15.0

20.0

25.0

MSE MR & RB Housing FIG OthersPortfolio At Risk (segment wise) % of AUM


Covid resurgence derailed the collection trend as reflected in Apr’21 collections falling to 89%, similar to Oct’20 collections and further expected to decline in May’21 considering 15% portfolio at risk as at Mar’21. We believe increasing share of secured loans and calibrated approach in MFI book would help Ujjivan improve its asset quality on sustainable basis in the long term. However, near-term asset quality concerns persist given NNPL at 2.9% (~59% PCR) and restructured pool of 6.8% as at Mar’21.

Table 4: Trend in collections – Apr’21 collections fell 89% due to lower collections in unsecured MSE segment and microbanking Mar'20 Apr'20 May'20 Jun'20 July'20 Aug'20 Sep'20 Oct'20 Nov'20 Dec'20 Jan'21 Feb'21 Mar'21 Apr'21 Total collections 93% 5% 16% 54% 61% 69% 84% 88% 89% 94% 92% 92% 94% 89% Microbanking 93% 2% 14% 53% 60% 68% 83% 88% 89% 94% 92% 92% 94% 88% MSE 82% 19% 17% 46% Secured 57% 64% 64% 81% 86% 88% 90% 90% 89% 90% 87% Unsecured 30% 48% 44% 62% 67% 67% 69% 66% 62% 63% 48% Affordable Housing 94% 32% 33% 53% 67% 71% 92% 93% 94% 94% 94% 94% 96% 91% Personal Loans 91% 44% 38% 63% 62% 62% 79% 88% 88% 89% 91% 90% 91% 88% Vehicle loans 95% 33% 23% 71% 72% 68% 92% 91% 96% 97% 97% 88% 99% 96% FIG 100% 77% 67% 86% 100% 100% 100% 100% 100% 99% 98% 98% 98% 98% Source: Industry data, I-Sec research


15

Business operations stabilizing; steady improvement in efficiency and productivity led by optimum use of technology Post getting the in-principle approval to set up as an SFB, the most challenging task was to realign the erstwhile NBFC model to an SFB compliant model, which was not only time consuming but also costly. However, Ujjivan approached the transition in a most effective manner by expanding footprints initially to capture the market and then focus on driving efficiency and productivity. In past 4 years, it focused on equipping branches with adequate manpower (~29 employees per branch), full range of banking products and latest digital banking platforms. Further, with most back-end operations being digitised, physical branches mostly act as customer acquisition, retention and brand building tools. Since the commencement of SFB operations in CY17, total branch network grew at 6% CAGR and employees grew at 13% CAGR between FY17-FY21.

Ujjivan has achieved strong growth in advances and deposits by providing user-friendly end-to-end digital banking services through the optimal use of advanced, cost-effective technology and analytical tools. These digital platforms and analytical tools has also helped Ujjivan in the process and cost optimisations, as reflected in improved cost-to-income ratio and operating expenses/average assets of 60% and 6.3% in FY2021 vs 67% and 8.2% in FY20 respectively.

As a modern, technology-enabled bank, Ujjivan has built cutting-edge digital capabilities for all stakeholders including employees, customers, regulators and management. It plans to leverage its front-end technology platforms to further improve customer acquisition and transaction management. This, coupled with neo-banking services, will also make it easier for customers to manage their transactions, while facilitating significant cross-selling opportunities for Ujjivan.

Front-end technology: Company’s full range of alternate banking channels like mobile banking, internet banking, missed call services, SMS banking, ATMs and ACRs is allowing the customers to access banking services round the clock from the convenience of their homes and neighbourhoods. It has empowered its relationship officers and branches with multi-functional handheld devices and various software solutions (such as customer relationship management, loan origination systems and collection management systems) to deliver products and services to customers at their doorstep.

Back-end technology: At the back-end, Ujjivan has put in place an array of solutions such as loan management system, core banking solutions, customer relationship management solutions, credit decision rule engine and enterprise risk management solution to provide timely delivery of products and services to customers as well as create a secure banking environment.

Key initiatives to improve productivity and efficiency: Ujjivan intends to automate the operational processes by adopting robotic

processes in order to become faster and efficient. In phase-I, >100 processes are being automated, which will lead to improved efficiency and cost benefits.

Fully digitised onboarding for all asset and liability products – onboarding processes like statement analysis, document verification, e-agreements, e-


16

mandates – are now operational. TAT for various processes in the onboarding journey reduced by 70-90% and processing capacity increased by 30-70%.

In order to enhance adoption of digital channels among the underserved segment, the bank has undertaken measures to improve its mobile application by activating voice-enabled and gesture-enabled interfaces in regional languages.

Use of data analytics to do better customer segmentation and understand their evolving requirements leading to new product development, faster and better credit decisions and proactive risk management.

To move from person-to-person services to providing technology-assisted services using handheld devices and phone banking services to the entirely self-service model through the use of internet and mobile banking.

Chart 22: Initial transition phase utilised to build infrastructure…

Chart 23: …incrementally focuses on productivity and cost optimisation

457 464 524 575 575

10,16711,242

14,757

17,84116,571

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

100

200

300

400

500

600

700


Branches Employees (RHS)

1.5 7.3 8.6 8.2 6.3

95.3

67.176.5

67.460.3

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


Cost / Assets Cost / Income (RHS)


Chart 24: Improvement in employee productivity... Chart 25:... as well as branch productivity

0.2

3.4

5.0

6.0

7.9

5.8 6.

5 7.2 7.

9

8.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


Employee productivity

Deposits per employee Advances per employee

4.5 81

.3

140.

8

187.

5 228.

4

128.

3 158.

1 201.

4 244.

2

252.

1

0.0

50.0

100.0

150.0

200.0

250.0

300.0


Branch Productivity

Deposits per Branch Advances per Branch Source: Industry data, I-Sec research Source: Industry data, I-Sec research

We believe that greater adoption of its digital service delivery mechanisms is likely to drive cost-efficiency and data analytics to ensure better target customer profiling, customised and tailor-made products to suit the diverse requirements of underserved mass populations.


17

Comprehensive product offering – complementing its deep distribution reach

Ujjivan’s vision is to become a ‘new-age digital bank’, a one-stop-shop for financial services, delivering quality products and solutions, along with a personalised customer experience to a diversified customer base. It constantly conducts qualitative and quantitative research to understand the changing requirements and expectations of its target customers and the same reflects in its comprehensive suite of 103 asset and liability products. In FY20, 63% of the customers were using 3 or more banking products (from Ujjivan).

Incremental focus on formal segment for expanding liabilities and asset products: With the availability of funds at cheaper costs due to strong deposits mobilisation post SFB conversion, Ujjivan incrementally focuses on tapping formal segments to bring quality into liabilities and asset products. While it continues to focus on informal segments like small traders, etc., incrementally it focusses on getting into more formal segments like manufacturing, large service units, etc. by offering MSE, housing, personal and vehicle loans, and expecting these segments to be major contributors in credit growth in near-to-medium term. Ujjivan is also focusing on developing products and services designed for rural and urban mass retail customers, specifically digital savings products for younger customers who have just entered or are entering into banking channels, and salaried savings accounts with organisational tie-ups.

Chart 26: Comprehensive banking product and service offerings

Source: Company data, I-Sec research *Loan against rent receivables #Work in progress

Loan Products

Microbanking Group Loans Individual Loans Top-up Loans –

group loan Agriculture &

allied loans Gold loans Street vendor

loans Top-up Loans –

individual loans# Micro – LAP#

MSE Loans Secured

Enterprise and Business Loans

Business Edge Loans and Overdrafts

LARR* Overdraft with

fintech partnership

Loan against property

Affordable Housing Loans

Construction and Purchase

Home Improvement

Composite Home Home Equity

Loans Commercial

Purchase Loans

Vehicle Loans 2W loans MMCV Loan Electric 3W Small commercial

vehicle(SCV) 3W - ICE Used Car loan#

Personal Loans Loans to salaried

customers Self-employed professional loans Small-ticket

personal loan with fintech partnership

FIG Term loans to

NBFCs and MFIs CC/OD and

WCDL to NBFCs and MFIs

Deposit Products Third-Party Products

Retail Products Current Account Savings Account Term Deposit Goal-based Savings Digital Savings & FD

Institutional Products Fixed Deposit Term Money Current Account Certificate of Deposit Collection/Escrow Account# Call money products# G-Sec trading#

Fee-based Products Insurance APY Aadhar enrolment services CMS Mutual Fund#


18

Chart 27: Comprehensive product offering coupled with data analytics resulted in improving ‘products per customer’ ratio

4.6 4.9 5.1 5.3 5.5 5.5 5.7 5.9

1.9

1.6

1.3

1.0

0.70.6

0.50.3

0.00.20.40.60.81.01.21.41.61.82.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Q4FY19 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Customer penetration

Total Active Customers Active Asset Only Source: Company data, I-Sec research


19

Asset strategy – Gradually focuses on formal segment Key asset strategy Ujjivan is likely to follow going ahead: Realign AUM mix with micro and non-microbanking shares at 50%-50% over

next 3 years from currently 72%-28% respectively.

Improve share of secured portfolio to 40% within next 3 years from currently 27%.

Affordable housing and MSE segments to remain key non-microbanking growth drivers in the medium term with focus on the formal segment.

Ujjivan has improved its internal processes by way of digitisation and the focus on productivity resulted in an-time high disbursement in Jan’21.

MSE marked Ujjivan’s entry into the formal segment. To expand its target market and shift product mix to bring in a better quality of book, it plans to deal with more formal segments rather than only the informal and the semiformal. In Q3FY21, it had tied up with fintechs for supply chain finance and it believes partnerships like these are going to strongly supplement its growth, will come through these alternate channels.

Personal and vehicle loans in the early stages, but Ujjivan plans scale them up in next 2-3 years.

Disbursement in personal loans and vehicle loans has shown strong traction in FY21 and, most importantly, the growth came from Ujjivan’s own channels rather than any high-cost third-party channel. Bank is also trying to partner with many fintechs for alternate distribution. Most importantly, most of its branches are now enabled to cross-sell vehicle loans and personal loans to branch customers.

Gold loans: Ujjivan entered the gold loan space in Q3F21 and expects it to remain a focus product in FY22.

Credit cards in FY22: Company also plans to introduce credit cards for its customers in FY22 and is already in discussion with credit card issuers. It is also exploring the opportunity to go down the path of the white labeled cards and then effectively learn the business to see if it is feasible to do it on its own.


20

Chart 28: Since FY18, incrementally it focuses on building non-MFI biz

85 84 7666 59

13 98

1011

1 35

78

2 4 811 14

0 0 0 0 10 0 0 0 10 0 0 1 1

0%

20%

40%

60%

80%

100%


Microfinance - Group loans Microfinance - Individual loans MSEHousing Agri FIGGold loan Personal loans Vehicle FinancingOthers

Source: Industry data, I-Sec research

Chart 29: Over past 3 years, incremental growth was largely driven by secured loans…

17%

210%

140%

70%

57%

48%

38%

3%

0% 50% 100% 150% 200% 250%

Total AuM

Agri

Personal Loan, Vehicle loan, Staff Loan &others

FIG

Housing

MSE

Microfinance - Individual loans

Microfinance - Group loans

FY19-FY21 loan cagr


Microbanking: Ujjivan focuses on improving household penetration. Currently, its microbanking customer base largely comprises women. It intends to offer MSE loans, vehicle finance and micro-loans against property to family members of Joint Liability Group (JLG) customers. It has also developed need-based products for small and marginal farmers and intends to develop more products to finance agriculture and allied activities.

In microbanking, Ujjivan caters to over 4.7mn customers classified into 4 categories, viz. group loans, individual loans, rural banking, and Sampoorna Family Banking.


21

Table 5: Key features of microbanking loans Segment Microbanking Asset Product Group Loan Agri Group

Loan Individual Loan Kisan Suvidha Loan

Kisan Pragati Card

Type Unsecured Secured Ticket-Size Rs2,000 to

Rs60,000 Rs30,000 to

Rs60,000 Rs51,000 to Rs200,000 Rs60,000 to Rs200,000

Rs50,000 to Rs100,000

Tenure 1 to 2 Years Up to 2 Years 6 Months to 3 Years Up to 2 Years Up to 5 Years Loan book Rs108.7bn Customer Base 4.7mn+ ATS (Q4FY21) Rs38,463 Rs113,909 (trending up) Source: Company data, I-Sec research

Group loans: Delivered through the JLG model. Company launched top-up loan (for short-term needs), which is disbursed within a day, one of the fastest services in the industry.

Individual Loans: Targeted towards long-term group loan customers with a repayment track history who can become individual customers.

Agri loans: Launched a new agri secure product, Kisan Pragati Card, to cover farmers’ credit requirement for agricultural and allied needs. Also, initiated Kisan

Pragati Club, comprising 15-20 volunteer-farmers across 35 branches to promote customer engagement, disseminate the principles of development through credit and inculcate better repayment ethics (in short, to encourage good banking practices).

Rural Banking: Agri group loans and Kisan Suvidha loans are offered in Ujjivan’s existing markets (Karnataka, Tamil Nadu, West Bengal, Odisha, Gujarat) as well as newer markets (Rajasthan and Uttar Pradesh).

Sampoorna Banking: Company launched Sampoorna Banking to step forward in its motto of ‘building banking behavior’ among its microfinance customers and their families. This helped scale up individual lending via introducing goal-based savings to meet the family’s short- and long-term goals. The deposit base stood at Rs8.07bn as on March’20. More than 80,000 family members were covered through the Sampoorna Banking initiative.

MSE segment – Incrementally focuses on formal segment. Ujjivan is widening its product portfolio to meet the diverse need of SMEs. It offers a range of loan and overdraft facilities to customers in this segment and intends to introduce bill discounting and non-fund based credit facilities too.

Table 6: Key features of Micro and Small Enterprises (MSE) loans Segment Micro and Small Enterprises (MSE)

Asset product Business Loan OD against Property

Business Edge Term Loan and Overdraft LAP

Type Secured

Ticket-size Rs1mn to Rs2.5mn Rs1mn to Rs10mn Rs2.5mn to Rs20mn Rs0.3mn to

Rs1mn Tenure 3 to 10 years Up to 1 year 3 to 7 years Loan book Rs12.9bn Customer base 14,500+ ATS (Q4FY21) Rs1.98mn (trending upwards sharply) Source: Company data, I-Sec research

Ujjivan strategically tweaked its MSE business model in CY19 by: a) shifting focus on financing the formal MSE segment with 100% security, and b) discontinuing unsecured MSE lending from Sep’19. Higher stress from legacy unsecured MSE loans was the primary reason behind Ujjivan’s redefined SME strategy. Subsequently, it


22

hired a vertical head Mr. Rajiv Kumar Pathak (ex-HDFCB) a year ago and revamped the credit and underwriting process to ensure better quality growth in coming years.

As per the renewed strategy, Ujjivan incrementally focuses on tapping formal segment customers with 100% security. The share of secured MSE lending book increases to 90% in the overall MSE book as at Mar’21. This formal segment of customers are largely onboarded on the basis of balance sheet or financials, GST details, etc., and they could be traders, small & medium scale manufacturers, etc. Ujjivan sources 70-72% of customers in the MSE segment via its own channel and the rest via DSAs and connectors.

To address stress in the residual unsecured portfolio, Ujjivan set up a dedicated collection team for recovery. It also activated branch sourcing of MSE customers, with their share reaching 14% as at 31st Mar’20 (4% a year ago).

Chart 30: Strategic shift towards lending to formal MSE segment…

Chart 31: …resulted in increase in MSE ticket-size

1,010 940

88 31

1,980

1,110

114 380

500

1,000

1,500

2,000

2,500

MSE AffordableHousing

MicroIndividual Loan

Group Loans

('000) Average Ticket size

March'19 March'21

40%

14%11%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

MSE Micro IndividualLoan

Group Loans AffordableHousing

FY19-21 CAGR in Average Ticket size



Affordable housing – plans to scale it up to 18-20% of the AUM in medium term Ujjivan plans to scale up its business in the affordable housing segment in a calibrated manner by testing the new market with small ticket-size of <Rs1mn and, after developing systems and processes factoring-in region-specific requirements, it would enter the high-ticket formal market. Key target market comprises salaried people in tier-1 and tier-2 cities and this reflects in the ~50-52% of customer base being salaried. LAP contributes a third of the company’s total mortgage portfolio.

Ujjivan offers an array of products ranging from small ticket-size home improvement loans to larger loans for purchase of ready housing units to help customers to meet their housing needs. It intends to collaborate with state housing boards for properties built by them for providing housing loans to the beneficiaries of such housing projects, as well as online aggregators to reach out to a larger potential customer base. With the introduction of credit-linked subsidiary scheme under the Pradhan Mantri Awas

Yojana, Ujjivan finds significant opportunities to offer affordable housing finance products to existing and prospective customers. Given diverse regulatory regimes


23

across states regarding real estate and customer preferences, it worked on developing region-specific policies in FY21.

Sourcing: 70% internal and 30% via DSAs, connectors, etc.

Yields: 13-14%

LTV: 50-55%.

Table 7: Key features of Ujjivan’s affordable housing loans Segment Affordable Housing

Asset product Construction and purchase, home improvement, composite home, home equity, commercial purchase

Type Secured Ticket-size Rs0.2mn to Rs7.5mn Tenure 3 to 20 years Loan book Rs20.5bn Customer base 19,000+ ATS (Q4FY21) Rs1.11mn (trending upwards) Source: Company data, I-Sec research

Vehicle loans. It focuses on secured lending towards 2-W and 3-W segments. Currently, 57% of the vehicle financing book comprises women customers and 74% are self-employed.

In this segment, Ujjivan has entered into memoranda of understanding with select OEMs to provide customers with financing facilities for electric vehicles. It intends to expand its offerings to finance purchase of two-wheelers, three-wheelers, small commercial vehicles, and used cars.

Table 8: Key features of Ujjivan’s vehicle loans Segment Vehicle Loans Asset product Electric 3W and 2W, MMCV and Used Cars Loans Type Secured Ticket-size Rs26,000 to Rs0.25mn (LTV - up to 95%) Tenure 1 to 3 years Loan book Rs0.12bn Customer base >1,800 ATS (Q4FY21) Source: Company data, I-Sec research

Personal Loans: Ujjivan’s personal loan products and their delivery structure is specially aligned with needs of the salaried segment and we believe it will be a key enabler in scaling up the salary account program.

Table 9: Key features of Ujjivan’s personal loans Segment Personal Loans Asset product Loans to Salaried Customers, self-employed professionals Type Unsecured Ticket-size Rs50,000 to Rs1.5mn Tenure 1 to 5 Years Loan book Rs0.79bn Customer base 5,300+ ATS (Q4FY21) Source: Company data, I-Sec research


24

Strengthening liability franchise with granular retail and CASA deposits Ujjivan’s key focus, post SFB conversion, has always remained towards strengthening the liability franchise, primarily retail and CASA deposits, which put forth a stable, low-cost source of funding. Its diversified geographical presence, coupled with deep distribution ‘phygital’ network and customer-suited product offerings, enabled the company in building a sticky deposit base. Its deposit base expanded at a robust 52% CAGR during FY18-FY21, while contribution of retail and CASA deposits also increased from 11% in FY18 to 48% in FY21. Its CASA ratio improved to 21% in FY21 from 4% in FY18.

Key actions taken:

End-to-end digital account opening, Selfie account opening and other value-added digital offerings.

Introduced simpler and user-friendly mobile app, with specific focus to on microbanking customers.

Revamped Business Edge current account product, ‘RuPay Platinum’ debit card with lifestyle benefits, increase in cash deposit limits and Cash Management Services (CMS) proposition to address the needs of medium and large businesses.

Privilege savings account: This offers superior banking services, such as unlimited free ATM transactions, higher transaction limits, complimentary RuPay platinum debit card with lifestyle benefits. New acquisitions in Privilege savings contributed Rs1.4bn in FY20 with an average ticket-size of Rs0.1mn.

Garima savings account: This is targeted at women as the product has been named; it offers multiple customised benefits to women, including a maximum of 7% rate of interest on the savings account.

Chart 32: Deposit growth continues to outpace AUM growth…

Chart 33: …with increasing share of retail deposits

38 74 108 131

96%

46%

22%

0%

20%

40%

60%

80%

100%

120%

0

20

40

60

80

100

120

140

FY18 FY19 FY20 FY21

(Rs

bn)

Deposits YoY growth (RHS)

Saving a/c, 17%

Current a/c, 3%

Retail TD, 30%

Bulk TD, 46%

CD, 3%

Deposit mix as at March'21

Source: Company data, I-Sec research Source: Company data, I-Sec research


25

Chart 34: Retail deposit share increases to 48% as at Mar’21…

Chart 35: … similarly, CASA ratio witnssed steady growth

4342

4344

45

4948 48

38

40

42

44

46

48

50

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

Retail deposits % of total deposits

1012 12

14 1416

18

21

0

5

10

15

20

25

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

Q2F

Y21

Q3F

Y21

Q4F

Y21

CASA ratio (%)


Chart 36: Sharp improvement in customer acquisition in FY21…

Chart 37: …with digital engine contributing ~15% of new account openings

1,20,128 1,59,029 1,68,344 3,15,827

209

277 293

549

0

100

200

300

400

500

600

0

50,000

1,00,000

1,50,000

2,00,000

2,50,000

3,00,000

3,50,000

Q1FY21 Q2FY21 Q3FY21 Q4FY21

Customer acquisition

Liability customer acquisitionCustomer acquisition per branch

15%

13%14%

13%

13%

14%

14%

15%

15%

Q1FY21 Q2FY21 Q3FY21

Liability customers sourced digitally


Diversify Revenue Streams An important strategic focus of Ujjivan is to diversify the revenue stream by improving the non-interest income stream. Over a medium term, it expects to build a sustainable revenue stream comprising of fee and commission-based income by leveraging on its strong ‘phygital’ network, increasingly diversified product and service portfolio, and robust digital platform. Further, it plans to extensively use data analytics to improve cross-sell and upsell, and is also pursuing strategic relationships with corporate entities, the GoI and state governments, to expand the customer base.

The inherent nature of its assets business gives Ujjivan an opportunity to build priority sector advances in surplus of the targets mandated by the RBI. Trading of priority sector lending certificates would continue to be an important source of fee income.


26

Chart 38: Diversifying revenue mix with focus on building sustainable non-interest income stream


Chart 39: Processing fees and PSLC income contributed >75% of total core fees

Processing fees, 53%

PSLC income, 29%

Bad debts recovery, 5%

Insurance income, 10%

Misc. Income, 31%

Core fee income break up as at FY21


Other

Income

Processing fees AMC/NACH/ CMS fee Treasury Income Bad debt recovery and others

Rs0.79bn in Q4FY21 and Rs2.33bn in FY21

Focused approach to maximise PSLC income by way of automated tagging and better timing

Majority of portfolio is PSL-compliant vs the regulatory requirement of maintaining 75%


Current line of products – to be ramped up over medium-term Insurance: Life, General, Health

insurance o Relevant benefits for target segment o Simple and easy process o Sold through branches and field staff

Products under evaluation Mutual Funds National Pension Scheme Process improvement Automation and IT integration Tick-based products


Third-party Products

PSLC Income

Fee-based and Others


27

Key initiatives

Insurance Tying up with an InsurTech Riskcovry for digital distribution of insurance business

through its API integration and the whole process of onboarding insurance customers will also get digitised.

Amongst the very few players who would have digitised the whole end-to-end insurance workflow as an insurance distributor and not necessarily as a manufacturer.

IRDA-certified professionals staff 95% of branches Revamped Hospi-Cash product in Aug’20: This is now a complete digital product

including onboarding, payment and policy delivery. Proposal to digitise Hospi-Cash claims has also been accepted by the IRDA.

Chart 40: Sharp uptick in retail insurance premium Chart 41: Retail insurance is driving fee income

727924

147

244

0

200

400

600

800

1000

1200

1400

Q4FY20 Q4FY21

(Rs

mn)

Insurance Premium

Credit Life Retail

3550

25

40

0

10

20

30

40

50

60

70

80

90

100

Q4FY20 Q4FY21

(Rs

mn)

Fee income

Credit Life Retail Source: Industry data, I-Sec research Source: Industry data, I-Sec research

Mutual funds Collaboration with BSE-Star to launch mutual fund distribution

Ujjivan is evaluating tech vendors in progress for digitising solutions for mutual funds and Atal Pension Yojana.


28

Valuations appear reasonable in relation to peers We understand that the transition phase from an NBFC to SFB (FY17-FY20) was challenging for Ujjivan and we believe it has done reasonably well as reflected in: 1) delivering 26% AuM CAGR over FY18-FY21 with successfully scaling down unsecured share to 73% in Mar’21 from >90% in Mar’17; 2) steady decline in cost/income ratio to 60% in FY21, with scope of further improvement; and 3) robust digital capabilities, which will ensure higher efficiency and better customer experience.

Ujjivan’s higher exposure to vulnerable segments (MFI), hence higher credit cost at 5.5% (higher than credit cost post-demonetisation) in FY21 led to stock valuation settling much lower at ~2x vs >3x during the IPO. However, the company remained focused on pursuing its long-term asset strategy of building secured retail assets even during the pandemic as reflected in the strong 32% YoY growth in non-MFI assets during FY21. Further, the increasing share of retail deposits to 48% in FY21 from 44% in FY20, speaks of its better execution on building a granular liability base. While near-term asset quality concerns persist due to economic disruption led by resurgence of covid, we believe its accelerated stress recognition in FY21 would ensure credit cost not spilling over beyond FY22E.

We initiate coverage on Ujjivan with an ADD rating and target price of Rs35, valuing it at 1.8x FY23E P/ABV. Our target multiple of 1.8x FY23E P/ABV is dictated by a likely RoA improvement to 1.8% in FY23E and >15% AuM growth over FY21-FY23E vs 7% in FY21.

Key risks: i) Sharper margin deterioration due to stiff competition in formal segment lending, and ii) higher than expected credit cost.

Table 10: Relative peer valuations

Particulars CMP Rating TP P/E (x) P/BV (x) P/ABV (x) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E

SFBs Equitas SFB 67 BUY 92 19.9 15.9 11.4 2.2 2.1 1.8 2.4 2.3 2.0 Ujjivan SFB 32 ADD 35 745.8 75.0 14.3 1.9 1.9 1.7 2.2 2.2 1.7 AU SFB 1,125 ADD 1,140 30.0 41.3 29.9 5.6 5.0 4.3 6.2 5.3 4.6 Suryoday SFB 212 BUY 310 189.7 44.9 15.7 1.4 1.4 1.3 N/A N/A N/A NBFC-MFIs

CAGL 721 BUY 765 81.0 28.7 17.4 3.0 2.7 2.4 N/A N/A N/A Spandana 720 BUY 840 23.0 9.1 7.9 1.7 1.4 1.3 N/A N/A N/A

Particulars EPS (Rs) BV (Rs) RoAA (%) RoAE (%) FY21 FY22E FY23E FY21 FY22E FY23E FY20 FY21 FY22E FY23E FY20 FY21 FY22E FY23E

SFBs Equitas SFB 3 4 6 30 32 37 1.4 1.7 1.8 2.2 9.7 12.5 13.5 17.0 Ujjivan SFB 0 0 2 17 17 19 2.2 0.0 0.4 1.8 14.0 0.3 2.5 12.3 AU SFB 37 27 38 201 226 261 1.8 2.5 1.5 1.7 17.9 22.0 12.8 15.4 Suryoday SFB 1 5 15 151 155 169 2.4 0.2 0.7 1.8 11.4 1.0 3.1 8.3 NBFC-MFIs CAGL 9 25 41 237 263 304 3.4 1.0 2.4 3.4 13.2 4.1 10.1 14.6 Spandana 31 79 91 434 497 570 6.3 2.7 5.7 5.6 15.6 7.4 17.0 17.1 Source: Company data, I-Sec research


29

Chart 42: Trend in Ujjivan’s P/BV

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21

PBV 2.5 yr avg avg. + 1 SD avg. - 1 SD



30

Financial outlook Pan-India presence, comprehensive product offerings, and vast untapped opportunity to drive >15% AUM CAGR over FY21-23E

Transition from its erstwhile NBFC avatar to the SFB model resulted in a volatile AUM trajectory for Ujjivan. During the first couple of years, post commencing SFB operations, AUM growth fell to sub-18% between FY17-FY18 and it rebound to average 35% between FY19-FY20 given gradual operational stability. While covid-led disruption resulted in lowest (in past 7 years) growth in advances to 7% YoY in FY21, notably, the non-MFI portfolio reported strong 32% YoY growth during the same period. Further, Ujjivan’s pan-India distribution network (575 banking outlets), increasing share of high-growth segments like MSE, affordable housing, etc. and adequate capital with tier-1 at 25% would ensure it reaching normalcy quicker than peers.

Considering the vast untapped opportunity at ~Rs10trn in small-ticket lending Ujjivan’s niche in small-ticket financing coupled with a diversified product mix would ensure it continues its industry-leading growth going forward. We estimate 16% AUM CAGR over FY21-FY23E, lower than the historical average given that H1FY22E is likely to remain subdued due to resurgence of covid cases.

Chart 43: AUM CAGR likely to remain at 16% over FY21-FY23E; H1FY22E to remain subdued due to covid resurgence

54 64 76 110 142 151 169 204

65%

18%19%

46%

28%

7%12%

21%

0%

10%

20%

30%

40%

50%

60%

70%

0

50

100

150

200

250

FY16

FY17

FY18

FY19

FY20

FY21

FY22

E

FY23

E

(%)

(Rs

bn)

AUM YoY growth (RHS)


Changing asset mix in favour of secured products will weigh on NIMs; improving liability profile to partially offset adverse impact

Ujjivan’s focus on increasing its secured asset mix and accelerating lending to formal segment customers, and relatively higher competition, is likely to impact asset yields adversely in near term. Asset yield fell from 22% in Mar’18 to 20% in Dec’20 and 17% in Mar’21 (due to higher interest reversals) given that share of secured assets increased to 27% in FY21 from ~7% in FY18. While its liability profile is improving as reflected in retail deposits’ share increasing to 48% in FY21 from 44% in FY20, the relatively younger franchise would limit its ability to cut deposit rates in near future. However, change in borrowing mix towards deposits would drive lower cost of funds


31

and thus partially offset the adverse impact of lower asset yields on NIMs. Cost of borrowing steadily fell to 6.8% by Mar’21 from 9% in Mar’18.

Chart 44: NIMs to settle at ~9% in medium term

11.2

12.4

10.5 10.4 10.8

9.5 9.5 9.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY15 FY16 FY18 FY19 FY20 FY21 FY22E FY23E

(%)

NIMs


Enhanced digital capabilities to drive productivity improvement

After expanding its reach (added 60 branches) and workforce (added ~3,500 employees) in FY19, Ujjivan focused on sweating its existing assets and building digital capabilities in subsequent years. It has enabled paperless and handheld device-based loan origination and cashless disbursements for its customers with remittances credited to their accounts. Since the commencement of its banking operations, ~99.5% of advances have originated through handheld devices. Further, it has developed an end-to-end digital account opening process for all liability customers. With the same branch network of 575, it delivered cumulative 35% advance growth in FY20-FY21 and delivered 33% deposit CAGR between FY19-FY21, while its cost-to-income ratio improved by >15% to 60% in FY21 from 77% in FY19. Most of its secured businesses are now breakeven at operating level.

Chart 45: Focus on sweating existing assets

7.3 8.6 8.2 6.3 6.2 6.4

67.1

76.5

67.4

60.3 59.4 59.9

50.0

55.0

60.0

65.0

70.0

75.0

80.0

0.01.02.03.04.05.06.07.08.09.0

10.0

FY18

FY19

FY20

FY21

FY22

E

FY23

E

(%)

(%)

Cost / Assets ratio Cost / Income ratio (RHS)



32

Near-term asset quality concerns persist, but increasing share of secured assets to help lower credit cost in FY23E

Ujjivan, post commencing SFB operations, incrementally focuses on building secured assets and higher lending to formal segments. As a result, the share of secured assets increased to 27% in FY21 from sub-5% in FY18 and the trend is likely to continue going forward. Strategic shift towards secured and formal segment lending would help it gradually change its customer risk profile in favour of better quality. While higher proportion of unsecured assets (~73% in FY21) resulted in higher credit cost in FY21 at 5.5%, increasing share of retail secured assets and stringent underwriting & risk management is likely to help it contain incremental slippages lower in FY22E/FY23E than in FY21. PAR 0+ at ~20%, NPL coverage ratio at 59%, and restructured assets at 6.8% as at Mar’21 poses an upside risk to our credit cost assumption.

Chart 46: Credit cost likely to moderate, but would yet be higher than the historical average

4.5

0.4

1.4

5.55.0

2.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY18 FY19 FY20 FY21 FY22E FY23E

(%)

Credit cost


RoA likely to cross 1.5% threshold by FY23E

Ujjivan’s SFB journey has been evolving well until FY20, with RoA crossing 2% and secured asset share increasing to 22% during the year. Retail deposit share has increased to 44% and there has been a steady decline in cost ratios since FY18. While covid-led disruption impacted financial performance significantly, business evolution continues with increasing share of retail deposits (~44% of total deposits) and retail advances (27% of loans) even in FY21. Further, over the past of couple of years, it built robust digital capabilities enabling lower cost of acquisition, better customer experience and improved cross-sell ratio. Combination of improving productivity and gradual normalisation of credit cost would offset the likely margin compression due to higher share of better quality assets going forward. Overall, we expect RoA to improve to 1.8% and RoE to >12% by FY23E.


33

Chart 47: Return ratios to improve gradually

0.1 1.7 2.2 0.0 0.4 1.8

0.4

11.5

14.0

0.3

2.5

12.3

-2.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-

0.5

1.0

1.5

2.0

2.5

FY18

FY19

FY20

FY21

FY22

E

FY23

E

(%)

(%)

RoA RoE (RHS)



34

Summary financials Table 11: Profit and Loss Statement (Rs mn, year ending March 31)

FY19 FY20 FY21 FY22E FY23E Interest earned 18,316 27,036 28,061 30,993 35,580 Interest expended 7,252 10,700 10,775 11,782 13,241 Net interest income 11,064 16,336 17,286 19,212 22,338

Other income 2,060 3,222 3,108 3,202 3,730

Staff cost 5,188 7,185 7,488 7,862 9,435 Other operating expenses 4,846 6,001 4,813 5,443 6,174 Total operating cost 10,034 13,186 12,301 13,306 15,608

Pre-provisioning op profit 3,090 6,372 8,093 9,109 10,460

Provisions & contingencies 406 1,710 7,991 8,006 4,663

Profit before tax & exceptional items 2,684 4,662 102 1,103 5,797 Exceptional items Profit before tax & exceptional items 2,684 4,662 102 1,103 5,797

Income taxes 692 1,163 19 278 1,459

PAT 1,992 3,499 83 825 4,338 Source: Company data, I-Sec research

Table 12: Balance Sheet (Rs mn, year ending March 31)

FY19 FY20 FY21 FY22E FY23E Capital 16,400 19,282 19,283 19,283 19,283 Reserves & surplus 1,796 12,595 12,904 13,730 18,068 Networth 18,196 31,877 32,187 33,013 37,351

Total borrowings 41,661 39,533 32,473 30,278 35,589 Term Deposits & CASA 73,794 1,07,805 1,31,358 1,53,534 1,81,041

Provisions 1,335 - - - - Other Liabilities 2,436 4,898 7,786 9,343 11,212

Total liabilities & stockholders' equity 1,37,422 1,84,112 2,03,805 2,26,168 2,65,193

Loans & advances 1,05,525 1,40,436 1,44,940 1,68,831 2,04,176

Investments 15,266 23,961 25,165 35,313 38,924 Cash and Balance 10,945 13,433 25,775 13,818 13,578 Fixed Assets 2,844 3,005 2,807 3,088 3,397 Current & other assets 2,842 3,277 5,118 5,118 5,118 Total Assets 1,37,422 1,84,112 2,03,805 2,26,168 2,65,193 Source: Company data, I-Sec research


35

Table 13: Key ratios (Year ending March 31)

FY19 FY20 FY21 FY22E FY23E Growth (%) AUM 46.2 28.1 7.0 11.5 20.9 Loan book (on balance sheet) 40.5 33.2 7.0 11.5 20.9 Total Assets 45.1 34.0 10.7 11.0 17.3 Total Deposits 95.6 46.1 21.8 16.9 17.9 Total NDTL 51.4 27.6 11.2 12.2 17.9 Total Investments 23.9 57.0 5.0 40.3 10.2 Interest Income 24.8 47.6 3.8 10.5 14.8 Interest Expenses 19.5 47.5 0.7 9.3 12.4 Net Interest Income (NII) 28.5 47.6 5.8 11.1 16.3 Non-interest income 84.8 56.4 -3.5 3.0 16.5 Net Income 34.9 49.0 4.3 9.9 16.3 Total Non-Interest Expenses 53.7 31.4 -6.7 8.2 17.3 Pre provisioning operating profits (PPoP) -3.3 106.2 27.0 12.5 14.8 PAT 2803.3 75.6 -97.6 894.3 425.7 EPS 2803.3 75.6 -97.6 894.3 425.7 CA

183.9 93.5 40.0 40.0

SA

75.0 83.3 40.0 40.0 Time deposits

41.3 12.0 10.9 10.7

Yields, interest costs and spreads (%) NIM on AUM 10.4 10.8 9.5 9.5 9.4

Yield on loan assets 18.6 20.3 17.8 17.8 17.5 Average cost of funds 7.6 8.1 6.9 6.8 6.6 Interest Spread on loan assets 11.0 12.1 10.8 11.0 10.9

Operating efficiencies Non-interest income as % of net income 15.7 16.5 15.2 14.3 14.3

Cost to income ratio (%) 76.5 67.4 60.3 59.4 59.9 Op.costs/avg AUM (%) 8.6 8.2 6.3 6.2 6.4 No of employees 14,752 17,841 16,571 19,057 21,915 Average annual salary (Rs '000) 351.7 402.7 451.9 412.6 430.5 Salaries as % of non-int.costs (%) 9.7 14.5 12.2 -8.7 4.3 AUM/employee(Rs mn) 7.5 7.9 9.1 8.9 9.3 Number of asset branches 524.0 575.0 575.0 625.0 675.0 AUM/asset branch(Rs mn) 210.9 246.1 263.3 270.1 302.5

Balance Sheet Structure Loans/ deposits (%) 143.0 130.3 110.3 110.0 112.8

Loans/ Total assets 76.8 76.3 71.1 74.6 77.0 Loans/NDTL 91.4 95.3 88.5 91.8 94.3 CA% of NDTL 0.7 1.6 2.7 3.4 4.0 SA% of NDTL 6.1 8.4 13.8 17.2 20.4 CASA% of NDTL 6.8 9.9 16.5 20.6 24.4 Total deposits as % of NDTL 63.9 73.2 80.2 83.5 83.6

Capital Structure Leverage (x) 7.6 5.8 6.3 6.9 7.1

CAR (%) 18.9 28.8 26.4 24.3 24.0 Tier 1 CAR (%) 18.4 28.0 25.1 23.1 23.0 Tier 2 CAR (%) 0.6 0.8 1.4 1.2 1.0 Tier 1 Capital (Rs mn) 16,530 30,180 28,630 31,362 35,483 Tier 2 Capital (Rs mn) 500 870 1,570 1,570 1,570 RWA (Rs mn) 89,900 1,07,750 1,14,200 1,35,684 1,54,299

Asset quality and provisioning GNPA (%) 0.9 1.0 7.1 9.4 4.8

NNPA (%) 0.3 0.2 2.9 3.3 0.8 GNPA (Rs mn) 979 1,371 10,689 14,985 8,877 NNPA (Rs mn) 275 275 4,286 5,251 1,407 Coverage ratio (%) 71.8 80.0 59.9 65.0 84.1 Credit costs as % of average AUM 0.4 1.4 5.5 5.0 2.5

Return ratios RoAA (%) 1.7 2.2 0.0 0.4 1.8

RoAE (%) 11.5 14.0 0.3 2.5 12.3


36

FY19 FY20 FY21 FY22E FY23E Valuation Ratios

EPS (Rs) 1.0 1.8 0.0 0.4 2.2 EPS fully diluted (Rs) 1.0 1.8 0.0 0.4 2.2 Price to Earnings 31.1 17.7 745.8 75.0 14.3 Price to Earnings (fully diluted) 31.1 17.7 745.8 75.0 14.3 Book Value (fully diluted) 9 17 17 17 19 Adjusted book value (fully diluted) 9 16 14 14 19 Price to Book 3.4 1.9 1.9 1.9 1.7 Price to Adjusted Book 3.5 2.0 2.2 2.2 1.7 Source: Company data, I-Sec research

Table 14: DuPont analysis (%)

FY19 FY20 FY21 FY22E FY23E Interest earned 15.8 16.8 14.5 14.4 14.5 Interest expended 6.2 6.7 5.6 5.5 5.4 Gross Interest Spread 9.5 10.2 8.9 8.9 9.1 Credit cost 0.3 1.1 4.1 3.7 1.9 Net Interest Spread 9.2 9.1 4.8 5.2 7.2 Operating cost 8.6 8.2 6.3 6.2 6.4 Lending spread 0.5 0.9 -1.5 -1.0 0.8 Non-interest income 1.8 2.0 1.6 1.5 1.5 Operating spread 2.3 2.9 0.1 0.5 2.4 Exceptional items 0.0 0.0 0.0 0.0 0.0 Final Spread 2.3 2.9 0.1 0.5 2.4 Tax rate (%) 0.6 0.7 0.0 0.1 0.6 ROAAUM 1.7 2.2 0.0 0.4 1.8 Effective leverage (AAUM/ AE) 6.7 6.4 6.1 6.6 7.0 RoAE 11.5 14.0 0.3 2.5 12.3 Source: Company data, I-Sec research


37

Annexure: Index of Tables and Charts Tables Table 1: Ujjivan has the geographically most diversified portfolio… .................................... 3 Table 2: Pan-India focus with higher share from loans from South at 33% and deposits

from North at 35%… ....................................................................................................... 4 Table 3: Highlights of key digital initiatives ........................................................................... 9 Table 4: Trend in collections – Apr’21 collections fell 89% due to lower collections in

unsecured MSE segment and microbanking ................................................................ 14 Table 5: Key features of microbanking loans ...................................................................... 21 Table 6: Key features of Micro and Small Enterprises (MSE) loans ................................... 21 Table 7: Key features of Ujjivan’s affordable housing loans ............................................... 23 Table 8: Key features of Ujjivan’s vehicle loans ................................................................. 23 Table 9: Key features of Ujjivan’s personal loans ............................................................... 23 Table 10: Relative peer valuations ..................................................................................... 28 Table 11: Profit and Loss Statement .................................................................................. 34 Table 12: Balance Sheet ..................................................................................................... 34 Table 13: Key ratios ............................................................................................................ 35 Table 14: DuPont analysis .................................................................................................. 36

Charts Chart 1: …with share of its top-3 states in total AUM lowest at <45% ................................. 3 Chart 2: …with equal focus on ex-rural markets ................................................................... 4 Chart 3: Ujjivan successfully navigated state-specific issues – diversified operations came

to rescue .......................................................................................................................... 4 Chart 4: Robust alternative channel platforms ...................................................................... 5 Chart 5: The number of transactions increased 2x since the covid-led disruption; share of

digital transactions stands at 57% as in Mar’21 .............................................................. 6 Chart 6: The share of secured loans increased to 27% by Mar’21… ................................... 6 Chart 7: Evolution of asset products – focus on building a secured asset portfolio ............. 7 Chart 8: Since FY18, Ujjivan incrementally focused on building non-MFI biz ...................... 7 Chart 9: Over past 3 years, incremental growth was largely driven by secured loans… ..... 8 Chart 10: …disbursement trend suggests strong traction in secured loans is likely to

continue ........................................................................................................................... 8 Chart 11: Improved turnaround time (TAT) since the implementation of tablet-based loan

origination system ......................................................................................................... 10 Chart 12: Increasing share of digital transactions............................................................... 11 Chart 13: Active customer base using internet & mobile banking platform jumped 1.6x over

past one year ................................................................................................................ 11 Chart 14: Enhanced net banking platform resulted in high adoption by SMEs .................. 11 Chart 15: UPI transaction value jumped 3.5x over past one year ...................................... 11 Chart 16: Increasing customer engagement as reflected in 30% YoY growth in average

ticket-size since covid onset .......................................................................................... 11 Chart 17: There was steady improvement in asset quality post-demonetisation, but covid

onset resulted in GNPL reaching historical peak .......................................................... 12 Chart 18: MSE segment appears most vulnerable; unsecured MSE loans contributed to

asset quality woes ......................................................................................................... 13 Chart 19: Maharashtra and Assam witnessing lowest collections at 74% and 66%

respectively in Apr’21 .................................................................................................... 13 Chart 20: PAR peaked out at 16.8% in Q2FY21, but near-term concerns persist due to

resurgence of covid ....................................................................................................... 14 Chart 21: ‘Portfolio at risk’ is highest in MSE book, but it contributes only 8% of AuM as at

Mar’21 ........................................................................................................................... 14 Chart 22: Initial transition phase utilised to build infrastructure… ....................................... 16 Chart 23: …incrementally focuses on productivity and cost optimisation .......................... 16


38

Chart 24: Improvement in employee productivity... ............................................................ 16 Chart 25:... as well as branch productivity .......................................................................... 16 Chart 26: Comprehensive banking product and service offerings ...................................... 17 Chart 27: Comprehensive product offering coupled with data analytics resulted in

improving ‘products per customer’ ratio ........................................................................ 18 Chart 28: Since FY18, incrementally it focuses on building non-MFI biz ........................... 20 Chart 29: Over past 3 years, incremental growth was largely driven by secured loans… . 20 Chart 30: Strategic shift towards lending to formal MSE segment….................................. 22 Chart 31: …resulted in increase in MSE ticket-size............................................................ 22 Chart 32: Deposit growth continues to outpace AUM growth… ......................................... 24 Chart 33: …with increasing share of retail deposits ........................................................... 24 Chart 34: Retail deposit share increases to 48% as at Mar’21… ....................................... 25 Chart 35: … similarly, CASA ratio witnssed steady growth ................................................ 25 Chart 36: Sharp improvement in customer acquisition in FY21… ...................................... 25 Chart 37: …with digital engine contributing ~15% of new account openings ..................... 25 Chart 38: Diversifying revenue mix with focus on building sustainable non-interest income

stream ........................................................................................................................... 26 Chart 39: Processing fees and PSLC income contributed >75% of total core fees ........... 26 Chart 40: Sharp uptick in retail insurance premium ............................................................ 27 Chart 41: Retail insurance is driving fee income ................................................................ 27 Chart 42: Trend in Ujjivan’s P/BV ....................................................................................... 29 Chart 43: AUM CAGR likely to remain at 16% over FY21-FY23E; H1FY22E to remain

subdued due to covid resurgence ................................................................................. 30 Chart 44: NIMs to settle at ~9% in medium term ................................................................ 31 Chart 45: Focus on sweating existing assets ..................................................................... 31 Chart 46: Credit cost likely to moderate, but would yet be higher than the historical average

...................................................................................................................................... 32 Chart 47: Return ratios to improve gradually ...................................................................... 33


39

This report may be distributed in Singapore by ICICI Securities, Inc. (Singapore branch). Any recipients of this report in Singapore should contact ICICI Securities,

Inc. (Singapore branch) in respect of any matters arising from, or in connection with, this report. The contact details of ICICI Securities, Inc. (Singapore branch) are

as follows: Address: 10 Collyer Quay, #40-92 Ocean Financial Tower, Singapore - 049315, Tel: +65 6232 2451 and email: [email protected],

[email protected].

"In case of eligible investors based in Japan, charges for brokerage services on execution of transactions do not in substance constitute charge for research reports

and no charges are levied for providing research reports to such investors."

New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)

BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

ANALYST CERTIFICATION I/We, Renish Bhuva, CFA (ICFAI); Kunal Shah, CA; Chintan Shah, CA; Piyush Kherdikar, PGDM, B Tech; authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the ICICI Securities Inc. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Institutional Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Retail Research. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities and ICICI Securities as an entity are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guarantee.

Documents

Ujjivan Small Finance Bank ADD - images.assettype.com