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Ujjivan Financial Services: Analyst sees higher execution risks

nomura, stock markets

Nitin Chugh, Head of Digital Banking at HDFC Bank, is likely to be the new CEO of Ujjivan. Chugh has been with HDFC Bank for almost 2 decades, heading various functions, including retail branch banking, credit card sales and, in the past 5-6 years, HDFC Bank s digital banking function. Given his pedigree and rich experience in retail banking, his appointment would bring more credibility to the Ujjivan management team, and we think some positive steps could be taken with regards to the liability side, given his branch banking experience.

Having said that, we see higher execution risks in the near to medium term as Ujjivan moves out of its comfort zone (microfinance) and expect its ROA profile to weaken compared to that of Equitas (EQUITAS IN, Buy) by FY21F. Hence, the P/B implied by our Ujjivan TP is at a 10% discount to that of Equitas, vs the 15% premium at which the stock trades.

We think the new CEO could drive some course correction on the liability strategy given his rich experience in branch banking. It would bring further credibility to build a diversified retail portfolio, which Ujjivan lacks currently. More importantly, the succession risk would be taken care of with this hire.

We still think small finance banks (SFBs) will remain asset stories in the near to medium term and the liability franchise will take time to build-up. In this context, Chugh has limited experience on the lending side, especially the microfinance book, which is 85% of AUMs. Then, there could be execution challenges in the new asset segments, which we expect to drive 50% of incremental growth for Ujjivan over FY19-22. Also, we see limited potential for digital initiatives in the customer segment in which Ujjivan operates currently.

We think given the weak liability strategy and the higher execution risks in new asset segments, Ujjivan will have a weaker ROA profile (1.8-1.9% by FY21F) than Equitas (+2% by FY21F) and, hence, warrants a valuation discount to Equitas vs the >15% current premium. Hence, we reiterate our Reduce stance. Our target price of `315, implying 9% downside, is also unchanged.