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Analyst Corner – Ujjivan SFB: ‘Downgrade’ with revised TP of Rs 20

Considering the likely lumpy provisioning in Q2FY22e and the uncertainty over the appointment of new MD & CEO, we downgrade the stock to HOLD (earlier Add) with revised TP of Rs 20 (earlier Rs 31) as we now value the stock at 1x FY23e PBV vs 1.5x earlier.

Ujjivan Small Finance Bank (Ujjivan SFB) hosted analysts call on August 20, 2021 led by Samit Ghosh and Sunil Patel to address the concern regarding higher attritions at senior management and Board level in the recent past, followed by the latest resignation of its MD and CEO – Nitin Chugh on August 18, 2021. Samit Ghosh (founder) was appointed as Additional Director on Ujjivan SFB’s Board w.e.f. August 20, 2021 along with 3 other newly appointed Board members. While admitting concern around asset quality and intent to clean the balance sheet in Q2FY22e, the Board assured continuity of strategic business initiatives under the new leadership. Immediate focus of the Board would be i) to manage and improve the asset quality with upfront provisioning if required and strengthen collection team, ii) rebuild senior management team, iii) ensure smooth transition of the bank under the new leadership and iv) prepare roadmap to ensure timely reverse merger process of holdco and the bank. Considering the likely lumpy provisioning in Q2FY22e and the uncertainty over the appointment of new MD & CEO, we downgrade the stock to HOLD (earlier Add) with revised TP of Rs 20 (earlier Rs 31) as we now value the stock at 1x FY23e PBV vs 1.5x earlier.

Board to conduct asset quality review and initiate corrective measure to strengthen balance sheet by Q2FY22e: Board admits that managing the asset quality in current environment along with change in guard is going to be the key challenge. Nevertheless, it sounded confident about sailing through smoothly given highly experience Board and appointment of special officer (Carol Furtado – prime candidate given her stint with the Ujjivan group for over 15 years) for better coordination between Board and business teams. Immediate focus would be on strengthening the collection team and upfront stress recognition with adequate provisioning in Q2FY22e. Post that, it intends to achieve business normalcy by Q4FY22e.

Appointment of special officer to ensure smooth transitioning: The Board appointed special duty officer to ensure smooth transition under new leadership, triggered by current MD & CEO Nitin Chugh stepping down as MD and CEO (w.e.f. September 30, 2021). The special duty officer will also resume role as interim CEO from October 1, 2021 till the appointment of new CEO (which is expected to take 3-4 months). Carol Furtado, being engaged with the Ujjivan group for more than 15 years, is one of the prime candidates for the said position based on her experience in – A) managing the previous MFI crisis for Ujjivan group and B) having the good ground and people connect due to handling of head of Human Resources division at Ujjivan.

Key risks: Upside risk – lower than anticipated provisions in Q2FY22, and downside risk – delay in appointment of MD and CEO could impact transition process and execution of the bank.

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