Recommendation from Banking & Financial Services Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

UJJIVAN SMALL FINANCE BANK: ABSOLUTELY BANKABLE

HERE IS WHY

✓  Demand for financial services
✓  Consistent increase in income
✓  Improvement in asset quality
 

The Indian banking sector has remained resilient despite the volatility in the global banking system in recent months. Besides, we are also witnessing renewed growth in the banking sector. According to a report by PricewaterhouseCoopers (PwC), the banking sector in India is expected to grow at a CAGR of 10 per cent from 2022 to 2027. The report also states that the sector is expected to reach a value of USD 3.7 trillion by 2027. Looking at the resilience of our banking system and huge growth opportunity going ahead, our low price scrip for this issue is Ujjivan Small Finance Bank.
 

Ujjivan Small Finance Bank (USFB) is among the leading small finance banks in the country. The bank is a mass market-focused small finance bank (SFB) in India. The bank’s portfolio of products and services includes various asset and liability products and services. Its asset products comprise loans to micro banking customers that include group loans and individual loans, agriculture and allied loans, MSE loans, affordable housing loans, financial institutions group loans, personal loans and vehicle loans.

USFB is in a good position to capitalise on this expanding demand for financial services. The rise in financial services is brought on by a variety of elements, such as the expansion of the economy, the rising of the middle-class and the expanding use of digital banking. In the microfinance industry, USFB has a solid brand image. This is because of its emphasis on offering excellent customer service and dedication to making financial services accessible and cheap. The small finance bank industry is also supported by the Indian government. 

This is because of the sector’scontribution to the provision of financial services to underserved populations. In Q4FY23, USFB’s net profit rose by 144.63 per cent YoY to ₹309.50 crore compared to ₹126.52 crore from the same quarter previous year. The total income of the bank increased by 40.98 per cent YoY to ₹1,363.89 crore compared to ₹967.42 crore from the same quarter previous year, while sequentially it increased by 11.74 per cent. The operating profit stood at ₹410.57 crore compared to ₹263.84 crore, a YoY growth of 55.61 per cent, while sequentially it increased by 5.57 per cent. 

NII growth was strong by 36 per cent YoY led by strong advances growth, even as margins contracted by 85 bps on a yearly basis and stood at 9.1 per cent. The bank also saw its asset quality improving with GNPA down by 446 bps and 76 bps on yearly and sequential basis, respectively. The shares of the bank are trading at a price-to-book value (PBV) of 1.6 times, which is higher than its five-year median PBV but lower than the industry mean. Nonetheless, this high PBV was primarily due to improving asset quality and better credit growth recently. 

The bank has a three-year compounded top-line and bottom-line growth of 15 per cent and 46 per cent, respectively, along with healthy ROA of 3.9 per cent for FY23. The share of the bank currently offers dividend yield of 2.2 per cent. USFB is well-positioned for growth in the coming years. The bank has a strong brand reputation, competitive advantage and government support. The growing demand for financial services in India is also a major growth trigger for USFB. Considering all these factors, we recommend BUY.