Recommendation from Banking Sector

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

Ujjivan Small Finance Bank Limited : SOLID FUNDAMENTALS AT COMPELLING VALUATION

HERE IS WHY
✓ Reducing microfinance exposure for a balanced loan portfolio
✓ Improving asset quality and collection efficiency in Q4FY25.
✓ Healthy historical income and profit CAGR

S mall Finance Banks in India were established to drive financial inclusion by offering banking services to underserved and unbanked populations. They play a vital role in providing credit to economically weaker sections, small businesses, and entrepreneurs, thus supporting inclusive growth. Their success has been driven by a localized approach, a strong presence in rural and semi-urban areas, and customized products. Going forward, digital lending is poised to be a major growth driver, expected to constitute 60 per cent of India’s fintech market by 2030, supported by rising financial access, income growth, and internet penetration.

Ujjivan Small Finance Bank (Ujjivan SFB) is a mass-market-focused institution dedicated to financial inclusion. Founded in 2005 as an NBFC, it initially targeted the ‘economically active poor’ lacking access to formal banking. Today, it serves about 93 lakh customers through a network of 753 branches across 326 districts in 26 states and union territories, reaffirming its commitment to community empowerment.

In Q3 FY25, Ujjivan’s net profit declined 64 per cent YoY to ₹109 crore (vs. ₹300 crore in Q3 FY24), mainly due to higher provisions for bad loans. However, total income rose 7 per cent YoY to ₹1,763 crore, and Net Interest Income (NII) increased 3 per cent YoY to ₹887 crore. Net Interest Margin (NIM) for the quarter stood at 8.6 per cent, slightly down from 8.8 per cent QoQ. The gross loan book grew 10 per cent YoY to ₹30,466 crore, while deposits rose 16 per cent YoY to ₹34,494 crore. Asset quality came under pressure, with Gross NPA rising to 2.7 per cent (from 2.1 per cent YoY) and Net NPA to 0.6 per cent (from 0.2 per cent YoY). Return ratios moderated, with RoE at 8.8 per cent and RoA at 1.2 per cent, down from 24.2 per cent and 3.1 per cent, respectively, in the previous quarter.

Ujjivan SFB has a well-diversified geographic presence, with Tamil Nadu, Karnataka, West Bengal, and Maharashtra being key markets. As of FY25, the asset mix is predominantly microfinance loans (57 per cent of AUM), supported by affordable housing (23 per cent), MSME loans (6 per cent), NBFC financing (9 per cent), and other retail products (5 per cent). The microfinance share is expected to moderate to 49 per cent by FY27E, indicating a planned portfolio diversification.

Notably, Ujjivan was the first among peers to recognize early signs of overleveraging and sectoral risks, scaling down group loan disbursements by 25 per cent in FY25 to mitigate emerging risks. Operationally, the bank demonstrated resilience, posting the best pre-quarter update among SFBs and MFIs for Q4FY25. Gross NPA declined from 2.7 per cent to 2.2 per cent, and Collection Efficiency improved from 96.0 per cent to 96.9 per cent.

Valuation remains attractive with the stock trading at a P/B ratio of 1.46x, above the industry average (1.27x) but below its 5-year median (1.6x). Over the past four years, Ujjivan has delivered a CAGR of 20.9 per cent in total income and 38.3 per cent in profits.

Given the improving fundamentals, proactive risk management, strong growth levers, and reasonable valuation, we recommend a BUY on Ujjivan Small Finance Bank.