Ujjivan Small Finance Bank - Top management change and lumpy provisioning concern to weigh on valuation in near term - ICICI Securities

Ujjivan Small Finance Bank (Ujjivan SFB) hosted analysts call on August 20, 2021 led by Mr. Samit Ghosh and Mr. 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. Mr. 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 Rs20 (earlier Rs31) 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 (Ms. 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.

- Top priorities of Board. To ensure smooth transition and continue business as usual, the Board of holding company (promoter of SFB) and Ujjivan SFB has focused on bringing in personnel from holdco to SFB for better coordination between Board and business teams. To strengthen SFB's Board, due to few resignations in the past couple of quarters, it appointed two independent directors along with two non-independent directors. The top priorities of newly restructured Board are managing and improving the asset quality and rebuilding & stabilising senior management team. The immediate focus would be on bringing back old employees and retaining good talent. Secondly, to ensure the smooth transition of the bank (with Nitin Chugh resignation), it appointed the special officer on duty (and interim CEO after September 30, 2021) till the appointment of new CEO and MD, which may take 3-4 months from now. The Board is currently contemplating all available options i.e. internal or external candidate.

- Assurance to continue journey of becoming "digital led mass market bank". The new Board clearly highlighted that it will continue to pursue the same strategy of becoming "digital led mass market bank".

- 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 Mr. 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). Ms. 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.

Shares of Ujjivan Small Finance Bank Limited was last trading in BSE at Rs. 19.7 as compared to the previous close of Rs. 24.25. The total number of shares traded during the day was 2255962 in over 6174 trades.

The stock hit an intraday high of Rs. 23.25 and intraday low of 19.4. The net turnover during the day was Rs. 47550687.

Source : Equity Bulls

Keywords