Nitin Chugh's exit, provisioning concern to weigh on Ujjivan SFB: Analysts

Including Monday's intra-day fall of 9.6 per cent, the stock of Ujjivan Small Finance Bank has tumbled 31 per cent in six days

The resignation of Nitin Chugh, managing director and CEO of Ujjivan Small Finance Bank has triggered a panic selloff in the stock as the scrip has plunged 23 per cent on the BSE over the past one week as against a 0.1 per cent decline in the benchmark S&P BSE Sensex. 
 

Including Monday’s intra-day fall of 9.6 per cent, the stock has tumbled 31 per cent in six days. In comparison, the S&P BSE Sensex was ruling 0.4 per cent higher in today’s intra-day deals.
 

Chugh’s resignation comes in the midst of the bank's persistent underperformance on asset quality front, delayed recognition/correction of non-performing assets (NPAs) as well as large scale attrition at the higher and lower-middle level which, according to analysts, doesn’t bode well for the lender’s growth. 
 

Earlier this month, directors Harish Devarajan and Mona Kachhwaha had resigned from the bank, while Chief Financial Officer Upma Goel had tendered her resignation on July 7. At the lower-middle level employees, analysts attribute the mass exodus to work environment rather than remuneration. CLICK HERE TO SEE TOP MANAGEMENT EXITS
 

“The churn in the management team and board of directors is likely to have a knock on effect on the growth strategy of the bank especially the exit of Mr Chugh who was spearheading the digital initiatives of the bank. Considering the uncertainty in terms of incoming top management and the future growth outlook, we are putting Ujjivan SFB ‘under review’,” said a note by Edelweiss Securities.
 

Those at Emkay Global, meanwhile, have ‘sell’ rating on the stock as they believe the financial improvements achieved under Chugh’s tenure could slowdown going forward.
 

During Chugh’s tenure, who has been at the helm of the bank since December 2019, the bank did well on deposits, as CASA ratio consistently increased from 11.6 per cent in Q3FY20 to 20.3 per cent in Q1FY22. Further, operating expenses (Opex) were controlled, with opex to assets ratio in FY21 seeing a sharp reduction to 6.2 per cent from 8.2 per cent in FY20. 
 

However, while transition towards a secured loan profile was progressing, with secured share rising from 21 per cent to 32 per cent on a year-on-year basis in Q1FY22, material exposure (80 per cent of loans) to MFI and secured SME severely affected the lender’s asset quality.
 

The bank’s overall recognized stress pool stands at 15.6 per cent of the loan book (including gross non-performing assets of 9.8 per cent/restructured loans of 5.8 per cent) and the portfolio-at-risk has swelled to 30 per cent as of June, 2021.
 

“Compared to listed peers, Ujjivan SFB saw more stress formation, as indicated by the spike in GNPA coupled with existing and likely restructuring. This may suggest that asset quality pain for the bank has not ended yet and the bank could see more balance sheet stress emanating,” observed analysts at Centrum Broking.
 

Going-forward, the immediate focus of the bank would be on bringing back old employees and retaining good talent, along with ensuring smooth transition of the top management, said a report by ICICI Securities.
 

Earnings downgrade

Given the development, analysts see more pain in store for the lender and have cut their earnings estimates. Centrum Broking has downgraded FY22E earnings by 76 per cent due to loss in Q1FY22 and likely provisions in FY22. 

Those at Kotak Securities, meanwhile, expect subdued return in equity (ROEs) over FY2022-23E and recovery to around 14-15 per cent over the medium-term.
 

“We build higher cost of equity of 16.5 per cent (from 15 per cent earlier) as the nature of problems and speed of resolution is unobservable from outside and hence involves elevated uncertainty. The bank is sufficiently capitalized (~25 per cent tier-1) to deal with higher-than-expected credit costs, but ROE recovery remains uncertain,” the brokerage said.
 

Emkay Global has trimmed its net profit/earnings per share (EPS) estimates by 6.7 per cent/8.5 per cent and 9.3 per cent/10 per cent for FY23 and FY24, respectively.  

Source: Brokerage reports