Ujjivan Small Finance Bank Limited (UJJIVANSFB) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Ujjivan Small Finance Bank Limited Q2 and H1 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions]. I now hand the conference over to Mr. Renish Bhuva from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, [indiscernible]. Hi, good evening, everyone, and welcome to Ujjivan Small Finance Bank Q2 FY '27 earnings call. On behalf of ICICI Securities, I would like to thank Ujjivan SFB management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of Ujjivan [indiscernible] presented by Ms. Carol Furtado, All-Time Director and CEO; Mr. Balakrishna Kamath, CFO; Mr. Ashish Goel, Chief Credit Officer; Mr. [indiscernible], micro banking [indiscernible] and retail liability task and third-party products, Mr. [ Pradip], Head Housing and Micro Montage; Mr. Martin, Chief Operating Officer; Mr. Brajesh Chief Risk Officer; Mr. [indiscernible] Head Investor Relations; and Mr. [indiscernible], Investor Relations. I will now hand over the call to Carol for her opening remarks, and then we'll open the floor for Q&A. Over to you, ma'am.

Thank you, Renish. Good evening, and thank you all for joining us to discuss Ujjivan's Small Finance Bank's Q2 FY '27 Earnings Call. Please note I will be referring to year-on-year comparisons with Q2 FY '26 and quarter-on-quarter with Q1 FY '27. I would like to start with a few important developments before delving into the quarter. Post our MD, Mr. Sanjiv Nautiyal's decision to take an early retirement due to health reasons. The NRC is actively engaged to ensure timely submission of the MD candidate to the regulator. Our growth in H1 FY '27 has been built on strategic capacity creation and product evolution. This is matched with pristine asset quality outcomes. We remain well positioned with regards to people, technology, systems and risk management to continue this growth momentum. Within the shareholders approved resolution at the AGM, we proposed to raise equity capital of INR 409 crores from QIBs by issuing shares on a preferential basis to marquee investors, [ International Finance Corporation, Bajaj Life Insurance, HDFC Life Insurance, and Aditya Birla Sun Life Insurance], subject to shareholder approval. Holding the RWA constant at September 26, the proposed capital raise would increase [ CRAR ] by approximately 1.2% and from 20.69% on a pro forma basis. Since fund raise is being done at a premium to current BPS, it will lead to accretion of INR 0.8 per share as of September 26. We remain nimble to the evolving needs of the bank. Thus, as shared, we have enhanced our funding mix by increasing the securitization pool by INR 500 crores in October month. This will be NIM accretive and P&L neutral. Now coming to the operating environment. India's GDP, gross capital formation and high-frequency indicators remain healthy and a pure resilient to external shocks. Renewed conflict in the Middle East and increased volatility in global energy and freight prices are adding to inflationary pressures. In its latest NPC statement, the RBI raised its FY '27 GDP growth forecast to 7.1%, while the committee increased the repo rate by 25 bps and shifted to calibrated tightening. A deficient southwest monsoon and strong El Nino conditions pose risk to rural demand, while urban demand remains stable. Q2 of FY '27 has demonstrated another quarter of strong growth, anchored on well-rounded credit growth and stable margins. Along guided lines, in H1 of FY '27, we have strengthened our distribution by adding 104 branches and 1,335 employees. We launched a well-curated brand campaign in September 26 with a new brand ambassador, [ Padmasree Edi], [ Mr. R. Madhavan]. Ujjivan today has evolved significantly in terms of its scale, reach and breadth of offerings. The tagline, nothing small about us reflects the scale of Ujjivan's aspirations, reach and the breadth of financial solutions it offers. This campaign will be run across TV, print and digital and is expected to reach around INR 35 crore viewers. Other institutional building spends on digital and technology have been set in motion and will reflect in H2. This quarter marked an important milestone as we cross INR 50,000 crores in deposits. Total deposits increased to INR 50,643 crores, up 29.2% year-on-year with CASA at 26%. We continue to add customers and increase volumes across our various deposit offerings. We benefited from the downward repricing of deposits, which helped maintain the cost of funds at around 6.9%. Although no rate hikes were taken in Q2, the increase affected in Q1 would now start showing and we expect the cost of funds to start moving upwards. In line with our strategy to expand services for depositors, we launched the [ ASPA ] facility in Q2. Going forward, we will focus on simplifying transactions, increasing awareness and adoption of newly introduced services and deepening engagement with customers. The gross loan book clocked robust growth and reached INR 45,699 crores, up 32.1% year-on-year. This translates to 12.4% YTD growth and are on track to meet the full year guidance. The secured business lines continue to grow faster and now from 52.1% of the loan book. The unsecured fees consisting of micro banking delivered healthy growth reaching INR 22,037 crores. This portfolio has grown approximately 6% in the first half of FY '27 and remains on track to deliver around 12% to 14% for the full year. Some key call outs for the quarter in micro banking. Collection efficiency remained strong with bucket X collection efficiency at 99.7%, in line with Q1 outcome. New customer acquisition increased sequentially with an addition of 2 NAC customers in Q2. Despite usual weather disruptions in July, August, September, we have delivered on healthy disbursements and collections. Going ahead, our endeavor is to make newly added branches come up the productivity curve. Our housing business is a key vertical for the bank that caters to the aspirations of our customer base. Affordable housing and micro mortgages combined crossed INR 12,000 crores, up 38.1% year-on-year. This quarter, the affordable housing crossed an important milestone by crossing INR 10,000 crore mark and reached INR 10,056 crores. Portfolio quality remains stable with [ Par ] and [ GNPA ] at 3.7% and 1.2%, respectively. The balance transfer out for Q2 was flat sequentially at 4.3%. We are targeting to preserve yields and are comfortable with the current growth levels. Micro mortgages growth remained strong, loan book crossed INR 2,000 crores, reaching INR 2,031 crore, up 85.7% year-on-year. Portfolio quality continues to season at a comfortable pace with GNPA at 0.7%. The MSME business built on -- upon the capacities created and product changes grew to INR 3,871 crores, up 51.3% year-on-year. The new book reached INR 3,000 crores plus while maintaining GNPA of 0.5%. Gold loan continues to witness larger industry-wide tailwinds and grew to INR 1,275 crores, up [ 209.8%] year-on-year. In H1, we have added 117 branches and plan to expand to a similar number of branches in H2. The disbursement LTVs are maintained below 78%. Agri banking grew to INR 914 crores, up 79.2% year-on-year. As part of strategy, we operate in select locations with new importance to environmental factors. Portfolio in Karnataka is INR 165 crores. Out of this, INR 1.2 crores is eligible under the relief scheme and direct agri exposure in Maharashtra is nil. Two-wheeler loans grew to INR 2,081 crores, up 64.8% year-on-year. We are geared up for the festive season and expand -- expect enhanced business momentum. The asset quality performance as measured across parameters remain steady. The slippage ratio is at 1.6% of average gross loan book. While the credit cost came in at 0.7% of ATA. PCR continued to remain stable at 85% level. [ GNPA ] and [ NPAs ] remained healthy at 2.1% and 0.3%, respectively. Total write-off for the quarter was at INR 59 crores. Financial performance, robust asset growth translated into strong revenue momentum with total income reaching INR 2,450 crores and NII rising 35% year-on-year to INR 1,244 crores. Advances yield continues to be in comfortable zone and cost of funds remained largely stable, leading to net interest margin at 8.4%. Other income for the quarter increased at a healthy 17% sequentially. Operating expenses increased by 6% quarter-on-quarter, wherein employee expenses increased by 3% quarter-on-quarter and other OpEx by 10%. The increased OpEx was on account of planned investments in our comprehensive brand campaign and ongoing branch network expansion. This has resulted in an all-time high quarterly profit after tax of INR 365 crores, with ROA of 2.4% and ROE of 19.7%. We are taking steps to optimize capital consumption and have seen CRAR improvement by 33 bps to 20.69% as of September 26. This is largely onetime, and we would resume consumption in a normalized run rate going forward. As to outlook and guidance. Strong advanced growth in H1 will support interest and related income growth run rate. However, the change in policy rates and resultant pass-through will lead to higher interest expenses than planned. While OpEx towards institutional build-out will accelerate we anticipate a slower pace as planned. Asset quality outcomes are also expected to be along delivered lines. Considering these outcomes, we could overshoot our guided ROA range. We remain vigilant of revised monetary stance risk of global rates and supply chain disruptions, coupled with weather-induced issues. Our high-frequency indicators across products for October remain in line with recent outcomes. IRDAI's notification is a consultation paper, and we await the final guidelines on the matter. We remain engaged with our insurance partners as well as through IBA channels. Since discussions with IRDAI are ongoing and submissions are due on October 25, it would be premature to elaborate further. However, we are closely watching the developments. Lastly, I would like to say that at Ujjivan, our strategic focus continues to be on diversified advances growth with shift towards secured assets while we build the bank to provide Indians with the access to their financial aspirations. With that, I conclude my opening remarks and request the moderator to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Shreepal Doshi from Equirus Securities.

Congrats on a good quarter. My first question was related to margins. So this quarter, we have seen margin moderation of 10 basis points. Now incrementally, we are looking at a much steeper rate up cycle. And with our aspiration to continue to focus on secured portfolio on the asset side, how do you see margin moving in the second half of the financial year and also in FY '28 from here on?

The margin for Q2 was at 0.45%. And as you rightly mentioned, repo rate has gone up by 25 bps, so that will have an impact of around 10 bps on the margin. So we feel the margin would come down to around 8.35% for the second half of the year. Now coming to the mix change, yes, whatever the impact will be set off by planned DA, which we are planning. So overall, the impact will be restricted to 10 bps, which will be resulting in a NIM [ of 8.3 ].

And sir, we -- okay, got it. The second question was on the par 0 increase in group loans as well as in micro mortgages, and also, in some of our key states like Karnataka and Maharashtra, there is drought-like situation which has been announced. So how do you see that impacting us as we speak in terms of collections? As well as could it have any deviation in our credit cost guidance for full year?

Shreepal, on group loans and individual loans, par increase is flat. You can see some basis points here and there. But by and large, since the [ bucketex ] collection efficiency has stayed steady at 99.7%. The PAR increase would be some decimal points, not more than that. Would it have any impact on the credit cost? Credit cost comes with a 6-month kind of a lag. So credit costs will remain within our guided range.

On micro mortgages?

Yes, you also spoke about micro mortgages. So micro mortgages is a business which is about 30 months old. A little bit of increase in PAR is expected. This is a business where the seasoning is currently happening. So yes, there will be a marginal increase in power. Currently, we are at about 1.8%. We can expect this to stabilize in the range of maybe 2.5%, just below 3%.

Okay. But -- and just some color -- qualitative color on our exposure as well as impact in states like Karnataka and Maharashtra because of the drought.

Yes. Shreepal, this is [indiscernible]. As far as Karnataka and Maharashtra is concerned, these remain in our key watch list following the recent government and [ SLBC ] brought announcement which could affect collection to some extent, mainly because government interventions. However, the guidelines primarily apply to pure agri portfolio. While our exposure is largely to align agriculture activity. More than 60% of MB borrows -- microfinance borrows also have at least 2 sources of income in their family. As far as Karnataka alone is concerned, about 80% of microfinance branches are in metro and urban locations, mainly because we were urban microfinance company. Exposure to [indiscernible] also remains limited and we have proactively moderated business there through our branch expansion and risk management strategy. [indiscernible] and allied activities represent approximately 20 to 25 [indiscernible] of portfolio, we have totaled INR 2,400 crores in Karnataka. Out of that, 20% to 25% portfolio this is are [indiscernible], and these customers also have multiple sources of income. Now coming to the customers who are included as per the document, out of INR 2,400 crores in Karnataka, only INR 15.1 crores is eligible as per the SLBC notice, and we are in touch with this customer to understand their requirement. Maharashtra, approximately 97% of our branches operate in metro and urban markets. Exposure to drought-affected areas, like [ Vidarbha, Marathwada, or KosiMaharashta], we don't have presence out we have very [indiscernible] there. Reflecting our disciplined branch expansion and risk management strategy. Agri and allied activity accounts only 41% in Maharashtra. There, the entire Maharashtra microfinance portfolio is INR 1,682 crores. Out of that, agri-related loans, which qualifies as for [ BC ] is only INR 18 crores, less than [indiscernible]. That's how we are looking at it, and we are -- but at the same time, we remain cautious in portfolio quality, collections and calibrated growth. In drought-affected areas, we have ending credit assessment and customer engagement while following all [indiscernible] and local admiration and collection guidelines. This is how we are looking at these states. And also we are very, very closely looking at other states also where it might come up and we and we have to deal with that as well. But overall, we feel that it is something which can manage.

So while it can be managed on the asset quality side as you are seeing in terms of exposure, can it also lead to some slowdown in business momentum for the sector at large and for us [indiscernible]?

It may -- for the sector, it may happen for the -- for the specific for the organizers who have very large presence in a particular state, which is in -- under this drought affected things like Karnataka and Maharashtra. But as a strategy, we have -- we don't have more than 15% portfolio in any of the states. And we always have a space to grow somewhere else. If there is some problem, this we have deferred in the past also. As far as overall growth is concerned, we -- our guidance on microfinance growth remains intact for the financial year.

Which would be, say, at what percentage? If you could repeat?

It would be between -- somewhere between 12% to 14%, in between 12% to 14%.

This is for the group launch, right?

It is for the entire micro banking, [indiscernible].

The next question is from the line of Shailesh Kanani from AMSEC.

Just first question is on [indiscernible] income. So that line item has seen a decent enough of growth in last few quarters, right? And it is predominantly a representation of AMC charges, P&L charges. So just wanted to understand the sustainability of this growth number because it is the second largest item in terms of foreign test income? And what should we kind of market to? Is it related to disbursement or the balance sheet growth? If you give some to light on that?

You are referring to miscellaneous income line?

Yes.

It will grow in line with where the business is growing as the deposits grow and the business grow, it will move in the same line going forward also.

The source seems to be late payment P&L charges, card charges. Hence, I was like a little bit curious on the growth number. The growth is very robust, INR 86 crores for this quarter.

So it's a continuous process. So this is a trend we have seen in the last few years with [indiscernible].

Okay. Fair enough. My second question was with respect to affordable housing. So we have seen a very robust growth [ rate ] over there. And similarly, there has been an uptick in terms of disbursement, ATS as well over year. So what numbers we are comfortable in terms of yields, in terms of asset quality and we are a decent size in terms of book as well as now, right? So how long we can kind of expect this growth momentum to continue?

Shailesh, [ Pradip ] here. See the growth, whatever we are actually doing from last 6, 7 quarters, I think that momentum should continue. Even in the Q1, Q2, it's in the range of below 37%, 38% on OSP. And we have actually taken around 35% growth in our plan as well. That should continue. The reason behind, we are well diversed across the states. We are active in 23 states in affordable housing and micro mortgages, there is around 17 states. One of the best portfolio quality we have insured with the 1.2% [ NP ] as of now. And with the present collection strategy, whatever we have kept on, I think I don't see any challenges in the growth as well as from the credit cost side. On the ticket side, [indiscernible], we are at INR 17 lakhs and micro mortgages, we have decided to defocus on less than 5 lakhs and the focus has been shifted in 5 to 15 lakhs. So ticket size actually shifted from INR 7 lakhs to INR 7.8 lakhs as of now. In the year, the remaining quarter, it will actually stabilize around INR 8 lakhs.

And affordable, what would be a sweet spot over there in terms of ticket size?

Yes, we are taking INR 17 lakhs. That should remain in the same as we don't want actually further bring down our yields. To maintain that, we will be there on.

Okay. So this is predominantly the current number, what we are.

Next question is from the line of Sarvesh Gupta from Maximal Capital.

First question on -- follow up on the previous participants, I think on the drought situation in some of the states because of the lack of rainfall, et cetera. So I got all the numbers. But on the ground level, are we seeing any changes in the behavior of the borrowers? Or in terms of how we are able to collect as opposed to September? Have you seen any changes happening because of this announcement as well as the situation?

So last month, in the month of September, we didn't face any issue. Our collection percentage remained in the range of around 99.7%. In this month til today, we have not heard anything. We are also -- as I mentioned, we are also in touch with the customer to understand their requirements, who are eligible as per the [ SLBC ] guideline. And so far, majority of customers are not in favor of availing the facility as they can repay. And this mainly originates from the fact that in our agri portfolio, [ 110 ] customers have more than one source of income. In micro banking portfolio also, more than 60% customers have more than one source of income. And Agri is not the only source of income for them. As far as overall impact is concerned, I as you mentioned about Karnataka and Maharashtra and other states also, we are not -- so far, we have not faced any kind of issue in the collections.

Okay. And sir, as a follow-up to that, we saw the leader also growing at just 3% on the microfinance book. And in your book also, if I look at GL alone, it would be a very small number and [ GL IL ] is also lower than the year's guidance also. So I mean, if we are seeing a good sort of an environment do we want to step up the pedal in terms of the disbursement because the industry is also shrinking in size and opportunities, demand will still be there, I guess, for the players who are still strong like Ujjivan. So how do you see that?

So in the first half of the financial year, we have been able to grow about 6.5%. And in the remaining part of the financial year, overall, our guidance is 12% to 14%. From growth point of view, this is the sweet spot where we want to be as far as [indiscernible] to Ujjivan is concerned, whether we can grow faster, whether we can disburse more in the financial year is something which you're very well calibrated in [ G1 ] strategy going forward. How do we want to look at this year and the next 4 years as well? As far as overall, our growth is concerned, how -- from where it is coming so far, a good part of our growth is coming from new customer equation. So you are right, the demand has increased, especially from the last quarter of the last financial year. And the bank [ repeat ] also, we are seeing a good demand. But at the same time, as I mentioned, in some of those states, we need to be cautious, careful and carefully choose location where we want to disburse loans in this financial year. And considering all these facts, we are very comfortable to grow at a rate of between somewhere between 12% to 14%.

Okay. And sir, my final question is on the insurance income. So we have gotten around INR 90 crores in the first half. So how much of this is linked to credit life for loans. And I think this is -- I mean, what is the typical commission rates that we have gotten here? And what are the expenses against this income that we typically incur in our other expenses?

[indiscernible]. So roughly 50% income comes through the credit line. This have been paid for last year. So as of now, it's very difficult to comment how much will drop because the [indiscernible] are draft and nobody is very sure about what will be the real drop in income. So it is right on the consultation paper has been released, and we are giving our feedback to [ IDA ] and also small [indiscernible] association. As of now, it's very -- it will early to comment what will read, but we are closely watching the situation and in case it happens, we have some other way to raise [indiscernible].

And what is the expense that we do like do we pass on some incentive or this is basically going to our bottom line?

No, it largely flows our bottom line.

The next question is from the line of Rajiv Mehta from Yes Securities.

Congratulations on a very strong performance. So firstly, on capital and liabilities growth. So on capital, see, you've done -- you're doing a [indiscernible] of INR 400-odd crore. Then is there any time line for the remaining capital raise? How are we thinking about the pending capital gains because the overall resolution for a much larger capital to be raised? So any thoughts about the pending of the remaining capital base, given the fact that we're growing at a much faster than guided rate. And on the deposit side, how do we plan to mobilize or accelerate deposit mobilization? I think ma'am spoke about likely witnessing an uptick in funding costs in Q3. Would that be a function of just churn in the deposits? Or would it also be a function of any planned rate actions that we might want to take on [ sign ] retail term deposits for stronger mobilization of it, so as to match the asset group.

Rajiv, [indiscernible] here. First, coming to the fund raise part. You are aware we have approval up to INR 2,000 crores for the fund raise. Out of which INR 409 crores, we have got the approval today and we'll be going ahead with it. Okay. Now as far as the balance is concerned, the resolution is valid up to July [ 2020], and looking at the favorable time, yes, we want to raise that within that, right? So that is our plan. And coming to the cost of fund, I'll answer that around 10 bps, there is impact due to the 25 bps water has gone up in the repo. And the details, I'll pass on to [indiscernible]. [indiscernible], you can take that.

So if you look at overall deposit growth has been very good this quarter. We have grown almost 29%. CASA growth has slightly moderated, but our strategy remains the same. We have a segmental approach. We are focusing on H&I, [indiscernible] NR, corporate salary and we also market approach like we are focusing [indiscernible] top 30 cities where our growth rate is almost double. We are growing at almost 40% CASA growth in these 2 markets. So we'll remain focused. We had some outflow from existing customers, some are deliberate, some are not that deliberate, but I don't see the systematic [indiscernible] so we can [indiscernible] very quickly. So we remain committed to our growth projection, what we have given earlier.

No. So for the second half, so I think [ Camas ] has said that by 10 basis points and the cost of fund will increase and then it will keep on increasing as the deposits churn? And are you planning some rate actions on [indiscernible] retail term deposit side, which will also lead to incremental deposit costs increasing further?

So this 10 basis point guidance is based on that only. We have a calibrated rate [ provision ] we'll do as we go along. As of now, we have not done anything, okay? But yes, as we go along, we will do some changes in the [indiscernible] rate or [indiscernible].

And just understanding on the OpEx side, see the brand campaign was launched in September. So I believe the billing and the cost will come from September onwards, maybe and the brand addition also picked up of late and there were also some plant taking investment. I think initially, when you gave the first quarter guidance, we were thinking about spending roughly all put together INR 250-odd crore in the current year. So by how much are we likely to undershoot that figure in the current year? Maybe the remaining will spill over in the next year, but out of INR 250 crores, how much is coming in the current year as per the current budget? And second is on the credit cost. When I look at the first half number, we are at 80 basis first and second quarter average. You're still guiding for 90 to 100 basis points. And at the same time, we are saying that MFI, we are not seeing any risk built up, and we are moving more secured also wherein within secured products also, we are not seeing any kind of a risk buildup. So I mean this extra credit cost as per the current run rate, is it something that could it be because of some provision that you may want to take as a buffer in the second half?

Rajiv, [ Surat ] here. Before we take up the first 3 questions of yours, I just want to reiterate that Carol [indiscernible] has stated on the call that the run rate of credit cost is going to be in line with the first half. So we are not looking at credit cost increasing from where it is currently, right? I'll now just pass it on to [ Bala ] sir to take on the first 2 questions.

So coming to the OpEx, I think we had given an indication last time that it will be around OpEx to AT ratio, 6.4%. Considering the way it is moving, we feel it may end up at 6.2%. So there could be a saving of 0.2 [indiscernible]. I think that answers your question.

Yes, part of the amount of spend on the brand. But there's going to spill over to Q3. So the entire bill has not come in Q2.

The next question is from the line of Ashlesh Sonje from Kotak Securities.

A few questions from my side. Firstly, how are you thinking about funding your growth aspiration now, especially given that the CASA mix and the [ BTD ] mix seems to be moving unfavorably as of now? That is one. Secondly, on the insurance commission norms, I understand it is still quite premature. But just wanted to check very qualitatively if that can potentially change your branch profitability math and hence, your branch expansion plans. And a few data-keeping questions Sorry, just one data keeping question. If you can share the MFI slippages for the quarter.

[indiscernible]. So as I said earlier, CASA, if you look at overall deposit growth is very healthy, okay, we are growing very well. Yes, we had some pressure in CASA, but I don't believe it is any systematic issue here. We have seen some outflow in certain accounts, which is a temporary nature. But what I want to highlight that we are acquiring more customers now. If you look at a year-on-year basis, our new TV has gone up by 34%, okay? Plus, we are also acquiring a segmented focus customer like [indiscernible] customers. So these customers typically give you higher value. So we do not foresee any stress on CASA going forward. And we remain committed, whatever we have given guidance, we will be able to deliver that kind of number as we go along from [indiscernible].

Okay. Sorry, just to clarify, sir, you mean you can reach again to that 30% CASA ratio by the end of the year?

30% will be difficult. I don't want to give any number, but yes, slightly lower, let's say, 2% lower than that.

Ashlesh,, on your slippages question for micro finance, it was 1.85% for the full year.

Sorry, sir, you mean 1.85%?

Slippages for the full year.

So for the first half?