Ujjivan SFB tumbled 32% in six days. Here’s what analysts said

Analysts are not convinced that the resignation of Chugh, whose three-year term would have ended in December 2022, was due to personal reasons. But their price targets suggest the stock has mostly factored in the negative event.

Chugh’s exit came in the backdrop of exit of multiple board members and management executives at Ujjivan SFB. That included the CFO’s resignation a month ago.

Emkay Global said the impression from the analyst call was that the resignation of Chugh, an ex-digital banking head at HDFC Bank, was mainly due to the bank’s persistent underperformance on the asset-quality front, delayed recognition of NPAs in MFI and large-scale attrition at the lower-middle level.

Other than the underperformance, some niggling issues with the old management and his incompatible new-age management style in the still MFI-dominated old school bank could also have contributed to the resignation, Emkay said.

“Ujjivan’s current situation is probably an extreme version of challenges that smaller/newer banks have faced when undergoing leadership transition or entry of external talent at senior management level. Rebuilding and motivating the team will be critical so that the bank can recover lost ground and benefit from a possible recovery in asset quality and loan growth over the next 12 months,” Kotak Institutional Equities said.

The brokerage, however, felt this is not an underwriting issue and is a lot more operational in nature. While the medium-term challenge will be to identify the next suitable CEO, such transitions, Kotak said, are rarely smooth.

The stock fell 9.64 per cent to hit a low of Rs 17.80 in Monday’s trade. The scrip is down 31.93 per cent over August 12’s closing of Rs 26.15.

A decision on the appointment of an interim CEO will be taken in the board meeting on August 25, Wednesday. Chugh’s resignation will be effective from September 30.

“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, as Chugh 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 preview,” said Edelweiss Securities.

The bank has on-boarded four directors, including Samit Ghosh and erstwhile CEO/CFO Sudha Suresh, to strengthen the board, oversee the management transition and make an attempt to resurrect the bank.

Ghosh is a common director with the holding company Ujjivan Financial Services.

As MD & CEO, Chugh’s Ujjivan faced 4 major challenges: holding company dilution, opex control, retail deposit build-up, and improving secured loan share. Analysts said the bank was on the path to sorting out three of these four issues.

“On the hold-co dilution issue, the RBI via letter dated July 9 permitted SFBs and holding companies to apply for reverse merger, which signalled that Ujjival Financial Services could be reverse merged with Ujjivan SFB. During Chugh’s tenure, the bank did well on deposits, as CASA ratio consistently increased from 11.6 per cent in December quarter to 20.3 per cent in June quarter. Opex was also controlled, with opex to assets in FY21 seeing a sharp reduction to 6.2 per cent from 8.2 per cent in FY20,” said Centrum Broking.

The brokerage said while the transition towards a secured loan profile was progressing well, with the secured share rising from 21 per cent to 32 per cent on a YoY basis in June quarter, material exposure (nearly 80 per cent of loans) to MFI and secured SME severely affected asset quality.

“Resignation of key managerial personnel could lead to near-term pressure until someone is appointed, though stress formation is partly priced in. We had downgraded FY22E earnings by 76 per cent due to loss in Q1FY22 and likely provisions in FY22. MFI/MSE loan exposure at 80 per cent is affecting USFB, leading to stress build-up and protracted recoveries,” Centrum said while suggesting a target of Rs 31.

Kotak has a target of Rs 24, down from Rs 31 earlier. Emkay finds the stock Rs 17 worth Monday’s low, these targets suggest a limited downside from here on.