Analyzing Ujjivan Small Finance Bank Ltd : Stock Analysis December 2023

Analyzing Ujjivan Small Finance Bank Ltd : Stock Analysis December 2023


The analysis and opinions provided are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. 

Should We Buy, Sell or Hold This Stock and Why?

The company has a strong 23% 5-year sales growth rate and 176% 5-year profit growth rate. It also has debt with a debt to equity ratio of 7.08. Promoter holding is high at 73.66%. Pledged promoter holding is 0%. The company is profitable with good margins and return on equity. Valuations also seem reasonable.

?Buy Signal?: The debt to equity ratio is high at 7.08, which is typically a caution point. However, the promoter holding is relatively stable, and there is no pledged holding. The OPM (Operating Profit Margin) is high at 58.2%, and the Stock P/E is lower than the industry average (9.33 vs. 13.0), indicating potentially undervalued stock. Given these factors, especially the high OPM and stable promoter holding, it might be a potential buy, but caution is advised due to the high debt to equity ratio.

Vital Company Ratios for a Layman:

The company has a high OPM of 58.2%, indicating good operational efficiency.

  • Stock P/E is 9.33, which is lower than the industry average, suggesting the stock might be undervalued.
  • Debt to equity ratio is high at 7.08, indicating significant leverage.
  • ROE (Return on Equity) is 33.3%, which is quite high.
  • Dividend Yield is 2.09%, offering some return to shareholders in terms of dividends.
  • Sales Growth (5 Years): 23%
  • Profit Growth (5 Years): 176%
  • Return on Equity: 33%
  • Promoter Holding: 73.66%
  • Pledged Promoter Holding: 0%

Competing Companies and Performance Comparison:

Key competitors are other private banks like HDFC Bank, ICICI Bank, Axis Bank etc. Compared to the median of private banks, this company has higher sales growth of 23% vs 29%, higher ROE of 33% vs 6%, and lower debt to equity ratio of 7.08 vs 7.42. So it seems to be performing better than competitors on some key parameters.

  • Compared to peers like HDFC Bank, ICICI Bank, and Kotak Mahindra Bank, Ujjivan Small Finance Bank has a lower P/E ratio, indicating it might be undervalued.
  • Its OPM is significantly higher than most of its peers, suggesting better operational efficiency.
  • However, its high debt to equity ratio is a negative point compared to its peers.

Is This Stock Overvalued or Undervalued?

The stock seems reasonably valued trading at 9.33 P/E compared to sector median P/E of 12.65. Also, the difference between CMP and book value is not high. So the stock does not seem overvalued.

The stock appears to be undervalued considering its lower P/E ratio compared to the industry and its high OPM. However, the high debt to equity ratio and the price being almost 3 times its book value suggest caution.

Should We Buy This Stock and Why?

Yes, the high sales and profit growth, reasonable valuations, high and increasing promoter holding, zero pledged shares, good margins and return ratios make this stock attractive to buy from a long term perspective.

A potential buy considering the high OPM, stable promoter holding, and low P/E ratio. But the decision should be balanced with the high debt to equity ratio.

Industry Growth Prospects:

The private banking industry has been growing at a healthy pace driven by increasing financial penetration, digital payments growth, retail credit growth etc. This should benefit well-run banks like this company.

The banking industry, especially small finance banks, has been growing, focusing on financial inclusion. Ujjivan’s sales growth over 5 years is 23.2%, indicating steady growth in its sector.

Long Term Performance Prospects:

The company should perform well in the long run given its strong track record of growth and profitability, improving asset quality, strong capital adequacy, stable promoter holding and significant under-penetration of banking services in India.

The company has shown good profit growth and sales growth over the years. If it can manage its high debt effectively, there’s potential for good long-term performance.

Short Term Performance Prospects:

In the near term, the company is expected to continue delivering strong growth in loans and profits. Asset quality is also on an improving trend. However, any significant volatility in the overall markets or economy could impact its stock performance in the short run.

The company has shown a significant return over 1 year (95.1%) and 3 months (20.0%), indicating strong short-term performance. However, short-term investments should be made with caution due to market volatility and the company’s high debt levels.

In summary, Ujjivan Small Finance Bank Ltd shows potential as an investment due to its operational efficiency and growth prospects. However, its high debt to equity ratio is a significant factor that requires careful consideration. The decision to buy, sell, or hold should be based on individual risk tolerance and investment goals, and it’s always recommended to consult with a financial advisor for personalized advice.

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