Target: ₹26
CMP: ₹25.74
Prolonged stress in Utkarsh Small Finance Bank’s microfinance portfolio marred Q3FY25 earnings (net loss at ₹168 crore) and may result in elevated credit cost in Q4 as well. However, X-bucket collection efficiency touching 99 per cent in Feb’25 vs 98.5 per cent in Jan’25 vs 98 per cent in Dec’24 indicates subsiding stress in the MFI segment.
Credit cost in Q3 remained elevated at 9 per cent (annualised) vs 4.4 per cent q-o-q. Further, elevated stress pool with SMA 1-2 at 5.6 per cent and PCR at 61 per cent as on Dec’24 would keep credit cost higher in Q4-FY25-Q1-FY26.
Overall retail loans have grown at 74 per cent CAGR while JLG (joint liability group) loans grew at just 10 per cent CAGR between FY20-9MFY25. Given the improving trends in MFI, it expects PAR to stabilise and then gradually improve in coming months. It added ~350 employees in Q3 and about 2,000 in 9MFY25 to improve collections and reduce case load per officer to better manage its collections.
Given near-term profitability may remain under pressure and business could normalise by Q2-FY26, we maintain HOLD with a revised TP of ₹26 (earlier: ₹40).
Key risks: Downside risk is sharp margin deterioration due to stiff competition in secured lending; and upside risk is asset quality normalisation coming in faster than anticipated.
Rewrite this news article and keep the same structure, information and length.
