Ujjivan Small Finance Bank (USFB) has reported NII of Rs4,666mn, which is 6% above our expectation on the back of 33% growth in advances and improvement in cost of funds even as calc. loan yields remained stable at 20.3%. The liability side of the business continued to show improvement with deposits growing by 46% YoY, but sequential growth of 1.2% in deposits looked pale in light of the preceding growth rates. The slowdown in deposit accretion should also be seen in light of the funds mobilized through the IPO as well as the decline in disbursements (down 13% YoY and 4% QoQ). The management has ruled out any loss of deposits due to premature withdrawal or ‘flight to safety’ on account of the Yes Bank fallout. The cost trends were particularly impressive during the quarter with total opex coming down by 2.6% QoQ against a total income growth of 7.5% QoQ. Cost improvement has been made possible due to aggressive digital push and renegotiation of various contracts, including rent. With bulk of the tech investments over and negligible need for employee addition, we believe the room for gaining operational efficiencies is quite significant. Note that cost to income ratio for 4QFY20 was 64.6%. PPOP came in 31% above our estimate on account of superior cost performance. However, provisions increased by 683% YoY/217% QoQ on the back of covid-related provisions which amounted to Rs700mn. The covid-related provisions are far in excess of the RBI requirements. PAT came in 8.5% below estimate, growing by 14.7% YoY. The bank reported GNPAs of 0.97% compared to 0.95% in 3QFY20 while net NPAs reduced by 18bps QoQ to 0.20%. Given the provisioning during the quarter, the bank has increased PCR to 80% compared to 60% in 3QFY20, which should strengthen the balance sheet. The management commentary suggests that they are optimistic with respect to recoveries going forward as the proportion of severely affected customers is quite low (4% based on an internal survey across 90,000 customers). To back up their hypothesis, the management has given a fairly detailed color on the micro-banking customers, which suggests that most of the borrowers are: 1) self-employed 2) engaged in some sort of an essential service 3) having a secondary source of income 4) not migrant workers. Broadly, rural, which represents about 1/3rd of the overall portfolio, is expected to bounce back faster as customers are unlikely to remain economically inactive for a prolonged period. Plus, a higher degree of business localization in rural areas should also support recoveries. Given the high rate of run-off on the book, lockdown stretching to two full months and assuming a gradual build-up in disbursals over the year, we build in a loan book growth of 8.5% for FY21. Even though the management has sounded optimistic about recoveries, given the broader economic uncertainty, we build in higher NPAs resulting in higher credit costs. However, continued traction on cost improvement would help support profit generation. We would keenly watch how the new leadership team delivers in such uncertain and tough times. We think the implied valuation for Ujjivan Financial Services (UFSL) remains favorable. We therefore value UFSL based on 0.8xFY22E BV of USFB and apply a 20% holdco discount. We retain BUY rating on UFSL with a target price of Rs192.