Detailed analysis on UGRO Capital Limited

During FY23, UGRO Capital Limited operationalized several co-lending/co-origination arrangements and has been categorised as a leader in “Lending-as-a-service” business model. The company’s co-lending AUM, as on March 2023, came in at INR2,442 crores. Given that it has a huge lender base of more than 60 lenders, going forward in FY24, it will focus on consolidating count of lenders and plan to increase ticket size per lenders with an unwavering focus on reducing borrowing costs.

Company overview

UGRO Capital Limited is data-tech lending platform which uses strong distribution reach and data-tech methodology to address small business credit gap in India. The company’s term loan programmes are suitable for MSMEs, irrespective of specific requirements. It has a strong backing of marquee institutional investors (as the company has raised INR 900+ crore of equity capital in 2018 and INR 340 crore in 2023). The company targets to capture 1% market share in upcoming 3 years.

The company continues to work for mission to ‘Solve the Unsolved’—$600 Bn small business credit need. It expects that problem of small businesses will be solved by developing strong expertise around core sectors of SMEs in India along with data centric, technology-enabled approach.

Business model of UGRO Capital Limited

UGRO Capital Limited provides dedicated programme for secured and unsecured loans which are targeted at MSMEs. It has alliances with large and renowned OEMs to offer end-to-end solution. The company’s supply chain programme gives MSMEs both demand and supply side solutions and tailor-made programmes for small and micro companies.

Its data analytics capability and healthy technology architecture offer customised sourcing platforms for each and every sourcing channel. GRO Plus, an uberized intermediated sourcing module, GRO Chain, is a supply chain financing platform having automated end-to-end invoice approval and flow, GRO Xstream platform specifically for co-lending, an upstream and downstream integration with fintechs and liability providers, and GRO X application to offer embedded funding options to MSMEs.

Track record of management

Mr. Shachindra Nath is Founder, Vice Chairman and Managing Director and Chairman - Asset-Liability Committee of UGRO Capital Limited. He assumed role of entrepreneur as he acquired control of a listed NBFC called Chokhani Securities Limited in 2018. Before embarking on entrepreneurial journey at this company, he has been influential in establishing insurance companies, global asset management businesses, capital market and lending institutions.

S Karuppasamy was former Executive Director – RBI and presently is an Independent Director and Chairman (Compliance Committee) of UGRO Capital Limited. He is still associated with several high-profile working groups in some areas, including High-Power Committee on Urban Cooperative Banks, Framework of Rating for Urban Cooperative Banks, Cross Border Supervision and Integrated System of Alert. This includes serving as Independent Director at Asset Reconstruction Company (India) Limited.

Financial performance of UGRO Capital Limited

UGRO Capital Limited has approved financial results for quarter and financial year ended 31^st March 2023. The company continued its growth momentum in last and final quarter of FY23. It AUM came in at INR6,081 crore (as of Mar'23), exhibiting a rise of 105% from Mar'22. Total income of the company for 4Q23 came at INR217.2 crore (exhibiting 92% growth year-over-year and 15% growth quarter-over-quarter) and INR683.8 crore for FY23 (up 119% from FY22).

In 4Q23, it saw 131% growth in consolidated net profit to INR14.0 crore, showcasing a rise from INR6.1 crore in previous year. It was able to efficiently leverage co-lending partnerships, having off-book AUM at 40%, better than its FY23 guidance of 35%. The company has been able to collaborate with 10 co-lending partners, more than 65 lenders, 35 fintechs, and 1,200 GRO partners to offer data-backed customized finance solutions to more than 46,000 MSMEs across India.

Over previous 4 years, the company was able to serve more than 48,000 customers in 4,000 different pin codes, analyzed more than 93,000 bank statements, 34,000 GST records, and was able to process more than 63,000 GRO Score logins. Despite significant challenges to lending industry, the company successfully built AUM of INR 6,000+ crore and with monthly net disbursement of over INR 500 crore. Its increasing off book AUM of 40% exhibits that its credit scoring model and underwriting framework continue to be accepted across banking industry.

During FY23, the company’s total revenue came in at INR68,376.28 lakhs in comparison to INR31,211.21 lakhs in prior year. Profit before tax was INR8,382.84 lakhs versus INR2,017.78 lakhs for previous year. PAT was INR3,977.64 lakhs against INR1,455.06 lakhs in previous year. Strong AUM growth momentum continued in FY23. This growth stemmed from large distribution infrastructure (comprising 98 branches, more than 1,200 GRO partners, over 105 Anchors and original equipment manufacturers and more than 1,200 employees).

Industry analysis

Bank credit saw an increase of 15.4% against 9.7% in previous year because of large industries, primarily metals, petroleum, and chemical industries. Credit growth to infra sector decelerated because of fall in credit to telecom sector. MSMEs’ credit growth remained strong because of Emergency Line Guarantee Scheme (ECLGS) which was extended till March 2023.

Services sector credit saw strong momentum in 2H23, stemming from flows to NBFCs, both housing finance companies and others NBFCs, with wholesale and retail trade considered under MSME category and simpler access to loans under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). However, credit to trade sector saw increased growth in 2H23. Retail loans were prime contributor to overall credit growth in FY23.

MSME sector is considered as a backbone of Indian economy and is of great significance for India to reach USD 5 trillion economy threshold. This sector contributes in a very significant way, as ~6.3 crore MSMEs produces more than 8,000 products and contributes ~30% to overall GDP. MSME sector gives employment to a large section of Indian population (more than 11.10+ crore) and has contributed ~50% to country’s overall exports for previous 5 years.

Indian MSMEs are competing with global companies, and their products and services continue to be accepted overseas. Share of MSME sector in manufacturing output came in at 33%. Approximately 50% of total MSMEs carry out operations in rural areas and offer 45% of total employment. Around 97% of total employment in this sector comes from micro segment.

Future prospects for UGRO Capital Limited

In FY24, UGRO Capital Limited is expected to focus on improving its profitability. Over past couple years, it has been able to build formidable distribution strength and its cost-to-income ratio continued to remain high. This is because a large part of Opex was upfronted in initial years.

The company expects that its existing infrastructure should be enough to support growth targets for FY24 and it will sweat its existing installed capacity so that operational efficiency can be improved. It will continue to build on its “Lending as a service” through Co-lending model and has a target of 45%+ Off-book AUM Proportion.

The company has plans to leverage existing 75 GRO Micro branches to increase AUM mix of Micro loans. This will further help in improving asset mix towards high-yield products.

UGRO Capital Limited has been successful in raising equity capital of INR 340.50 crores through mixture of Qualified Institutional Placement of INR100.50 crores and preferential allotment making up INR240 crores.

Risk factors

Access to financing in timely manner and that too at competitive costs seems to be challenging. This is particularly true for smaller and mid-sized NBFCs because of higher interest rates. Borrowing costs of the company and its access to debt capital markets are dependent on India’s credit ratings. In case of any negative revisions to credit ratings for India and several other jurisdictions it operates in by global rating agencies, the company’s ability to raise additional financing can be hampered.

Negative economic developments like higher fiscal or trade deficit, or default on national debt can impact investors’ confidence and might lead to higher volatility in Indian securities markets. This can indirectly impact Indian economy in general.

Shareholding pattern of UGRO Capital Limited

Promoters of UGRO Capital Limited hold ~2.19% in the company by end of June 2023 while FIIs make up ~21.99% of total shareholding. There has been a significant increase in holdings of FIIs in June 2023 in comparison to March 2023.

Public shareholders make up ~69.02% of total shareholding at end of June 2023.  

Valuation and investment rationale

Stock of UGRO Capital Limited currently trades at ~45.74x of FY23 EPS, which is at a discount to sectoral average of ~52.34x. Therefore, investors can consider going long on this stock given its promising business model and favourable industry dynamics.

Technology should play a critical role in taking financial services to next level of growth by supporting challenges that stem from India’s vast geography, making physical footprints in smaller locations unviable. With higher smartphone penetration and faster data speeds, consumers continue to encourage digitization as they find it more convenient and easier to use.

Market share of NBFCs in overall systemic credit went up from ~16% in FY17 to ~18% in FY22. This is expected to compound at 11-12% over FY23-FY25.

UGRO Capital Limited has recently announced its second equity capital raise from renowned institutional investors. This capital raise is expected to further enhance the company’s strong capital position and strengthen its balance sheet.

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