Ugro Capital Ltd Q1 FY2023 Concall Summary

Key Takeaways

• AUM surged, off-book mix jumped: AUM grew by over ₹700 crore QoQ to ₹3,650 crore, while off-book AUM shifted from 16% to 21% of the balance sheet, driven by new co-lending partnerships.
• Credit quality held, GRO Score 2.0 validated: Credit cost remained under control at ~1.4%, and the proprietary GRO Score 2.0 model is performing as expected, with risk bands aligning to assigned default probabilities across both on-book and off-book portfolios.
• Infrastructure bet is paying off: Early, heavy opex investment in physical and digital infrastructure during the pandemic is now driving growth, with the first set of new branches breaking even this quarter and all branches expected to be highly profitable by December.
• Co-lending leadership window is open: Management believes it has a 3-year window to become the market leader in co-lending before large and small NBFCs catch up, and it signed its first private bank co-lending partnership this quarter.
• What to watch next quarter: The launch of the direct-to-customer digital channel by end of August, the signing of two more bank partnerships, and progress toward the FY23 target of ₹7,000 crore AUM with 35% off-book and >2% ROA.

Growth Engine: AUM, Off-Book Shift & Distribution

• AUM trajectory: AUM reached ₹3,650 crore, a jump of over ₹700 crore in a single quarter, keeping the company "absolutely on track" for its ₹7,000 crore FY23 target.
• Off-book mix accelerating: Off-book AUM moved from 16% in March-22 to 21% in Q1 FY23, with month-on-month disbursements now running at 35–40% off-book. The target is 35% by FY23 end and 50% by FY25.
• Co-lending partnerships multiplying: Punjab and Sind Bank was signed for all products, and a first private bank co-lending partnership was also signed this quarter. Two more banks are expected to sign by next quarter.
• Distribution muscle: The network now spans 96 locations with over 1,000 GRO partners and over 700 front-end people. 55% of business comes from Prime branches, with roughly half of the book generated by intermediaries and half direct.
• Branch economics on track: The first set of 70-odd branches opened in Q3 and Q4 FY22 broke even by the end of this quarter, validating the 12-month breakeven timeline. All branches are expected to break even and deliver high profitability by December.
• Micro branch focus: Over the next two quarters, the priority is making the existing 75 micro branches highly profitable before further expansion. Any new branches will only be micro branches, which are expected to be a bigger contributor to portfolio yield and profitability over time.

Shachindra Nath: "We at UGRO with a 1000 crore of capital with A rating and 5-year of vintage with very mass portfolio quality and focus on digitization, are becoming a preferred player for multiple banks to do co-lending with us."

Credit Quality & Underwriting Evolution

• Portfolio resilience demonstrated: The portfolio remained intact through both pandemic waves and is in much better shape than competition. GNPA on a total AUM basis (1.7%) is cited as more reflective of true performance than headline GNPA, which is inflated by a denominator effect from low first-year AUM and two pandemic waves.
• GRO Score 2.0 validated: Since its July 2021 implementation, risk stacking is working as designed. Customers in GRO Score 'A' (least risky) through 'E' (most risky) bands are performing in line with their assigned probability of default, for both on-book and off-book customers with 6–12 months of vintage.
• Restructured book status: Education and light engineering segments have returned to pre-pandemic normal. Hospitality stressed customers continue to be stressed, with approximately ₹7–8 crore more NPA expected from the unsecured hospitality portion of the restructured pool; current provisions are more than sufficient to cover it.
• Sector mix derisked: Education and hospitality, which comprised about 15% of the book in Q1 FY22, is now below 5% due to restructuring. Encouraging signs are emerging in both sectors, with demand picking up especially in education as children return to school.
• Micro secured product: This high-yield secured product is behaving extremely well and is acceptable to large PSU banks for co-lending because of stringent collateral checks aligned with bank requirements. Co-lending on this product has already started with a couple of banks.

Amit Mande: "Our proprietary GRO Score, we call it the magic sauce, sometimes we call it the Coke formula, remains at the heart of everything that we do."

GRO Score 3.0 & The Data Stack Opportunity

• GRO Score 3.0 launch timeline: The next-generation model is in development and expected to go live by end of Q3 FY23 (December 2022). It will incorporate GST data alongside banking and bureau data.
• Key capability upgrade: Unlike GRO Score 2.0, which predicts default probability and categorizes customers into five risk bands, GRO Score 3.0 will also predict loan affordability (e.g., whether a customer can afford a ₹1 lakh loan versus a ₹2.5 lakh loan). This is currently estimated through front-end policy and product programs.
• Account aggregator catalyst: Management expects the account aggregator framework, once fully live with all banks participating and a lifetime consent framework established, to significantly improve data efficiency for both underwriting and continuous cash-flow monitoring during the loan lifecycle, strengthening early warning signals.
• Long-run underwriting vision: The goal is for physical underwriting inference and input to become as low as possible, with the underwriter's role shifting to quality reference checks and scorecard improvement while the machine takes over.
• SME credit transformation thesis: Over the next 2–3 years, management expects the entire SME credit space to move to data-driven underwriting, supported by the India data stack (identity, payment, data layers) and OCEN/ONDC networks. U GRO is already live as the first lender on the GeM SAHAY platform under the OCEN framework.

Subrata Das: "3.0 is going to incorporate the GST records of the entity and thereby it is going to be first of its kind a very robust predictive model which captures the intensity of business in a real time GST. The financial discipline of the intent to pay through the Bureau record and the ability to pay through so let say the current cash situation and the credits and debits visible in the bank statement."

Capital, Leverage & The Funding Question

• Self-imposed leverage discipline: While regulatory norms permit up to 6x leverage (15% CAR), the company has imposed a self-cap of 3.5–3.8x for its initial 5–7 years. Management states it can sustain a full year and beyond without raising capital if needed.
• Multiple levers before dilution: The company has several triggers to continue growth without a capital raise: it can increase leverage toward the 3.5x self-cap, and it can push the off-balance-sheet mix from the targeted 35% to as high as 45% depending on market conditions, all while keeping leverage the same.
• Capital sources are open: Beyond public markets, private equity, DFIs, and large family offices are available. Management notes that some private investors may compare to private market transactions at 3x to 7–8x price-to-book, and it sees an opportunity for public market investors to benefit like private equity investors from the growth and infrastructure already built.
• Public market discount acknowledged: Management recognizes that public market investors remain worried about the impact on bank and NBFC balance sheets and adjusted book values, and that U GRO is caught in that mix despite demonstrating portfolio quality through the pandemic.
• ROE target: The company targets 18% ROE by FY25. If the off-balance-sheet mix increases by another 10 percentage points, ROE would kick in further, but management believes a pure marketplace model does not work for lending because bank partners want to see a principal lending partner with skin in the game.

Shachindra Nath: "If we can sustain a full year we can sustain even beyond if we want to."

Product & Channel Expansion

• Direct-to-customer digital channel: A new digital channel described as "one of its kind" will launch by end of August. It will start with simple, small-ticket, small-tenure products with low data requirements, graduating customers to higher-end products over time. More details will be disclosed next quarter.
• Product expansion roadmap: Expansion will focus on machinery finance, supply chain finance, and direct-to-customer products. The direct distribution focus is to keep improving through micro branches and businesses with direct-to-ecosystem models that bypass intermediaries.
• Geographic ambition: By FY25, the company has identified 280 clusters across 5 states (Telangana, Tamil Nadu, Karnataka, Rajasthan, Gujarat) from over 3,000 mapped pin codes, and would eventually like to be present in all 280 clusters.
• Branch expansion cadence: The company will look at adding 25 to 50 branches by year-end, possibly in Q4, depending on how existing branches behave and how early they break even.
• Co-lending ecosystem aspiration: Management aims to create a bridge where large banks become direct co-lenders to some of U GRO's partners and associates, with U GRO providing technology, credit enhancement, and service.

Income & Margin Dynamics

• Net total income at 10.5%: Management emphasizes that conventional NIM is not a relevant parameter because co-lending and off-balance-sheet income comes at lower cost. Net total income (interest income plus fee income from off-balance-sheet minus cost of capital) was 10.5% for the quarter. Of this, spread is about 5.6% and the rest is co-lending income.
• Demand resilience thesis: Management argues that in a domestic consumption-driven economy, interest rate rises and inflation will not mute demand within U GRO's customer set (below ₹5 crore turnover, retail trade focus). Neither credit demand nor cash flow is getting stretched, because constraining demand does not help control inflation in India where the problem is supply-side.

Shachindra Nath: "Pure marketplace model does not you know go well with when it comes to the lending as a business. All our banks and partners who are on the liability side want to see us as a principal lending partner so having in skin in the game having its own balance sheet helps..."

Guidance & Commitments

Key Metrics