Ugro Capital Ltd Q2 FY2023 Concall Summary

Key Takeaways

• PAT hit by one-off tax reversal: PAT fell to ₹5 crore from ₹7 crore QoQ, entirely because of a ₹7.19 crore deferred tax asset reversal; without it, PAT would have been ~70% higher.
• Yield and efficiency both improved: Yield rose 50 bps to 17.2% while the opex ratio dropped ~11 pp to 62%, driven by mix shift toward higher-yield portfolios and operating leverage.
• Co-origination is scaling fast: The off-book share of AUM jumped from 21% to 29% QoQ, with monthly off-book disbursements already at 50%, putting the 35% March target within reach.
• Asset quality held steady through macro tightening: Gross NPA stayed under 1.7%, Stage 1 improved to 96.4%, and the restructured book halved to 2.6% with 95% of those customers now repaying.
• What to watch next quarter: Whether the equity raise closes by year-end, the pace of micro branch break-evens across the remaining 44 branches, and any slippage from the residual restructured pool.

Profitability & Operating Levers

• Deferred tax reversal masked operating strength: A ₹7.19 crore DTA reversal turned what would have been ~70% PAT growth into a decline; further DTA impact depends on future profitability and ability to absorb carry-forward losses, which management cannot yet quantify.
• Yield uplift was deliberate: The 50 bps yield rise to 17.2% came from a mix shift into higher-yield portfolios and passing through market interest rate increases to customers.
• Opex ratio improved sharply: The opex ratio fell from ~73% to 62% as efficiencies were gained, a drop management tracks granularly month-on-month against its FY23–FY25 plan.
• Borrowing cost held nearly flat despite repo shock: While the repo rate rose from 4% to 5.9%, Ugro's borrowing rates increased only ~20 bps in H1 because of efficiencies and seasoning with its 65+ lender relationships.
• Credit cost is structurally lower than peers: Management attributes this to its SME GRO score database underwriting, which it applies differently from typical SME lenders, and estimates the gap will persist.

Anuj Pandey: "As far as your comparative credit costs are concerned, yes, we are a little lower and we would like to remain that way because our underwriting is very different than a typical SME lender underwriting. We have been using our SME GRO score database underwriting in a very different way so our estimates are that it will always be little lower than what our peers are."

Asset Quality & Collections

• Portfolio quality improved at the top of the funnel: Stage 1 assets rose to 96.4% from 94.6% QoQ, while gross NPA remained stable at just under 1.7%.
• Restructured book is winding down cleanly: The restructured pool fell from 7% to 2.6% of the portfolio, with 95% of those customers having begun repayment; management estimates only ~3–4% more from this pool may flow into NPAs.
• Provision coverage is adequate and rising: Stage 3 provision coverage ratio improved by 200+ bps to ~30%, which management considers comfortable given net NPA of only ~1.2%; coverage will keep increasing gradually as the portfolio matures.
• Collection efficiency is stable with a predictable waterfall: Overall efficiency held at ~94% for the last 2–3 quarters; first-bucket (0–30 DPD) resolution rates are 95–97% because SME customers typically pay within the calendar month, second-bucket (30–60 DPD) at 70–80%, third-bucket (60–90 DPD) at 50–60%, and NPA recovery at 20–25% depending on product.
• Bounce rates are declining steadily: Bounce rates have fallen to ~70%, and management expects collection efficiencies to improve further with the macro economy.

Co-Lending & Liability Strategy

• Off-book AUM is scaling faster than the headline target: Co-origination book rose from 21% to 29% of AUM, with Q2 co-lending disbursements at ~₹170 crore, up from ~₹125 crore in the prior quarter; the company is already disbursing 50% of monthly volumes off-book.
• The 50% off-book ambition by 2025 looks credible: The trajectory from 21% to 29% in one quarter, combined with the 50% monthly disbursement run-rate, puts the 35% March 2023 interim target within reach.
• PSB limits are far from exhausted: Limits from SBI, Central Bank, Bank of Baroda and other PSBs are way higher than what is currently being co-lent; co-lending books with some banks are now upwards of ₹600 crore and demand from PSBs is increasing, so limit constraints are not an issue for at least another 6–12 months.
• The co-lending moat has three layers: Ugro's differentiation rests on its platform, the intellectual property of GRO Score that partners use to evaluate the portfolio, and its ability to act as a lender to smaller NBFCs, a combination management argues is distinct from a pure platform play like Yubi.
• Leverage is deliberately conservative: Debt-to-equity stands at 2.85x against a self-imposed cap of 4x; management believes the vintage could support 5–5.5x but prefers to stay below 4x for visibility and lender comfort, with Tier-2 capital up to 50% of Tier-1 available but unexplored.

Amit Mande: "One is the platform; two is the intellectual property value and of the GRO score for each of these partners to access and evaluate the portfolio; and third of course is the ability to be a lender to the smaller NBFCs. So, it is little different than with a platform like a Yubi which is only a platform that connects multiple partners."

Micro Branch Strategy

• The model is validating on schedule: 31 of 75 micro branches have broken even, tracking the expected 12–15 month break-even period; gross NPAs in the micro book are under 1% over 12–15 months of experience, confirming underwriting, location selection and target segment choices.
• Expansion pauses until proof is complete: Management deliberately held off adding branches this year to let the existing 75 reach profitability first; the entire set is expected to break even by end of this year, after which 50 more branches will be added in the first two quarters of next year.
• Micro enterprise is the long-term growth engine: With a roadmap of 250 branches over the next three years, micro enterprise branches will form a large portion of the growth strategy.

Amit Mande: "We started about 75 branches in Q3 and 25 branches in Q1 Q2 and then you reached about 75 branches in Q3 and Q4. The learning curve has been, we always believed that there would be a learning curve and so this year we decided to not expand and see how these branches become profitable so that it really powers our growth going forward."

Underwriting & Technology Moat

• GRO Score is evolving to 3.0: The upgrade will incorporate GST data for predicting repayment behavior and eventually forecast customer cash flows by sector and estimate eligibility, deepening a model already built on GST, banking and repayment data.
• The lead time on underwriting is a durable advantage: While the underlying data sources are available to all, management argues that applying machine learning algorithms on a chosen target segment and evolving the model over time creates a 2–3 year head start that competitors would need to replicate from scratch.
• Portfolio construct is fixed at 70:30 secured-to-unsecured: Management is very clear that 70% of the portfolio will remain secured and 30% can remain unsecured, providing a structural anchor on credit risk.
• Digital lending compliance is fully addressed: All four parameters under the draft digital lending guidelines (disbursement into customer account, repayments from customer directly into escrow or own account, e-customer fact sheet, IP audit) have been implemented across all partnerships, with no impact on any relationship.

Anuj Pandey: "Today our underwriting is primarily based on GST, banking and repayment. Now these are things which are available to all for last five years, but still basis the application of a machine learning algorithm on our chosen target segment we have been evolving the underwriting model and that is something which takes time and hence whosoever chooses to do that of course can do for their own chosen target segment but in that journey, we think we would be always two to three years ahead."

Capital & Shareholding

• Equity raise is in process but not mathematically required: Management is working to close an equity raise this financial year, but states that strictly from a calculation standpoint it is not needed to meet AUM targets on-book and off-book; the co-lending approach alone should suffice for the next 12–18 months.
• Investor preference is shifting toward granular, long-duration capital: The company wants investors with smaller ticket sizes who will stay 7–10 years as shareholders, or capital market investors who are more granular in nature.
• PAG has halved its stake via market sales: PAG brought its shareholding down to ~9% from the original ~19%, obtaining liquidity directly from the market.
• No imminent PE exit pressure exists: Management states there is currently no exit pressure from any PE funds, though they will eventually look at an exit over the next two-to-four-year time frame.

Anuj Pandey: "There is currently no exit pressure from any of the funds at this point in time, but they will eventually look at an exit over the next two-to-four-year time frame."

Guidance & Commitments

Key Metrics