Ugro Capital Ltd Q3 FY2023 Concall Summary

Key Takeaways

• AUM crossed ₹5,000 Cr with 16% QoQ growth, driven by highest-ever quarterly disbursement of ₹1,874 Cr as multiple distribution channels matured simultaneously.
• Profitability inflection arrived: PBT grew 27% QoQ to ₹22.2 Cr and PAT jumped 149% QoQ to ₹13.1 Cr, with net total income rising 24% QoQ as the yield profile improved.
• Off-book AUM ratio hit 35% ahead of schedule, but management is deliberately not adding new partner lines because existing large bank partners already expect higher monthly delivery than U GRO can currently meet.
• Cost-to-income ratio rose slightly to 63.9% on one-off expenses; the adjusted ratio would have been ~60%, and management expects steady improvement as the pre-invested infrastructure now scales.
• What to watch next quarter: Whether the GRO Score 3.0 pilot (with GST data) validates the credit hypothesis, the form and size of the capital raise planned by Q4 or Q1, and whether disbursement momentum sustains without yield compression.

Growth Engine: Channels & Capacity

• Disbursement surge was capacity-led, not demand-chasing: Origination capacity now exceeds ₹600 Cr per month, built over three years from 150 people and 8 locations to ~1,500 people, 100 locations, 150 in technology, and 40+ in data analytics. Management stated actual delivery already has a 30–40% gap versus installed capacity.
• Supply chain financing was the standout channel, seeing significant growth from festive season demand and channel maturation; management expects it to remain a key contributor, focusing on green energy, healthcare and other sectors.
• Micro-enterprise branches take ~18 months to breakeven because they require direct origination with sales, credit, collection, legal, and brand-building for secured loans where customers pledge their only property; once mature, they start throwing assets.
• Prime business is now ~50% of monthly volumes, while higher-yielding secured channels (micro enterprises, machinery) are gradually growing their share, driving a few basis points of portfolio yield increase rather than decrease.
• Digital channel and customer-facing app are imminent: the app is expected to launch from mid-February, and the digital channel will go live soon.

Shachindra Nath: "So our growth and we are not chasing growth, actually, our installed capacity versus what we are delivering, we already have a gap of 30%, 40%."

Profitability & Operating Leverage

• Net total income rose to ₹108 Cr (24% QoQ) and as a percentage of on-book AUM improved to 12.9% from 11.3%, driven by the improving yield profile as higher-yielding secured channels grow.
• Cost-to-income ratio increased to 63.9% from 62.7% on one-off expenses; the adjusted ratio would have been ~60%, and employee cost month-on-month has been stable. Management expects the ratio to improve every quarter because opex investment is now largely complete and only asset-side growth remains.
• Cost of borrowing held at 10.5% with only 20 bps increase over two quarters versus 100 bps+ for peers, attributed to a well-diversified base of 65-plus lenders including large banks and NBFCs.
• Tax rate was elevated due to being in MAT (old regime) and reversal of deferred tax assets inherited from the Asia Pragati merger; part of the pending ~₹17 Cr DTA may require further reversal in coming quarters, and ~₹7 Cr of deferred tax liability lapses next year.
• 2025 cost-to-income ratio target is roughly 45%, with management stating the focus for next year will be delivering profitability comparable to any traditional or vintage lender while doubling the bottom line.

Shachindra Nath: "We have been profitable from day one. And also, we are competing head on to come to a cost-to-income ratio, a return on asset and return on equity, which is equal to or better than most of our peer market."

Off-Book Strategy & Partner Dynamics

• Off-book AUM ratio reached 35% (₹724 Cr) , achieving the March 2023 target ahead of schedule, driven by co-lending (₹273 Cr), direct assignment (₹108 Cr), and co-origination (₹343 Cr).
• NBFC partner count reduced from six to four because management learned to say no to partnerships where philosophies did not match; certain NBFCs were suspended amicably.
• Existing large bank partners expect ~₹100 Cr per month delivery, which U GRO has not been able to meet, creating pressure; this is why new partnership lines are not being added currently. Top three banks cover 75% of the 2025 off-book target, and they are public sector banks.
• Line increases are at partner banks' discretion: a large bank would pause and review at ₹1,000–1,500 Cr before granting another ₹1,000 Cr line. Management will limit relationship expansion now and expand only next year, when one bank has reached around ₹700 Cr and another around ₹200 Cr.

Shachindra Nath: "We realized that in marriages, it is not just important for bride and groom to come together and tie the knot, they have to live together also and living together had different connotation."

Credit Quality & Underwriting

• GRO Score 2.0 risk classification (A to E) is stacking up decently with no surprises so far; post-pandemic sourcing (post-July 2021) shows book quality remains consistent even after 12–18 months. Management wants 2–3 more quarters for comprehensive validation.
• 94% same-month collection efficiency should be read alongside subsequent bucket resolution rates; Bucket X resolution rate is the primary driver of what flows into NPAs, not just the 6% flowing into buckets.
• GRO Score 3.0 is piloted and going live in Q4 FY23, incorporating GST data in addition to bureau repayment behaviour and banking behaviour.
• FLDG guarantee provisioning was described as "very, very small" relative to the ₹74 Cr total provision, though no specific number was provided.

Capital, Ratings & Market Perception

• Capital raise is planned by end of Q4 FY23 or Q1 FY24; form, shape and size are not yet defined.
• Rating agency transition created noise: U GRO moved from Acuite to CRISIL, which rated U GRO A- (two notches below Acuite's A+). Acuite subsequently downgraded U GRO from A+ to A, which management attributes to Acuite self-justifying after U GRO accepted CRISIL's lower rating. No lender has raised concerns.
• ESOP trust purchased shares worth ₹25 Cr, adjusted against capital; ~₹3 Cr of the ~₹28 Cr approval remains. Equity from March 2022 to now increased by only ₹2 Cr because of this ESOP trust adjustment.
• Management expressed frustration with capital market reception, noting that despite higher growth and improving profitability, the platform's potential over two to five years appears unrecognized, possibly due to lower market cap, muted capital markets for lending businesses, and the differentiated model not being fully propagated among institutional investors.

Shachindra Nath: "So no businesses, which are superior to their peer set can remain out of mainline radar for a very long period of time."

Guidance & Commitments

Key Metrics