Ugro Capital Ltd Q4 FY2023 Concall Summary

Key Takeaways

• AUM doubled, profitability surged: AUM crossed ₹6,000 crores (up ~105% YoY) while PBT rose 4x to ₹83 crores; adjusted PAT would have been ₹60 crores absent a one-time DTA write-off.
• Operating leverage is kicking in: Cost-to-income ratio improved from ~72% to 62% for the full year, with Q4 exiting at ~56%, and management expects this to reach ~47% in FY24 as opex stays nearly flat.
• Asset quality held up, model validated: Gross NPA declined from 2.0% to 1.6% and net NPA from 1.6% to 0.9%, while the GRO Score model proved its predictive power across risk bands, even on customers scored but not disbursed.
• Capital raise de-risks growth: The ₹340 crores equity infusion in April–May, including a sovereign-backed investor, lifts pro forma capital adequacy to ~30%, sufficient to fund all FY24 needs without further equity.
• What to watch next quarter: Whether the ₹10,000 crore AUM and ~47% cost-to-income targets stay on track as the company adds only ~20 micro-enterprise branches and begins scaling its direct-to-customer app.

Growth & Scale

• AUM trajectory: AUM doubled to ₹6,000+ crores, driven by all asset engines and investments in infrastructure and technology made during COVID now reaping benefits.
• Disbursement engine: FY23 gross disbursements reached ~₹7,200 crores versus ₹3,138 crores in FY22, powered by scaling of the Lending-as-a-Service model and multiple co-lending and co-origination partnerships.
• Off-book mix ahead of plan: The company reached slightly more than what was envisaged on the off-book side this year, putting it slightly ahead of time in achieving the 50% off-book target by 2025.
• Branch expansion paused for proof of concept: Post Q1 FY23, no new branches were set up because management wanted to see that the ~75 micro-enterprise loan branches set up earlier could break even within 12–15 months; most of those branches have now achieved breakeven.
• Network scale as a moat: Coverage spans 25+ lakh counterparties, more than 10% of India's registered companies, over 95% of the top 500 companies, and 19% of all GST-registered companies, driven by GST linkages and the data platform.

Shachindra Nath: "I think our MOAT is that what Bajaj was able to do in 2008, 2009, 2010, 2011, post Global Financial Crisis and what we have been able to create post-COVID crisis is exactly same. So, our MOAT is that when it comes to the MSME financing in India, we have a five year of head start..."

Profitability & Operating Efficiency

• Income growth: Total income up ~119% and net income up ~123% YoY, driven by AUM scale-up.
• Cost-to-income improvement: Reduced from ~72% to 62% for the full year, with Q4 exit at ~56%, driven by operating leverage as infrastructure investments made during COVID now deliver efficiency.
• FY24 cost-to-income target: Expected to touch ~47% or more within a year, with only ~20 incremental micro-enterprise branches (low-cost) planned, so opex is essentially flat this year while AUM grows.
• ROE trajectory: ROE is expected to hit double-digit this year (from single digit currently) and move into high teens the year after, with the desired ROE number targeted by end of 2025 or so.
• Profitability impacted by one-time item: PAT of ₹39 crores was impacted by a one-time DTA write-off of ₹20.6 crores; adjusted PAT would have been ₹60 crores.

Shachindra Nath: "So, think of somebody making a small banquet hall then that goes to full capacity, then they make another banquet hall and then make a third banquet hall. ... So UGRO has been designed and built like that."

Asset Quality & Underwriting

• GNPA and NNPA improvement: Gross NPA declined from 2.0% to 1.6%, net NPA from 1.6% to 0.9%, and PCR improved from 26% to 48%, reflecting stable credit quality and GRO Score model effectiveness.
• GRO Score model validation: Risk ranking and portfolio behaviour as predicted by GRO Score across risk bands A–E holds not only for own customers but also for customers scored but not disbursed, proving model effectiveness.
• Portfolio quality concentration: ~88% of portfolio customers have GRO Score of A and B, indicating strong portfolio performance outlook.
• Unsecured asset quality outlook: Out of the total ₹55 crores GNPA in the unsecured book, a little less than half is from the restructured portfolio; the portfolio originated post-implementation of GRO Score 2.0 is "very, very healthy" with hardly any stress seen, and lifetime GNPAs are not expected to go above 3% to 3.5%.
• NPA philosophy by product: Unsecured business (yield 19%) carries a lifetime NPA budget up to 3%–3.5%; secured (hard collateral) up to 0.5%–0.75% lifetime, with underwriting calibrated to stay below these benchmarks.
• Stage 1 and 30+ DPD stability: Stage 1 assets at ~96.1% have remained stable over preceding quarters; 30+ DPD in the 3.8%–3.9% range, with no significant changes expected given portfolio construct and risk cut-offs per product.

Anuj Pandey: "...we don't foresee the gross NPAs for lifetime to go above 3% to 3.5%."

Product & Platform Strategy

• GRO Score 3.0 launched: Third generation of the proprietary underwriting model, with a self-sustaining machine learning platform, feature library, and ability to predict probability of default for the next 12 months; GST parameters are now incorporated as statistical features, not just eligibility tools.
• Direct-to-customer app launched: GRO X, an app-based lending platform, launched to serve very small merchants aligned with Udyam Aadhar registered entities; initial phase focused on acquiring customers and maturing data, with need-based lending to be perfected over time.
• Supply chain financing evolution: Yields are rising because the company is graduating from vendor-based financing to purchase-based financing, financing distribution chains from anchor to distributor and distributor to retailer.
• Product mix philosophy: Products are mixed by LGD calculation, collateral, duration, and broad market access; supply chain, machinery finance, and GRO X bring large customer funnels for future cross-sell of machine loans, rooftop solar, and secured loans within 12–18 months.
• GRO Xstream platform not monetized: The platform predominantly connects UGRO's own distribution and origination to its bank partners and has not been opened for third-party use or monetized as a platform play.

Shachindra Nath: "Every supply chain financing or a dealer or a retailer is a customer where in 12 months to 18 months time, I would be able to cross-sell a machine. I'll be able to cross-sell a rooftop solar. I will be able to cross-sell a secured loan, so on and so forth."

Funding & Liability Management

• Borrowing cost resilience: Only ~27 bps increase in borrowing cost for the full year versus a 225 bps broader market increase, due to a robust liability platform with 66 lenders and diversified funding sources.
• Capital raise completed: In April, raised ₹340 crores via a Preferential Issue (₹240 crores from a Denmark government-backed sovereign fund, IFU) and a QIP (~₹100 crores from domestic institutions and large insurance companies).
• Sovereign investor rationale: The purpose of bringing in the Danish government entity was to ensure shareholders with longevity of duration on the cap table, because lending as a business is a business of duration; they hold roughly 16.5%, equal to TPG and ADV Capital.
• No further equity in FY24: The ₹340 crores raised in April–May is the only equity infusion for the 12 months starting April 2023; balance sheet growth will be funded entirely by debt, with ~₹2,500 crores of fresh liability planned.
• Co-lending partner dynamics: Public sector banks are the first call because they hold the majority of public deposits and are hungrier on the asset side; the company has exhausted its asset-side capacity to take on more co-lending partners, with more private sector banks approaching them than they can onboard.

Shachindra Nath: "So, there are entities which may be much younger, five years, six years, we have a cost of borrowing which reflects the cost of borrowing of who their parent is. Obviously, they have a disproportionate advantage vis a vis us, but actually they are our partners, most of them. All those such entities are actually doing business with us, so that shows our capability."

Guidance & Commitments

Key Metrics