Ugro Capital Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Profitability inflection, not just growth: Pre-tax profit jumped 143% YoY to ₹35.6 crores as the post-COVID infrastructure build-out now delivers operating leverage, with cost-to-income falling from 72% to 55%.
• Asset quality is deteriorating by design: Gross NPAs rose to 1.8% as the book seasons past 12 months on book, a calibrated move management expects to reach ~1.9% by year-end, not a surprise.
• Off-book AUM doubled to 43% of the total book, driving capital efficiency and ROE improvement; management targets 50% in six quarters but will cap it there to keep banking partnerships balanced.
• The ₹20,000 crore FY25 AUM target is now explicitly secondary: management will sacrifice AUM for bottom-line performance, asking investors not to punish a miss if ROE hits 18.5% instead.
• What to watch next quarter: Whether the co-lending income trough reverses as bank priority-sector volumes return, the pace of micro-enterprise branch maturation, and any regulatory movement on UPI credit that would unlock GRO X.

Profitability & Operating Leverage

• Pre-tax profit inflection: Pre-tax profit reached ₹35.6 crores, up 143% YoY from ₹10 crores and 6% QoQ from ₹33 crores, while pre-provisioning profit hit ₹56.6 crores, up 187% YoY. The post-COVID infrastructure investment phase is now delivering on AUM, revenues and controlled credit costs.
• Cost-to-income ratio collapsing: The ratio fell from 72% to 55% as the same infrastructure base supports a much larger book. Management's judgment is that the 45% target for 2025 may be achieved even earlier.
• Opex discipline with a caveat: Opex was flat QoQ despite growth, partly because PMS and incentive outflows ran below budget in Q1. That underspend will catch up through the year, and inflationary factors will push opex slightly higher from here, though not significantly above the Q1 level.
• ROA and ROE trajectory: ROA improved to 2.2% from 1%, ROE to 8.7% from 3%. This year, ROE is expected closer to 10% with ROA at 3.1%; the 18% ROE target is for FY25, with capital infusion assumed.

Amit Mande: "In my judgment, we should get there even before that. But at this point in time, we are tracking very well on our positive income ratios."

Asset Quality & The Seasoning Trade-Off

• NPA rise is calibrated, not alarming: Gross NPAs moved from 1.6-1.7% to 1.8% as the share of the portfolio older than 12 months on book steadily increases. Management's internal forecast was to end the year at ~1.9%, so the move is on plan. Collection efficiency has held at 97% for five straight quarters.
• Credit cost mechanics: The 1.3% credit cost is calculated on total AUM. For off-book exposure, co-origination involves a first-loss cover provisioned for the entire credit cost, while co-lending and direct assignment carry different structures. The correct denominator, per an analyst's math, is balance-sheet AUM plus co-originated book plus 20% of assigned book in co-lending and 10% of direct assignment.
• Underwriting combines machine and human judgment: Every loan except micro loans runs through GRO Score 3.0, which assigns a probability-of-default band from A to E; D and E are straight rejects unless a bureau reporting error is flagged. Even so, 50% of GRO Score A and B applications still get declined by underwriters for reference, collateral or other reasons, a gap management expects to narrow over time.

Shachindra Nath: "In India lending businesses whether banks or NBFC have not failed because of the underlying size of the customer type. They have failed because of the governance itself. You can have cyclical risk, but you cannot have a failure risk."

Off-Book Strategy & Capital Efficiency

• Off-book AUM doubled to 43% of the total book from 21%, helping sweat capital better and lift leverage to 2.5x. The target is 47% by year-end and 50% within six quarters.
• The 50% ceiling is deliberate: Management will not push off-book beyond 50% because it wants to remain an equal partner to lending institutions, not a dominant originator that banks lose confidence in. It also needs to build its own book for innovative products that banks adopt only with a lag.
• Co-lending income dipped on seasonality, not rates: Co-lending and direct assignment income fell from ₹63 crores to ₹43 crores QoQ because Q4 typically sees banks ramping up priority-sector lending while Q1 is lower. Rates are pre-negotiated and unchanged.
• Co-lending returns are structurally superior: Margins are almost similar to on-book lending, but capital attachment is far lower because banks take 80% of the exposure while UGRO retains only 20%, so the same income is earned on much less capital deployed.
• ALM is positive across all maturities: Long-tenure secured loans of up to 10-12 years are mostly down-sold to banks via co-lending, with only 20% held on books matched to equity capital, keeping the ALM position comfortable.

The MSME Opportunity & UGRO's Positioning

• The credit gap is structural and growing: The MSME credit gap expanded from ₹69 trillion in FY17 to ₹106 trillion in FY22, driven by formalization through GST, UPI, UDYAM registration and ITR filings. The existing credit system is, in management's view, completely undercapitalized and insufficient.
• Sweet-spot customer profile: Over 80% of the portfolio consists of micro and small enterprises with turnover between ₹50 lakhs and ₹10 crores. The prime secured customer typically has ₹5-10 crore turnover, is a manufacturer or service provider, and demonstrates strong financial discipline with regular GST and banking habits. Average ticket size is ₹70-80 lakh.
• ~20% of AUM sits outside the GST net: Roughly 10% is micro enterprises and 10% comes through partnerships and alliances, all secured by property. These are very small customers for whom GST is not applicable.
• Micro-enterprise branch model is proving out: The 75 branches set up by Q4 last year are now delivering ₹85-90 lakh disbursement per month, 20-22% above market average, validating the hypothesis that a branch takes 15-18 months to break even. Expansion into 280+ locations across five states will trigger once the current-year financial target is nearer.

Shachindra Nath: "We view this, that the opportunity and the need is for not just one UGRO, but hundreds of UGROs' to emerge to fulfil this gap, because existing credit system of the India is completely undercapitalized and insufficient to fulfil this gap."

Technology & Data Moat

• GRO Score 3.0 is the central underwriting engine: Every loan except micro loans passes through it, producing a probability-of-default band. The score is now publicly available on the company website for small businesses to self-assess.
• A dedicated machine-learning office has been carved out to reduce distraction, built around four modules: API-sourced cloud-hosted data ingestion, a proprietary feature library on AWS, a 10+ model inventory using NLP and time-series techniques, and a central rule engine for real-time deployment.
• GRO X remains in beta, gated on regulation: The platform is live in beta with exponentially high approval rates, but the portfolio is being controlled and management is waiting for RBI regulation on UPI credit before scaling. User and disbursement numbers were not disclosed.
• OCEN is already live: UGRO was the first implementation of OCEN through the GeM Sahay platform. Account aggregation, GST fetching and banking data fetching are all part of the OCEN stack. Management did not address the timeline for mass adoption by platforms like Swiggy, Zomato or Uber when asked.

Guidance & Commitments

Key Metrics