Ugro Capital Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Profitability inflection, not just growth: H1 FY24 delivered 2.2% ROA and 9.2% ROE, with PAT doubling YoY to INR 56 crores, as heavy upfront infrastructure investment begins to pay off.
• AUM growth deliberately tempered for margin: Management is willing to sacrifice INR 500-600 crores of AUM to protect PAT, prioritizing yield improvement and cost control over hitting the INR 10,000 crore aspiration.
• Asset quality migrating as planned: Gross NPA rose to 1.9%, driven by the unsecured book seasoning toward its 4.5-5% lifetime loss budget; management expects stabilization with unsecured GNPA at 3.5-4% and micro-enterprise at ~2%.
• Co-lending pivot accelerates: Off-balance sheet AUM reached INR 3,405 crores, and the company is now shifting co-origination partnerships from NBFCs to banks under the CLM1 model, targeting 50% off-book sooner than expected.
• What to watch next quarter: Whether the 75 new micro-branches open on schedule, the pace of unsecured GNPA migration toward the 3.5-4% stabilization band, and any progress on the stated public market capital raise.

Profitability & Operating Leverage

• PAT inflection: H1 PAT of INR 56 crores already exceeds the INR 40 crores earned in all of last year, demonstrating that operating leverage has begun to flow through after 2.5 years of crisis-era investment in infrastructure.
• Cost-to-income trajectory: The ratio has fallen from 72% in 2022 to 64% last year to 55-56% now, though the first half ran 2-3% above expectations for reasons management attributes to accounting timing, not business stress.
• Employee cost jump is optical: The QoQ rise from INR 37 crores to INR 46 crores reflects a INR 5 crore bonus provision reversal in Q1 that flattered that quarter, plus a fresh INR 2.5 crore provision in Q2; no headcount or wage increases occurred.
• Other opex increase: Other operating costs rose INR 3 crores QoQ, with half driven by a GST input credit reversal as the NBFC is now entitled to only 50% credit, making the other 50% a P&L charge.
• Steady-state ambition: Management targets a sub-45% cost-to-income ratio, sub-2% credit costs, 4% ROA, and 18% ROE beyond the next two years, with 3% ROA expected by this fiscal year-end.

Lodha: "So cost to income ratio has been constantly reduced in the organization. So if you look at the past data, 2022, the cost-to-income ratio at 72%. Last year, it was for the full year, it was 64% and now we are closer to 55%, 56%."

Asset Quality & Credit Costs

• Portfolio quality snapshot: Collection efficiency at 99%, gross NPA 1.9%, net NPA 1.1%, provision coverage 49%, and 95% of assets in Stage 1; management expresses confidence in maintaining these levels.
• Unsecured GNPA migration is planned: The rise in unsecured gross NPA reflects the portfolio seasoning toward its lifetime loss budget of 4.5-5%, which translates to roughly 1.5% annualized credit cost; stabilization is expected at 3.5-4%.
• Micro-enterprise NPA dynamics: A portion of micro-enterprise loans is secured by property, and the cycle of repossession and sale is now active; the unsecured portion is being covered under the Mudra Guarantee Scheme, with GNPA expected to stabilize around 2% over the next year.
• Mudra Guarantee Scheme adoption: Starting Q1 FY24, all unsecured loans under INR 10 lakhs are being covered under the government-backed Mudra Guarantee Scheme, with the intention to reach 100% coverage of the unsecured portfolio going forward.
• Stage 3 provisioning guidance: Management plans to maintain Stage 3 coverage at approximately 65%.
• Steady-state GNPA target: On a consolidated AUM basis, the plan is ~2% GNPA; with 50% of AUM off-book, that translates to 3-3.5% GNPA on the on-balance sheet portfolio.

Nath: "So overall, when we do a lifetime budgeting of NPAs for unsecured, our budgets for lifetime is around 4.5% to 5%, which roughly translates to about 1.5% of an annualized credit cost."

Co-Lending & Liability Strategy

• Off-balance sheet scale: Off-book AUM stands at INR 3,405 crores, and management expects to reach 50% off-book sooner than previously anticipated.
• Shift from NBFC to bank partners: Co-origination was initially built with large NBFCs; the company is now gradually migrating to banks under the CLM1 (co-lending model 1) framework as banks become operationally ready.
• Capital efficiency logic: Co-lending allows UGRO to earn spread without deploying capital, making it highly capital-efficient; management chooses partners based on who offers the best price and can execute most efficiently.
• Liability cost reduction: Management sees a real possibility of reducing on-balance sheet liability costs as the portfolio gains vintage and performance history with lenders.
• Co-lending industry context: While securitization took four decades to reach INR 4 lakh crores in India, co-lending has reached approximately INR 75,000 crores in aggregate across the banking system in just 3-4 years.

Nath: "On the co-lending side, you are more or less paying spread or loan spread without providing the capital. That's why it's very capital efficiency in this model."

Distribution & Branch Expansion

• Micro-branch footprint doubling: Currently at 75 branches across five states; an additional 75 branches will open in the next two quarters, adding Uttar Pradesh, Madhya Pradesh, and Andhra Pradesh as new states alongside the existing Tamil Nadu, Karnataka, Telangana, Rajasthan, and Gujarat.
• Branch economics: Micro-branches take 12-16 months to break even, with fairly low operating cost; the new cohort is targeted for activation by fiscal year-end and will become productive gradually in Q1 next fiscal year.
• GRO X digital channel: A new direct digital distribution ecosystem called GRO X has been launched, complementing the physical branch network.
• Origination engine stability: Net loan origination was stable at INR 1,476 crores this quarter, having grown from INR 642 crores in Q2 FY22 to ~INR 1,450 crores by Q4 FY23; the engine will gradually gear up for FY25 aspirations without sacrificing bottom-line performance.

Underwriting & Product Mix

• GRO Score v3: The proprietary scorecard evaluates retailing capability, tenacity of turnover, and banking cash flows, categorizing customers into five risk bands; it also scrubs bureau data for customers not yet lent to and compares score performance.
• Proprietorship risk capture: For proprietorships, the GRO Score incorporates the proprietor's consumer bureau data to capture personal consumption risk, distinguishing UGRO's small-business lending from unsecured consumption loans.
• Supply chain ticket size shift: Average ticket size in supply chain financing dropped from INR 1 crore to INR 50 lakhs, reflecting a deliberate migration toward more granular, higher-yielding supply chain business and last-mile retailer financing; the number of retailer financing customers has doubled.
• Partnership yield disclosure change: The reported drop in partnership and alliances yield is a presentation change: yields are now shown net of partner service fees and interest share, rather than gross.

Guidance & Commitments

Key Metrics