Ugro Capital Ltd Q3 FY2024 Concall Summary

Key Takeaways

• AUM growth stays strong, but the mix is shifting: AUM rose 64% YoY, driven by secured products and partnerships, while co-lending is set to cross 50% of the book, reshaping how income flows through the P&L.
• Profitability is the binding constraint, not growth: PAT grew 8x as operating leverage kicked in; management explicitly prioritizes profitability over hitting the aspirational INR10,000 cr AUM target this fiscal.
• Asset quality is deteriorating on plan, not by surprise: GNPA rose 0.1% QoQ and 0.3% YoY as the portfolio seasons, with unsecured lifetime GNPA guided at 4.5-5%; collection efficiency remains stable.
• Branch expansion is the next growth lever, but it is measured: A second round of 75 branches is underway, with 30 now live; management will pace further expansion against operating leverage, not chase a fixed number.
• What to watch next quarter: Whether secured disbursements recover to the INR360 cr run-rate, the pace of co-lending mix shift beyond 50%, and any uptick in cost of borrowing as rate hikes seep through.

Portfolio Construction & Asset Quality

• Secured-first philosophy: 70% of the portfolio carries some form of collateral, with underwriting built on repayment ability first and collateral as a second defence, a deliberate long-term strategy that management contrasts with housing finance companies' collateral-first approach.
• Unsecured GNPA is seasoning, not souring: The unsecured book is 89-90% post-COVID and seasoned to about 24 months; the planned lifetime GNPA range is 4.5% to 5%, and the recent uptick reflects an additional 12 months of review flowing into GNPA and credit cost, not a change in collection behaviour.
• Collection infrastructure is electronic-first: 100% of loans are NACH-registered; on bounce, a large collection team and call centre follow up, with about 90% of that collection also electronic; cash collection is rare.
• Credit cost trajectory: Overall credit cost on a steady-state basis is likely to settle around 2% or below in the next few quarters, though management cautions that modelling is complex because the translation to the balance sheet depends on how much portfolio sits on-book versus in co-lending or co-origination.
• Micro enterprises product rationalization: Net originations in micro enterprises fell INR6 cr QoQ because UGRO was running two products (secured and unsecured) and found that non-collateralized loans were cannibalizing secured loans, so it moderated the unsecured offering.

Shachindra Nath: "Sir, predominantly, housing finance company, whether the prime housing finance company, like the HDFCs and other or affordable housing finance company are evaluators of collateral. So they rely on collateral first and repayment ability second. We rely on repayment ability first, collateral is the second defence to recover our money in case of a default."

Co-lending & Off-Balance-Sheet Shift

• Co-lending is overtaking co-origination: Co-origination dropped because 95-98% was with larger NBFCs where UGRO provided first-loss cover; with the credit guarantee scheme for co-lending and the interest rate cap rising from 18% to 21%, bank adoption of business loans accelerated, moving NBFC-led co-origination to co-lending.
• Off-book AUM target pulled forward: The original target was to take off-book AUM to around 50% next year; given liquidity dynamics and new bank partners, management now expects to achieve it much faster and probably go beyond 50% in the next few quarters.
• NII flatness is a feature, not a bug: Net interest income has been flat for three quarters because half the business is on-balance-sheet and half off; total income continues to increase, and management argues the relevant metric is total spread (interest spread plus fee spread on co-lending), not NII alone.
• Risk-weight hypothesis: Management hypothesizes that moderation in bank lending to NBFCs could have a consequential indirect positive benefit to co-lending, because banks should try to take more assets on their own balance sheet from the same NBFCs.

Branch Expansion & Micro Enterprises

• Second branch wave underway: 75 new branches began opening about 1.5 months ago, concentrated in UP, MP, Andhra and a few other states; 30 locations are ready by month-end, with 25-30 operationally live and starting business by quarter-end; the remaining 45 branches come next quarter.
• Productivity target: This second set of 75 branches is expected to deliver INR75 cr per month over 12 to 14 months; micro branches AUM will more than double in the next year.
• Pacing discipline: Management acknowledges the micro enterprise segment is underpenetrated and technically warrants 200 more branches, but will manage the pace based on the arbitrage between operating leverage and incremental opex, not a fixed rollout schedule.
• Yield uplift from micro mix: With increased contribution from new micro enterprise branches and retailer finance, yield is expected to inch up quarter-on-quarter; by next year-end, management sees about 75 to 100 basis points of yield increase across the portfolio.

Shachindra Nath: "I think we have to constantly invest in the business for long term, while delivering the quarter-on-quarter profitability as per the expectation."

Funding, Liquidity & Margins

• Cost of borrowing stability: The cost of borrowing has been managed at reasonable levels for four quarters despite RBI rate increases and tight liquidity, thanks to diversity and relationships with lenders built over five years; it may inch up a little from here but no significant jump is expected.
• Floating-rate pass-through: Most loans, barring the unsecured portion (~30%), are floating-rate, so incremental cost of borrowing can be passed on to customers.
• Yield stability with an upward bias: Yield has been stable at 16.3% for three quarters; with the micro vertical and higher-yield product mix increasing over the next 12 months, NIM can expand further.
• Interest rate tailwind: The topping of interest rates may start seeping in, which management views as an additional ticker for the company.
• Fund raise on hold: UGRO has approval for INR500-odd cr but timing is undecided; the business still has ample capital buffers and management wants to mature the business before hitting the market.

New Licenses & Product Developments

• Factoring license obtained: After roughly 1.5 years, UGRO is now a factor; this allows participation on the TReDS platform, though NBFCs like UGRO are not competitive there because invoice discounting yields suit banks and very large NBFCs; the real benefit is improving products like sales invoice discounting by allowing assignment of receivables under the factoring act, so that an obligor like Dabur pays UGRO directly rather than routing through the borrower.
• eKYC license in progress: UGRO has registered for the license and is implementing it internally; it will help achieve efficiencies in KYC processes.
• Secured disbursement dip is temporary: Prime secured disbursements fell from INR360 cr in Q4 to INR250 cr because long-term loans in co-lending do not stay on the books; management expects a recovery to the INR360 cr level, hopefully this quarter.

Shachindra Nath: "In today's scenario, Dabur pays back that money to me, when I'm a supplier, and then I pay back to UGRO because there is a financing is there. The risk is that if I have some other need at that point of time, I would spend money that Dabur pays to me, I will use that money for something else. Now we convert that as a factor, which means I assign that receivable to be on the factoring act and Dabur is obligated to pay that money directly to me."

Guidance & Commitments

Key Metrics