Ugro Capital Ltd Q2 FY2025 Concall Summary

Key Takeaways

• INR10,000 crore milestone reached: The pure-play MSME lender hit this mark in an effective 3.5-year operative journey, a milestone management calls a matter of great satisfaction.
• Micro enterprise pivot is now templated: Volume doubled QoQ to INR456 crores as the learning curve on the first 75 branches ended; the path to 400 branches and a 30% AUM mix is now a repeatable playbook.
• Asset quality is diverging from retail credit stress: Management argues MSME lending has no correlation to the over-leveraging seen in microfinance or consumer finance, and the portfolio is behaving as expected with Stage 1 assets improving to ~94%.
• On-book GNPA is optically inflated: Co-origination FLDG mechanics pull only bad loans back on-book while good assets stay with partners, making reported GNPA look worse than the underlying risk.
• What to watch next quarter: Whether the 150 bps yield uplift from product mix shift starts to materialize, the pace of micro enterprise branch additions toward the 250 year-end target, and any further supply chain stress beyond the INR16 crore write-off already taken.

The Micro Enterprise Engine

• Volume doubled in one quarter: Micro enterprise channel grew from INR209 crores to INR456 crores, driven by the branch network reaching critical mass where the learning curve is over and expansion is now a templated exercise.
• Branch rollout is locked in: 210 branches today, another 50 coming this year, 150 next year, targeting 400 total micro enterprise branches in six quarters. The data analytics center has already identified the best 400 clusters from 3,000+ PIN codes analyzed.
• Yield uplift from mix shift: The pivot toward micro enterprises, which carry medium ticket sizes of INR35–45 lakh at much higher yields than the intermediated prime channel, is expected to add 150 basis points of incremental portfolio yield.
• Prime secured goes static: The ~INR150 crore monthly volume in prime secured business (average ticket ~INR70 lakh) will remain flat or grow only marginally to INR200 crores; all incremental growth comes from micro enterprises.
• Newer states are still building: Andhra Pradesh and Madhya Pradesh branches are newer and AUM is merely 2% per state, compared to the mature Tamil Nadu, Telangana, Karnataka, Rajasthan and Gujarat clusters where the first 75 branches were placed.

Shachindra Nath: "The learning curve of our first 25 branches, then the second 50 branches is more or less over. Now it is a templated exercise. We know the 400 geographies where we have to expand, we know how to hire and train our teams, and we know that how in shorter period of time, we can become profitable, and that is coming in play."

Asset Quality: Stress Contained, Supply Chain Wound Down

• Portfolio is stable where it matters: Stage 1 assets improved to close to 94%, and GNPA decreased in secured business loans and machinery loans. The uptick came only in business unsecured loans, micro enterprises, and supply chain finance.
• Supply chain finance is being euthanized: The vendor finance book has been winding down for about a year because the business did not make commercial sense at an unaffordable yield, leading to adverse customer selection. An INR16 crore write-off was taken this quarter for one large chunky account, peak NPA reached INR52 crores, and management says no further stress is anticipated.
• Micro enterprise delinquencies peak late: Peak delinquencies in micro enterprises happen at 18–24 months, and with secured loans, repossession takes 5–6 months to sell property. GNPA currently sits at 3.8% and management says success is already being seen.
• Repossessions are small but will grow: Life-to-date, roughly 100 properties have been repossessed out of INR4,000–5,000 crores of disbursements. In micro enterprises specifically, repossessions are very small currently but management anticipates much more in the coming year as the book seasons.
• Credit cost is inching toward 2%: First-half credit cost ran at 1.6%, well below the model's steady-state expectation. Management expects credit costs to peak and stabilize at around 2% or slightly less by the end of next year.
• One ARC sale, no haircut: INR50 crores of loans, a combination of business loans unsecured and supply chain, were sold to an ARC in an all-cash deal with no haircut taken. No further such transactions are planned.

Anuj Pandey: "The on-book GNPA looks artificially higher at this point in time because for the co-origination part of off-book, where we have given FLDG. Whenever the loan goes bad and the FLDG is applied, it comes back on our book. So the good part remains with the partner, only the bad part comes in and hence, the on-book GNPA looks higher."

The MSME vs Retail Credit Divergence

• Stress is not contagious across segments: Management draws a bright line between the over-leveraging and distribution-based lending that caused stress in microfinance and consumer finance, and UGRO's model of assessing repayment capability for small business owners in Tier 2/3 towns.
• Competitive pressure is channel-specific: In intermediated prime channels, customers who perform well tend to migrate to lower-yielding lenders. In the self-originated, direct micro lease channel, pressures on foreclosures and balance transfers are significantly lower.
• Rating upgrade reflects liability confidence: The upgrade to A+ stable long-term and A1 short-term rating came alongside the highest-ever liability funnel, with every bank, financial institution and DFI expanding liability lines to UGRO.
• Stock price disconnect from fundamentals: Management attributes the stock's underperformance to broader market narratives around RBI commentary on retail credit ballooning, bank lending to NBFCs, and periodic episodes of NBFCs getting banned, rather than company-specific issues.

Shachindra Nath: "What you are seeing in microfinance industry, the consumer finance and what we call the retail credit industry, that actually does not have any direct correlation to NBFC, which are focused on MSME financing, predominantly because the consumer financing, microfinance industry, the challenge has been very small ticket in microfinance industry, what I read from public market commentary, it is largely the over-leveraging of customers, which means that there is -- you do not assess the repayment capability and it becomes eventually a distribution business, so as in the consumer financing or any retail product."

Co-lending & Liability Structure

• Co-lending hit a record: Highest-ever co-lending volume of INR650-odd crores this quarter, with the mix deliberately shifting: co-origination with NBFCs is reducing, co-lending with banks and direct assignment is increasing.
• Off-book target is 50%: Currently at 44–45% off-book, management expects to reach 50% as the core hypothesis plays out. Co-lending and DA income should grow in the same ratio as AUM or slightly more.
• Co-origination with banks will take time: Banks have started taking business loans under the credit guarantee scheme on co-lending, but management says it remains a difficult proposition and may take another 12 to 18 months before banks are fully comfortable doing co-origination with NBFCs.
• Partner concentration is being managed: Over the next few quarters, no single bank or NBFC will account for more than 25% of total co-lending volume.
• DFC deal brings patient capital: A \$40 million deal with DFC was announced, with 70% of the borrowing committed toward women entrepreneurs and active participation in aspirational districts.
• Cost of funds has not yet turned: Management has not seen any reduction on the liability side yet and expects to wait another 2 to 3 quarters before seeing benefit. Overall, 75 bps of rate reduction is projected over the next 6–10 quarters, with cost of funds possibly rising another ~5 bps for the next 2–3 months before settling down.

Income Mechanics & Accounting Nuances

• Interest income compression is structural, not a warning: Sequential interest income declined despite AUM growth because higher DA and co-lending income naturally reduces balance sheet interest income, and an RBI circular in May on cheque clearance timing caused compression for the entire first half.
• Co-lending income is NPV-based, not EIR: Post-2017 Ind AS migration requires NBFCs to account for DA and co-lending income on an NPV basis, recognizing lifetime income upfront rather than spreading it over the life of the loan. This creates a timing difference in reported income.
• Co-origination income sits in interest income: The differential interest spread (e.g., loan at 15%, partner at 11%, 4% differential retained by UGRO) is accounted as interest income throughout the life cycle of the loan, distinct from co-lending and direct assignment income treatment.
• Partnership ROI is 15% net: UGRO's net revenue from partnership and alliance arrangements is 15%, with end-customer rates offered by the partner and the business backed by a first-loss guarantee.

Profitability Path & Operating Leverage

• Cost-to-income improved despite branch build-out: The ratio improved to 53% even after opening 46 micro branches this quarter and almost 100 branches this year. New branches take time to deliver operating metrics, so further leverage is expected as the maturity curve of another 8 to 9 months kicks in.
• Profit growth lagged AUM growth for a known reason: AUM grew ~30% but profits grew 22%, largely on account of credit costs inching toward the model's 2% steady-state. This quarter's credit cost was 1.8%.
• ROA bridge is directional, not quarterly: The target of 4% ROA on a steady-state basis as UGRO exits FY26 is described as aspirational, a number management sets for itself and gives to the Board. The bridge from March 2024's 2.3% to 4% is directional, with sequential delivery expected every quarter.
• Leverage can expand with capital: Management aspires to 5x leverage in the next 12–18 months as capital comes in.
• H2 profit trajectory is healthy: While management declined to give a specific number, they stated the first two quarters show a very healthy run rate versus the previous year and total profitability for this year will be significantly higher.

Shachindra Nath: "The reason why we give that kind of a number because to some extent, it is a state of aspiration which we want to set for ourselves, and that's why we always like to what we give it to our Board, is what we want to give to the market."

Guidance & Commitments

Key Metrics