Ugro Capital Ltd Q3 FY2025 Concall Summary

Key Takeaways

• AUM growth strong, ROA target delayed: AUM hit a record INR 11,067 Crores (32% YoY), but the 4% ROA target is delayed by two to three quarters due to lower volumes from a slower liquidity environment.
• Emerging Market channel is the growth engine: Disbursement in this channel tripled YoY to INR 543 Crores, supported by 74 new branches, and its higher yields are expected to lift overall portfolio yield as its mix increases.
• Co-lending volumes collapsed on regulatory perception: Co-lending disbursements nearly halved QoQ to INR 372 Crores as banks turned cautious on unsecured business loans, a headwind management expects to reverse in the current or next quarter.
• Cost-to-income is rising by design: The ratio inched up as the company invests in branch infrastructure for the Emerging Market channel, a trend management confirmed will continue for a few more quarters.
• What to watch next quarter: Whether co-lending volumes recover as banks restart business loan segments, the pace of Emerging Market AUM build-up versus its rapid repayments, and any early stress signals flowing through to portfolio asset quality.

Growth Engine: The Emerging Market Channel

• Renamed and refocused: The channel, previously called the Micro Branch Network, was renamed to clearly differentiate it from microfinance, a business UGRO does not engage in.
• Explosive disbursement growth: Disbursement grew to INR 543 Crores from INR 180 Crores in the same quarter last year, driven by the addition of 74 new branches, taking the total network to 224 branches across 11 states.
• AUM accrual lags disbursement: Despite INR 543 Crores in disbursement, AUM accrual was only INR 260 Crores because nearly 25% of the September portfolio paid off this quarter, partly due to confusion from the introduction of larger-ticket Sanjeevni loans in these markets.
• Branch economics are on track: A branch with monthly disbursement of INR 1 crore and AUM of INR 5 crore becomes positively ROA accretive; 90 branches added in the last two quarters have not yet reached that mark, but the rest are in positive territory.
• Yield uplift expected: As the Emerging Market portfolio, which carries higher yields, becomes a more significant part of the mix, overall portfolio yield is likely to rise, though competitive pressures on larger-ticket LAP and machinery loans are currently keeping net yields flattish at 16.7%.

Shachindra Nath: "Sir, I can only say that we are constantly trying to explain. We have failed in that to some extent. We will double up on our effort to convince people of what we are doing is best for creation of an institution."

The Co-lending Drag

• Volume halved on perception, not performance: Co-lending disbursement dropped to INR 372 Crores from INR 615 Crores in the previous quarter. The decline was driven by banks becoming cautious on the business loan segment after regulatory tightening around unsecured loans created a negative perception of NBFCs broadly.
• A structural shift, then a freeze: Initially, after a credit guarantee was introduced for business loans, all banks started co-lending and volume moved to them. In the last two quarters, that volume slowed sharply as perception around unsecured lending soured.
• Recovery expected soon: Management expects most banks will restart the business loan segment in the current or ensuing quarter, which should bring back co-lending volume for UGRO.
• Unsecured portfolio is guaranteed: UGRO's unsecured loans are covered under the CGTMSE scheme, ensuring portfolio quality and reducing risk, a point management emphasized to counter perception concerns.

Shachindra Nath: "It's nothing to do with us. We are not in microfinance. We are not in some of the consumption led loan, neither we are in PL, nor we do all of that. But overall, generally, when RBI takes action on NBFC, general perception on NBFC is lower, it impacts every player in the market."

Profitability Roadmap: ROA Delay and Cost Pressures

• ROA target delayed by lower volumes: The 4% ROA target is delayed by two to three quarters relative to where AUM should have been, primarily because slower liquidity environments constrained volumes.
• Cost-to-income rising with infrastructure build: The cost-to-income ratio inched up as the company accelerated branch infrastructure for the Emerging Market channel. Management confirmed this trend is not a one-off and may continue for a few quarters as the footprint expands, with operating expenses expected to stay around current levels.
• Other expenses driven by growth and guarantees: Other expenses rose from INR 38 crore to approximately INR 59 crore, driven by higher disbursement-related costs, CGTMSE guarantee costs (1% of portfolio secured, written off over 12 months), normal 6-7% inflation, and branch expansion.
• Cost of borrowing stuck at 10.68%: The rate remains flat and higher than peers; given the volume of borrowing and RBI's cycling on bank lending to NBFCs, costs have not come down as envisaged. Management believes continued scale and good performance will gradually reduce the rate, albeit at a lower pace.
• Balancing growth and liability cost: Management has built disbursement capacity that is much larger than the liquidity available, but does not want to expand liabilities at expensive cost, preferring to wait for bank financing to NBFCs to revive within a quarter or a little later.

Shachindra Nath: "But the capacity of the disbursement which we have built, if we have to match, our costs of borrowing will shoot up, which we don't want."

Asset Quality: Stable but Early Caution Signals

• Headline metrics stable: GNPA ratio held at 2.1% and net NPA at 1.5%, reflecting disciplined underwriting and proactive risk management.
• Early indicators show bureau stress: From the acquisition engine, a slight increase in machine-driven declines is being seen, primarily because customers' bureaus are getting stressed, showing over-leverage and dipping turnovers. These have not yet reflected in the portfolio and are not expected to, but approval rates will go down a little as a result.
• CGTMSE claims to roll back: Management expects CGTMSE claims to roll back into NPA recovery by next year, though no precise timeline was given.

Product Diversification: Machinery Loans and MyShubhLife

• Machinery loans performing but expansion is measured: Productive asset financing is performing well, with core underwriting based on cash flow analysis through a data analytics platform analyzing GST, banking, and bureau data. The product carries a shorter tenure with reasonable yield at a secured deal level.
• Expansion constrained by design: Expanding volume would require increasing ticket size or reducing the average cost of lending, both of which management does not want to do. The expansion to Emerging Market branches has not been very successful yet, as credit officers who just learned small-ticket LAPs could not immediately graduate to machinery.
• Machinery loan target: Management hopes to reach an average monthly volume of INR 100 Crore by the end of this quarter, and stabilize at INR 150 to INR 175 Crore per month next year, all within the same band of three-and-a-half-year tenure and INR 35 lakh average ticket size with an average yield of around 14%.
• MyShubhLife acquisition progressing: The embedded financing platform's AUM stands at INR 302 Crores as of December 2024, having served over 28,000 customers since the acquisition announcement through partnerships with PhonePe, FINO, Meesho, Airtel, and Mobikwik. More partners are expected to be onboarded this quarter.

Shachindra Nath: "We would like to expand it but not by increasing the ticket size or lowering the yield."

Guidance & Commitments

Key Metrics