Keynote On UGRO Capital

Keynote maintains our view on UGRO Capital Ltd. with a BUY rating with a target price of Rs. 197, valuing it at 1.2x FY24E BV.

In Q3 FY23, UGRO Capital Limited reported a staggering 81%/15% YoY/QoQ growth in interest income, as well as a 587%/51% YoY/QoQ increase in colending income. Over the past year, the assets under management have grown by 97% to 51Bn from 26Bn. Rising yield with constant cost of borrowing and falling cost to income coupled with its unique business model UGRO Capital is poised to capture the secular trend of growth in Indian MSME.

Strong set of Fundamentals: In Q3 FY23, the Company’s major KPIs, including AUM growth, profitability, asset quality, and branch growth, showed significant improvement. AUM grew to 51Bn achieving a QoQ growth of ~16% and a YoY growth of ~97%. Off-book AUM reached 35% of Total AUM increasing from 29% in Q2 FY23. PBT saw a sharp rise of 27% QoQ and 338% YoY (from Rs. 176Mn to 222Mn QoQ and Rs.~51Mn to ~222Mn YoY). PAT reached Rs. ~131Mn, representing a growth of 287% YoY and 149% QoQ. Additionally, on a YoY basis, Prime and Micro branches grew from 14 and 68 to 23 and 75 respectively with a number of customers rising to 38,000 from 32,000 on a QoQ basis.

Stellar Portfolio Performance: In Q3 FY23, collection efficiencies averaged at 94% (excluding overdue); and GNPA/NNPA stood at 1.7%/1.1% as opposed to 2.4%/2% in Q3FY22. Furthermore, the company demonstrated strong performance in terms of product mix, regional distribution, and sector exposure, with an increase in all types of loans both in absolute terms and in terms of ROI. The ROE/ROA in

Q3FY23 were 5.5%/1.4% respectively as opposed to 2.2%/0.6% in Q2 (post adjustment for DTA). The cost of borrowing (debt-equity ratio being 2.98x) has also stayed constant at ~10.5% since Q1 FY23 whereas the portfolio yield has increased from 16.7% in Q1 FY23 to 17.4% in Q3 FY23.

Huge Industry Opportunity: The MSME sector presents a vast opportunity for growth due to the current under-penetration of credit, caused by hindrances such as the lack of data, robust technology to analyse and predict heterogeneous borrower behaviour, high turnaround time, and the difficulties in assessing the ability and intent to repay based on irregular cash flows and/or a lack of collateral. However, these challenges can now be overcome through the of advanced data analytics-driven assessment and underwriting capabilities of UGRO Capital.

View & Valuation: Given its cutting-edge and data-driven model, along with positive and improving financial metrics, and the expertise of its experienced management team, we believe that UGRO Capital is well-positioned to seize upon the significant growth opportunity in the MSME Lending sector. We maintain our view on UGRO Capital Ltd. with a BUY rating with a target price of Rs. 197, valuing it at 1.2x FY24E BV.