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Investment Rationale and recommendation

We recommend a "Buy" with a target price of INR 361.75 (P/BV multiple of 2.50 x at Q1FY24 Book Value of INR 144.7 (post QIP and Preferential issue). We believe the Company deserves a premium in valuation due to the following factors:

UGRO Capital is DataTech driven NBFC and pioneer of Lending as a service (L-a-a-S) which is a highly profitable model;

2) Emerged as one of the fastest-growing and one of the largest Lending-as-a-Service providers in the MSME co-lending space where its total off-book AUM proportion is 43% and on book AUM proportion is 57%.

3) Underwriting in MSME space is moving from collateral based to cashflow based in which UGRO specialises;

4) The Company has a sectoral based lending approach by short listing 8 core sectors of MSMEs and further added 'Micro Enterprises' as the 9th sector post careful filtration of 180+ sectors;

5) The Company has developed Data driven proprietary scoring model powered by AI/ML Models - superior underwriting framework - GRO 3.0 (combines credit bureau data, banking data and GST); Risk management through "Expert Scorecards" for all Sub-sectors;

6) Credit process enabled by Integrated technology and a paperless, seamless customer on boarding & underwriting process supplemented by physical underwriting;

7) The Company's distribution and liability strategies are both powered by proprietary technology modules; U GRO’s distribution model is geared towards catering MSMEs across all geographies and ticket sizes with well diversified and granular portfolio;

8) The Company is backed by Marquee Institutions. Majority of the Company's shareholding is institutionally owned and its key shareholders include ADV Partners, New Quest (acquired by TPG), PAG, SAMENA Capital, SBI Life Insurance Company, Go Digit General Insurance, PNB Metlife India Insurance Company;

9) The Company's has raised equity capital of INR 340.5 Crore in April 2023 - Private Placement Offering of INR 240 Crore to IFU Investeringsfonden for Udviklingslande (IFU) - Danish Development Finance Institution (independent Denmark government - owned fund) and QIP of INR 100.5 Crore from marquee domestic investors like SBI Life Insurance Company, Go Digit General Insurance, SBI General Insurance and other marquee investors instills confidence on the Company;

10) Collection efficiency continues to remain robust and restructured loans too have decreased to 0.8% of Total AUM as on Q1FY24 from 1.1 % of Total AUM as on Q1FY23;

11) Company surpassing its guidance of AUM growth and is consistently meeting its targets on different parameters which instills confidence;

12) Good performance in Q1FY24 and FY23 result with strong outlook for the future (Management guidance: AUM target of INR 10,000 Crore for FY24, Loan growth of around 30 percent by FY25, Cost/Income ratio ~4 percent and RoE of ~>18% by FY25).

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