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We had initiated coverage on "UGRO Capital Limited" on October 2021 at Rs. 131.30 with a target price of Rs. 175.5 which got revised from time to time based on the quarterly performance of the Company. We continue our coverage on the Company post its Q3FY23 results and revise our price target to Rs. 280 per share and hereby present the updated research report.

Investment recommendation and rationale

At CMP of Rs. 151.45 the stock is valued at a P/BV of 1.08x (Book Value per share as on 9MFY23 ? Rs. 139.78). We recommend a "Buy" with a target price of Rs. 280 (P/BV multiple of 2x at 9MFY23 Book Value). We believe the Company deserves a premium in valuation due to the following factors:

1) U GRO Capital is DataTech NBFC and pioneer of Lending as a service (L?a?a?S) which is a highly profitable model;

2) Company's business model is well suited to the new age;

3) Specialized lenders like U GRO Capital are better positioned to bridge the MSME Credit gap;

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

5) 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;

6) Evolved to a Data tech Company within 3 years of inception  ? Leading NBFC transition to “Lending as a service”(L?a?a?S) and Faster customer TAT and credit decisioning;

7) The Company's distribution and liability strategies are both powered by proprietary technology modules;

8) U GRO’s distribution model is geared towards catering MSMEs across all geographies and ticket sizes;

9) Well diversified and granular portfolio;

10) Company is backed by Marquee Institutions and lenders. Majority of the Company's shareholding is institutionally owned which instills confidence. The Company's key shareholders include ADV Partners, New Quest (acquired by TPG), PAG, SAMENA Capital;

11) Active lenders: 67 as on December 2022;

12) The Company has developed Data driven proprietary scoring model powered by AI/ML Models  ?  superior underwriting framework ?  GRO 2.0 (combines credit bureau and banking data into one model) and GRO 3.0 (combines credit bureau data, banking data and GST  ? just piloted);

13) Risk management through "Expert Scorecards" for all Sub?sectors;

14) Over period of last five to six quarters, U GRO Capital has become a company which services the need of an SME or MSME customer right from a small Rs. 1?lakh loan to Rs. 5?crores of credit in different format;

15) Credit process enabled by Integrated technology and a paperless, seamless customer onboarding & underwriting process supplemented by physical underwriting;

16) Collection efficiency continues to remain robust;  

17) Company surpassing its guidance of AUM growth and is consistently meeting its targets on different parameters which instills confidence; 18) Good performance in 9MFY23 result with strong outlook for the future and good performance expected in the coming quarters.

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