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Guidance deferred due to macro stress

UGRO Capital reported Q4FY25, with total income and earnings coming in 10.8% and 3.1% below our estimates, respectively. The quarter was supported by the company's highest-ever disbursement, driving higher interest income. AUM stood at Rs120.0bn, up 33% YoY and 8.5% QoQ. Total income at Rs2.3bn grew 14% YoY (6% QoQ), though 11% below our expectations. On the cost front, operating expenses were contained, with the C/I ratio improving to 51.8% (vs. 57.7% in Q3FY25 and 52% in Q4FY24). However, management has guided for a near-term uptick in Opex due to branch expansions in emerging markets. Consequently, operating profit rose 15% YoY and 18.3% QoQ to Rs1.2bn. Credit cost (as % of AUM) remained stable YoY and declined 32bps QoQ to 1.88%. Higher interest income supported net profit growth of 24.1% YoY and 8.1% QoQ to Rs406mn. RoA improved by 60bps QoQ to 2.5%. On the asset quality front, GNPA increased by 20bps QoQ to 2.3%, while NNPA rose 10bps QoQ to 1.6%. Further, at the current price, the stock is trading at an undemanding valuation of 0.7x P/B on 1-year forward basis, making it an attractive investment opportunity. However, we remain mindful of the challenging macroeconomic environment – the management eluded to stress in the unsecured segment, the broader de-rating in valuation multiples across the lending space and higher expansion plans, which would delay its guided 4% ROA target by few quarters. We continue to maintain our P/ABV multiple of 1.25x FY27E to arrive at our target price of Rs319. Maintain BUY.

Highest ever disbursement clocked in a quarter

Ugro reported disbursements of Rs24.4bn, up 56.8% YoY and 16.1% QoQ with high growth registered in Emerging Market (EM) loans (+230%/+23% YoY/QoQ). Other segments of SCF witnessed foreclosures. A diversified product mix and strong growth over the last few quarters supported AUM growth of 33% YoY and 9% QoQ. The management remains committed to maintaining higher share of secured book (including quasi secured) and to bring it to 70% of AUM with increasing mix of high-yields products. The share of off book AUM is likely to move up to 50%. It plans to reach 400 branches by FY26, which would ensure continued growth.

Management commentary

Management aims to enhance CTI ratio and ROA, focusing on asset quality and profitability, with a targeted ROA of 4% in ~1.5 years. Expansion in emerging markets continues, leveraging technology for data analytics and underwriting, and adopting a multi-channel approach. Borrowing costs are expected to decrease as market rates soften. Challenges include short-term disbursement issues due to the CLM1 co-lending model transition, and GNPA in Emerging markets may rise to 3.7-4%. Credit costs may increase with mature portfolios.

Asset quality stable

Ugro witnessed a sequential rise in Stage 2 assets by 50bps to 4.9%. GNPA came in marginally higher at 2.3% vs. 2.1% in Q3FY25. Management expects credit cost to increase over the next few quarters and settle ~2% (of AUM) on a steady-state basis as the book seasons.

Valuations

We remain mindful of the challenging macroeconomic environment – management eluded to stress in unsecured segment, the broader derating in valuation multiples across the lending space and higher expansion plans of the company which would delay its guided 4% ROA targets by few quarters. Considering these factors, we continue to maintain our P/ABV multiple of 1.25x FY27E to arrive at our target price of Rs319. Maintain BUY.

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