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Strong AUM growth, led by micro branch addition; higher credit cost hurt profitability

Ugro reported a satisfactory performance in Q2FY25, where it delivered a strong performance in terms of highest-ever net disbursement of Rs19.7bn (+34% YoY; +71% QoQ) and AUM reaching Rs101.6bn (+34% YoY; +10% QoQ). The momentum on fund mobilization and co-lending/direct assignment was strong in the quarter, leading to strong growth in Assignment income. Additional write-off in the rundown supply chain finance book led to a surge in credit cost for the quarter, affecting profitability. Overall, the company is on the right track to deliver sustained strong growth with better profitability driven by operating leverage and improvement in funding cost. To reflect Q2FY25 developments, we have adjusted our FY25-27 estimates leading to ~6-10% cut in FY25-27 EPS. We reiterate our BUY rating on the stock with revised Sep-25E TP of Rs360 (earlier Rs390), implying FY26E P/BV of 1.6x.

Bounce back in AUM growth; accelerated write-off hurt profitability

Ugro delivered a strong bounce back in disbursements and AUM growth in Q2FY25 after a muted show in Q1. The company saw its disbursements in Q2FY25 growing 71% QoQ and 34% YoY to Rs19.7bn, supported by a strong addition of 46 micro branches in the quarter, taking the total count to 210. The strong disbursements resulted in a robust 34% YoY and 10% QoQ growth in AUM to Rs101.7bn. Driven by excellent co-lending/DA performance, the NIM+Fee yield was strong in the quarter; however, led by additional write-off of Rs160mn and the increased credit cost at Rs443mn (1.83% of AUM annualized), the PAT growth at 23% YoY was slightly muted. On the liability side, the company mobilized Rs11bn in the quarter.

Progressing well on its long-term ambition

After the issuance of Compulsorily Convertible Debentures (CCD) and Warrants during the previous quarter, the company has well-addressed the need of equity capital for its growth ambition over the next few years. With its AuM crossing Rs100bn and the offbook loans reaching Rs45bn (co-lending: Rs22bn), the company is already among the leading MSME focused lenders and a key originator in the Co-lending/Co-origination area. Notwithstanding some short-term issues, the company has made good progress toward its long-term ambition to deliver sustainable growth and ~4% RoA. The progress is also endorsed by credit rating upgrades in FY24/25 by multiple rating agencies, funding by development financial institutions, and the diversified borrowing and partnership with a large number of lenders. With its sharpened focus on the Micro Enterprise segment, the company is adding branches at an accelerated pace, and with seasoning of its loan book the co-lending partnerships are expanding and scope of products with existing co-lending partners is also increasing. Going ahead, the improving operating expense ratio and reducing cost of borrowing should help the company in improving its RoA gradually. The credit cost continues to broadly track as per the management’s expectations and is likely to stay stable.

Adjust estimates to reflect Q2 developments; reiterate BUY

To reflect Q2 developments and external developments, we have adjusted our estimates leading to ~6-10% cut in FY25-27 EPS. The cut in earnings are on account of our reduced assumption of Co-lending/Co-origination spreads and slight increase in credit cost. We maintain our BUY rating on the stock with revised Sep-25E TP of Rs360 (vs Rs390 earlier), implying FY26E P/B of 1.6x. As the growth momentum continues, Ugro is on the right track to gradually deliver ~4% RoA in the next 2-3 years as the operating leverage and improving cost of funds boost profitability. After the recent underperformance, Ugro shares are valued attractively at FY26E P/B of 1.1x.

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