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UGRO reported muted performance in Q1, with AUM growing 2% QoQ (36% YoY) to Rs92bn due to weak disbursements of Rs11.4bn (-26% QoQ/-10% YoY), strategic rundown of its supply chain portfolio, and higher BT outs. The management indicated that overall disbursement was impacted owing to heat waves and elections till mid-May, whereas June disbursement has been good and is expected to cover the Q1 shortfall in Q2, on account of a good start to this quarter. In its investor meet, the management maintained its growth guidance of >35% in the short term and 30% over the medium term. The focus will be on building a more granular book with strong focus on its micro secured loan book. The management aspires to grow its micro secured loan book to 40% in the medium term, which offers higher yield and would support its ambition of delivering 4% ROA on sustainable basis. To incorporate the Q1 developments and the management’s commentary and aspiration, we adjust our FY25-27 estimates. We reiterate our BUY rating with a downward revised TP of Rs390/share (implying FY26E P/B of 1.7x).

Seasonality and rundown of supply chain finance affects Q1 performance

UGRO reported a soft Q1, with PAT of Rs304mn declining ~3% sequentially (~20% YoY growth). The overall growth was impacted on account of: 1) seasonally-weak quarter, 2) low disbursement due to election and heat wave in April and May, 3) conscious decision of running down its supply chain book, and 4) Higher-than-expected BT-out. Despite some softness in Q1FY25, the management is confident of achieving its FY25 guided growth number on the back of improved efficiency and network expansion. The management also highlighted that margins in the quarter were impacted on account of low securitization and co-lending in Q1 (general trend), and it expects the same to increase in the coming quarters. Ugro intends to expand its branch network to ~300 by the end of FY25, which would increase opex, but this expansion comes at a lower cost. The management expects cost-to-income to see improvement on account of improved productivity. Credit cost for the quarter came in at 1.45% on total AUM (2.6% on BS), witnessing sequential improvement of ~43bps. The improvement was led by lower provisioning on its Stage 1 and Stag 2 assets due to a portion of the portfolio being secured under CGTMSE scheme (Exhibit 1).

The management is confident of delivering on its medium-term guidance

In its investor meet, the management maintained its long-term guidance of AUM growth (30% CAGR) and aspired to deliver ROA of 4% by end-FY26, on the back of improved asset mix, expanding distribution reach, and moderating opex. The management plans to increase the share of its higher yield product (Micro secure loan) to 40% in the next 8-10 quarters. Driven by product mix changes and loan-book seasoning, the management expects AUM-level credit cost to rise from the current 1.5% levels, but stay under the 2% mark. On opex, the branch expansion should not have material impact, as the accretion of higher yield assets and lean branch cost setup mean that the cost growth is well in line or below the revenue growth. With the acquisition of ‘MyShubhLife’ and its expanding branch network, UGRO expects to improve its customer acquisition engine and leverage its digital capability for better customer selection.

We adjust our estimates and reiterate BUY on UGRO

To reflect the Q1 developments and the management’s commentary, we have adjusted our FY25-27 estimates. We reiterate our BUY rating on the stock with our revised downwards Jun-25E TP of Rs390/share (from Rs410/share earlier) implying a P/B multiple of 1.7x (Exhibits – 2 and 3).

Investor meet KTA:

* The management informed that its focus is more toward improving profitability, while building a more granular portfolio with expected AUM CAGR of 30% over the medium term.

* UGRO maintains FY25 growth guidance owing to increased branch network and efficiency.

* Branch network to increase to ~300 branches by end-FY25 and company will continue to add micro branches in FY26.

* The management expects to deliver 4% ROA by FY26 on the back of improved profitability and moderating opex.

* AUM mix to see some shift with increasing share of micro secured loans to 40% by FY26, whereas the off-book, on-book mix should reach 50% each.

* Monthly disbursement to reach Rs5-7bn once new branches are added and the old ones reach breakeven.

* Income in the quarter was impacted on account of low DA, securitization, and co-lending.

* The management has consciously slowed down its supply chain finance business and will be focusing on retailer financing, which generates higher yield. Higher GNPA in this segment was on account of an accelerated rundown.

* The management expects margins to increase on account of improving asset mix, moderating CoFs, and opex. It guided for Cost to Income of 45%.

* Credit cost is expected to remain range bound at 2%, and the management indicated that it has a strict policy with regards to concentrated lending – will never take exposure to any client exceeding 1% of its net worth.

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