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UGRO Capital reported strong operating performance with total income, operating profit and earnings 5.7%, 7.1% and 4.9% ahead of our estimates. The beat was driven by higher other income (FV gain on derecognition of Financial Instruments) and opex control. AUM as on 3QFY24 stood at Rs83.6bn, up 64% YoY and 10% QoQ (2-yr CAGR at 80%). Total Income at Rs1.6bn, was up 51% YoY and 10% QoQ, lower than AUM growth as the portfolio yields (reported) declined by 100bps YoY to 16.3%. However, this was compensated by controlled opex (C/I ratio at 53% in 3QFY24 as against 64% in 3QFY23) resulting in strong operating profit at Rs 761mn (up 96% YoY and 16% QoQ). Credit costs (on AUM) inched up marginally by 8bps YoY and 12bps QoQ to 1.49% with the seasoning of portfolio. However, strong operating profit translated into handsome earnings of Rs 325mn (up 88% YoY and 13% QoQ). RoA for the quarter stood at 2.4%, up 10bps QoQ. GNPA increased 30bps YoY and 10bps QoQ to 2% while net NPA remained stable at 1.1%. We build in AUM/PPOP/PAT CAGR at 47%/74%/103% over FY23-26E and RoA/RoE of 3.6%/14.4% for FY26E. The stock is currently trading at 1.5x/1.3x FY25E/26E P/ABV. Given the strong AUM growth and RoA profile, we value UGRO at 2x 1HFY26E P/ABV to arrive at our Target Price of Rs395. Maintain Buy.

Diversified product mix supports strong AUM growth

Ugro reported disbursements of Rs 15.5bn, up 33% YoY and 5% QoQ with strong growth registered in Prime Unsecured (up 13% QoQ), Machinery Loans (up 35% QoQ) and Partnership & Alliances (up 25% QoQ). Other segments of Prime-Secured (affordable LAP discontinued), Supply Chain Finance (SCF) (building granular portfolio) and Micro Enterprise loans (MEL) (discontinued unsecured) registered a sequential decline of 20%, 39% and 4%, respectively. Diversified product mix and strong growth over last many quarters supported AUM growth of 64% YoY and 10% QoQ. Management remains committed to maintain share of secured book (incl quasi secured) at 70% with mix of high yields products moving up. Share of off book AUM is likely to move up beyond 50% as share of co-lending increases (45% in 3QFY24). It plans to add 75 Micro branches in 2 quarters (30 by March’24)

Growth in operating profit impressive

Operating profit increased 96% YoY and 16% QoQ led by (1) strong AUM growth and (2) opex control (up 25% YoY and 4% QoQ), which was marginally negated by NIMs compression. NIMs (calc, incl gain on derecognition of FI) on AUM declined 16bps QoQ to 7.1% as yields declined while CoB broadly remained stable. Portfolio yields (reported) improved by 10bps QoQ to 16.3%. Management guided for 70bps-100bps improvement in yields over the next one year as the share of high yield book increases. CoB is likely to go up marginally as MCLR rates for bank lending (~43% of borrowings mix) has gone up.

Asset Quality continues to remain resilient

Seasoning of portfolio led to 10bps QoQ increase in GNPA to 2% and 12bps QoQ increase in credit costs (on AUM) to 1.5%. Management expects credit costs to increase over next few quarters and settle below 2% (of AUM) on a steady state basis as book seasons.

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