IGI Logo

We initiate coverage on UGRO Capital with a BUY recommendation and target price of Rs425/share (implied FY25E P/BV: 2.1x), offering 47% upside. UGRO’s relative obscurity is mainly due to its private equity business model—techenabled, talent-intensive and frontloaded cost structure—designed to support scale while minimizing risk. Our conviction about UGRO’s strategy rests on 3 pillars: i) MSME-focused lending with large TAM. ii) Business model optimized for sectors, with stress on data homogeneity and underwriting tech models for six sigma events like GST/pandemic. iii) Its unique asset underwriting skills that can be symbiotically exploited to co-lend/co-originate with PSBs/others, which otherwise incur high credit cost on priority lending. UGRO would grow AUM by 3x to ~Rs194bn by FY26E and log 54% EPS CAGR over FY24-26E. With scale, the UGRO stock is set to pole-vault to a core portfolio holding, given its distinctive business model that has a long growth runway.

Business model aligned around evolving eco-system and scale: In our view, UGRO is more tech-loaded than most fintechs. Within MSMEs, UGRO has segregated a few sectors (and within that, tech-based sectors) to homogenize data that can support scale underwriting with low risk. Geographical & product diversity, board structure and even the AoA mandate hard-coding risk aversion and aligning Management incentives with minority shareholders. The underwriting tech model has been stress-tested for severe macro-economic dislocations. Notably, this model simply capitalizes on favorable ecosystems of digitalization and regulatory frame-work – hitherto absent. The model’s validity and light human intervention consistently reflect in: i) delinquencies confirming the expected co-relation with GRO Scores across buckets; and ii) delinquencies in the rejected portfolio being persistently higher than in those (i.e. customers) on-boarded.

Co-lending with business partners mutually beneficial; offers a big opportunity: Co-lending/co-origination or off-balance sheet (BS) book are clearly capital-efficient for UGRO — especially for the high-rated secured prime book. This though tucks in very well even with PSU banks/smaller private banks, which run persistently higher delinquencies on their priority book. For AAA NBFCs, which can get explicit FLGD guarantees, coorigination is a secure way of diversifying growth profitably.

Strong AUM growth-led operating leverage to power 5.8ppts expansion in RoE and 54% EPS CAGR over FY24-26E

UGRO’s approach of growing with a mix of on-book & off-book (Co-lending/Coorigination) allows it to compete in various yield spectrums in its target sector by offering medium-yield loans under off-book arrangements and high-yielding segments on its own book. With its large data, technology and credit team in place, the company will grow its total AUM by ~3x over FY23-26E to ~Rs194bn, achieving its targeted 50:50 on-book:offbook mix. This strong AUM growth will drive down the cost-to-income and cost-to-total AUM to 44% and 3.2% by FY26E from 63% and 5.4% in FY23, respectively. This will drive RoE expansion of 5.8ppts to 15.2% and EPS CAGR of 54% over FY24-26E.

We initiate coverage on UGRO with a BUY and Sep-24E TP of Rs425/sh

We initiate coverage on UGRO Capital with a BUY recommendation and Sep-24E target price of Rs425/share, implying FY25E P/B of 2.1x. We build-in equity raise of Rs5bn in FY24E, to enable stronger loan-book growth along with maintaining low leverage, for lenders’ satisfaction.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf &

SEBI Registration number is INH000000354