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UGRO Capital reported a good set of numbers in Q2FY24, with growth in AUM (+74% YoY/+12% QoQ), Profitability (PAT: Rs289mn, over 14% YoY, and above 5x YoY) and Asset Quality (GS3/NS3: 2.85%/1.52%)—broadly conforming with Company guidance. UGRO’s investments in tech, data and physical infra have delivered strong growth in the ‘on-book’ and ‘off-book’ (colending/co-origination), with reasonable asset quality driving stronger profitability growth, led by operating leverage. Overall, the Q2 results reaffirm our conviction on UGRO Capital’s rising MSME specialist lender stature (refer to our coverage initiation: The rise of an MSME specialist lender). We reiterate our BUY rating on the stock, with unchanged Sep-24E Target Price of Rs425/share (implied FY25E P/BV: 2.1x), which offers ~40% upside.

Strong performance boosts confidence on business model

UGRO’s Q2 performance remained strong, with AUM growing 74% YoY/12% QoQ, led by healthy disbursement of over 20% growth across the products segment, barring Secured prime and Machine loans. Disbursement share of Unsecured product stayed the highest, leading to improvement in NIM. Income from the off-balance-sheet asset saw sequential growth of ~32%, which resulted in NIM+Fee expansion by 99bps QoQ, thus boosting our confidence on UGRO’s strong partnership model of co-lending/co-origination. In terms of cost, opex was slightly elevated due to higher employee costs on account of branch expansion and increasing head-count. Q1 employee cost was low owing to reversal of Rs50mn from provisioning for employee bonus; employee cost in Q2FY24 is the actual normalized employee cost and would track similar levels. UGRO plans adding ~75 branches in the next two quarters, thus expanding presence across MP, UP, AP and its existing locations in the South.

Strong collection infra keeping collection efficiency steady

Collection efficiency for Sep-23 stood at 92% (97%, including overdue), a 1% improvement over Aug-23. Management stresses on its dynamic ‘Early Warning System’, which uses bureau data every quarter for existing and non-disbursed cases, for asserting the PD of disbursed and rejected loans, indicating customers’ leverage level; this hence helps the company take proactive action regarding high-risk customers. Company has a Collections work-force of ~250, with a legal team that takes care of collections. Collection efficiency of the X-bucket stands at 95%.

UGRO Capital is our conviction BUY

Q2 results reaffirm our belief in the UGRO story. 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 clock AUM growth of 3x to ~Rs194bn by FY26E and 54% EPS CAGR over FY24-26E. We reiterate our BUY on the stock, with unchanged Sep-24E TP of Rs425/share (implied FY25E P/BV: 2.1x).

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