Buy UGRO Capital Ltd For the Target Rs.254 by Choice Broking Ltd
The elusive quest for 4% RoA extends past Q4FY26, with clarity due in 2–3 quarters.
UGRO reported mixed operational performance in Q3FY25. Despite a 23.5% QoQ growth in its focused segment, net yield failed to move up. Cost to income ratio jumped by 399 bps in Q3FY25. The NBFC reported:
* Q3FY25 AUM at INR1,10,670Mn (vs CEBPL est. INR1,13,221Mn), was up 32.3% YoY and up 8.9% QoQ. 74 branches were added in 9MFY25.
* NII reported at INR871Mn, (vs CEBPL est. INR983Mn) was up 31.8% YoY and up 34.3% QoQ. Interest income from off-book AUM was INR 1036Mn, up 35.6% YoY but plunged 5.4% QoQ
* PAT for Q3FY25 reported at INR375Mn (vs CEBPL est. INR457Mn) was up 15.3% YoY and 5.5% QoQ. ROA inched downwards by 10 bps to 1.9% .
Branch addition approach driving calibrated AUM growth: UGRO achieved a calibrated 32.3% AUM growth on a YoY basis in Q3FY25 as the rebranded “Emerging Market LAP” segment grew 88.9% YoY representing 12% of the AUM mix. Management expects it to reach ~34% in next 7-8 quarters. AUM per branch declined from INR 804Mn to INR 494Mn. We expect it to decline further over next 4-5 quarters as UGRO is adding branches aggressively. Post this, AUM will shoot up as branches achieve maturity in 18 months. However, 30% long term growth with 18% ROE is only sustainable if share prices rises in tandem because “if” capital appreciation does not happen we expect that warrants issued of INR 10380Mn will expire worth less then UGRO will have to resort to new capital issue. The current average liquidity is so low that issue price of INR 264 will fail to provide any significant support.
New Product Segment launched: Thanks to acquisition of Mysubhlife, UGRO disbursed INR 3350Mn loans in Q3FY25. These loans are short duration with maturity less than a year and are repaid on daily basis. This is a 16% ROI generating product for the company with ATS of INR 100 thousand.
Headwinds in Co-lending Space: Management highlighted challenges in co-lending, including banks' discomfort with unsecured loans, regulatory scrutiny, and misperceptions of MSME loans. Despite these, management believes co-lending remains viable. Growth of Offbook AUM is of paramount importance in 4% RoA journey.
The ROA squeeze: Higher CI ratio outweighs promised efficiency gains: Higher C/I ratio of 55% is expected in FY25 and similar level in FY26. Earlier management’s roadmap to 4% RoA attributed 50bps boost from operating leverage but we estimate that RoA will rather take a 60 bps hit due to increased costs.
View and Valuation: We revise our FY25/26 ABVPS estimates by -3.1%/-6.9% and reiterate the ‘BUY’ rating with a revised TP of INR 254, valuing it at 1.45x FY26 P/ABVPS. While some medium to short term headwinds persist, the long term growth story remains intact. We strongly believe that UGRO's asset light model and calibrated AUM growth approach will continue to create value for its shareholders in long run.
For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer
SEBI Registration no.: INZ 000160131
