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Milestone Quarter for the, MSME focused, fastest growing tech led NBFC

Ugro witnessed a milestone quarter as its surpassed 100,000 mn Aum mark with lifetime highest Net Loan Origination of Rs 19,700 millions in current quarter attributable to burgeoning momentum in on-ground presence pan- India. The portfolio yields inches up as the focused segments ie Micro Enterprise and Business Loans witness robust growth during the quarter led by branch expansion. Credit Rating upgrade offers a testimony of a healthier balance sheet. Profitability during the quarter improved as PAT grew 17% QoQ after a dismal Q1FY25. Pat margin grew improved by 29 bps driven by operational leverage. GNPA and NNPA both rose by 20 bps along the expected lines. Journey to 4% exit ROA by FY26 remains on track.

* AUM momentum picks up – After a disappointing Q1, Ugro achieves a milestone quarter in net loan origination compensating for the earlier quarter. The branch addition plan of 104 branches in past 3 quarters and 46 during Q2F25 has driven the AUM beyond Rs100000 mn. Continued focus on high yielding products like micro enterprise loans, now at ~11% of total aum gaining ~300 bps YoY, is likely to improve the overall portfolio yield. The company is aiming to achieve Micro Loans to be at 35% of AUM by FY26. This looks achievable as Ugro plans to add 150 more branches till FY26.

* Operating Leverage at play – The cost to income ratio during the quarter improved to 52.7% improving 320 bps YoY and 135 bps QoQ. This was primarly led by lower other expenses during the quarter on YoY basis compensating for increased depreciation due to increased capex to drive branch expansion. The cost to Income ratio is expected to reach 44% by FY26.

* Asset quality worsens but on expected lines: The GNPA and NNPA on overall AUM rise 20 bps IN Q2FY25 on YoY basis and 10 bps on QoQ basis. GNPA and NNPA inches up to 2.2% and 1.3%. PCR remains flat at 47%. The higher credit cost, which grew 33.6%, was on account of accelerated provisioning and write-offs in supply chain book. Rs 160 million was written of in Q2FY25. Although the management expects to recover this amount in future.

View and Valuation:

After extensive learning on scaling the micro enterprise loan segment, the tech based NBFC is well versed to scale up its loan portfolio in this segment. AUM mix skewness, from 11% to 35%, towards a segment with ROI of 20.8% will drive the portfolio yield even in anticipated falling interest rate cycle. We believe this strategic shift along with lower borrowing cost due to increased negotiating power will drive 200 bps expansion in overall spread. Aided with falling cost to income ratio, Ugro is on track to achieve the 4% RoA mark. We reiterate our Outperform rating and target price of Rs 345 valuing the stock at 1.84x FY26 P/ABV.

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