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UGRO Capital, a tech-driven NBFC, specializes in lending to the MSME sector, positioning itself strongly in a substantial market. Key factors underpinning its positive outlook include: (1) a significant opportunity in MSME lending; (2) superior productivity metrics, highlighting the scalability of its business model; (3) advanced systems and data analytics that bolster asset quality management; (4) a focus on co-lending and co-origination, which enhances capital efficiency, AUM growth, and profitability; and (5) an upward trajectory in RoA and RoE as high-yield loans gain a larger share and operating leverage improves. UGRO Capital is projected to achieve a CAGR of 41% in AUM and 42% in EPS from FY24-26E, with anticipated RoA and RoE reaching 4.2% and 15.8% by FY26E. The sustained expansion and increased profitability are expected to drive a favorable re-rating of the stock, which currently trades at a meager 1.38x FY26E P/Adjusted BVPS.

* Scalable business model in evolving MSME eco-system: UGRO Capital has built a scalable business model tailored to the evolving MSME ecosystem by leveraging advanced technology and data analytics. Focusing on nine sectors, including tech-based industries, UGRO standardizes data to support large-scale, low-risk underwriting. The model benefits from geographical and product diversity, stress-tested risk controls, and minimal human intervention, aligning management incentives with shareholder interests. This tech-driven approach capitalizes on India’s digitalization, consistently achieving industry-leading productivity metrics like an AUM per branch of ?603 million and an AUM per employee of ?34.3 million as of FY24.

* Robust systems, well-defined policies, and data-driven underwriting provide assurance of asset quality: UGRO Capital combines a Data-Tech approach with traditional methods to maintain its loan portfolio quality. The GRO score, now in its third version, uses banking, bureau, and GST data to assess customers, significantly lowering default rates to almost half of non-GRO-approved cases. Alongside this, UGRO uses traditional inspections to ensure loan integrity. Over the last nine quarters, the 30+ days past due (dpd) rate has remained stable at 4-5%, with Stage 3 assets consistently controlled at 2% over the past five quarters.

* Operating leverage at play as scale builds up: UGRO Capital is poised to enhance its financial metrics significantly through the power of operating leverage as it scales its operations. The company is expected to boost its Return on Assets (RoA) from 2.3% in FY24 to 4.2% by FY26E, driven by a strategic shift towards capital-efficient co-lending and co-origination, which is projected to make up 48% of its portfolio. This growth is anticipated to double UGRO’s AUM to Rs 178.96 billions by FY26E. Despite this rapid AUM expansion, expenses are expected to grow at a slower pace, thanks to frontloaded investments made in earlier years. As a result, the company's C/I ratio is set to decline from 54% in FY24 to 45% in FY26. An improved financial leverage will support RoE growth from 9.9% to 15.6% over the same period.

View and Valuation

* UGRO is a niche tech-based MSME-focused lender with an extensive distribution franchise. The company follows a superior underwriting framework, aided by a strong technology platform. It has delivered superior growth in its business (61.8% CAGR in AUM over FY21-FY24) while maintaining asset quality (GS3 currently at 2.0%). UGRO’s unique multi-pronged distribution channels, viz., 1) traditional branch led, 2) ecosystem led, 3) partnership led, and 4) direct-to-customer models cater to MSMEs across geographies and ticket sizes. It has also partnered with over 45+ Fintechs / smaller NBFCs under co-lending / sourcing arrangements. We believe UGRO is well placed to capture the untapped growth potential in the MSME space. Increasing proportion of its off-book AUM should aid its other income and NIMs. Moreover, branch additions in new states should also support AUM growth, underpinning our robust estimate of 41% CAGR. This should translate into 55%/83% CAGR in NII/ PAT over FY24-FY26E, respectively, with RoA/RoE of ~4.2%/~15.6% by FY26E. Currently, the stock trades at 1.28x FY26E P/BV and 1.37x FY26 P/Adjusted BV. We recommend a OUTPERFORM rating and target price of Rs 345, valuing UGRO at ~1.83x FY26E P/ABV

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