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BUY UGRO Capital
The rise of an MSME specialist lender
BFSI - NBFCs  Initiating Coverage  October 23, 2023 TARGET PRICE (Rs) : 425

We initiate coverage on UGRO Capital with a BUY recommendation and target Target Price – 12M Sep-24
price of Rs425/share (implied FY25E P/BV: 2.1x), offering 47% upside. UGRO’s Change in TP (%) NA
relative obscurity is mainly due to its private equity business model—tech- Current Reco. BUY
enabled, talent-intensive and frontloaded cost structure—designed to support
Previous Reco. NA
scale while minimizing risk. Our conviction about UGRO’s strategy rests on 3
Upside/(Downside) (%) 47.4
pillars: i) MSME-focused lending with large TAM. ii) Business model optimized
for sectors, with stress on data homogeneity and underwriting tech models for CMP (20-Oct-23) (Rs) 288.4
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,
Stock Data Ticker
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 52-week High (Rs) 320
scale, the UGRO stock is set to pole-vault to a core portfolio holding, given its 52-week Low (Rs) 131
distinctive business model that has a long growth runway. Shares outstanding (mn) 92.5
Market-cap (Rs bn) 27
UGRO Capital: Financial Snapshot (Standalone) Market-cap (USD mn) 321
Y/E Mar (Rs mn) FY22 FY23 FY24E FY25E FY26E Net-debt, FY24E (Rs mn) 560

Net profits 146 398 1,319 2,683 3,671 ADTV-3M (mn shares) 1

AUM growths (%) 125.4 104.8 55.1 50.7 36.8 ADTV-3M (Rs mn) 148.9

NII growths (%) 30.2 40.7 85.4 47.6 33.7 ADTV-3M (USD mn) 1.8
NIMs (%) 9.2 12.5 13.6 14.9 14.2 Free float (%) -

PPOP growth (%) 56.2 183.6 104.7 71.4 34.8 Nifty-50 19,543

Adj. EPS (Rs) 2.1 5.7 14.4 24.9 34.0 INR/USD 83.1

Adj. EPS growth (%) (49.4) 176.2 153.8 72.3 36.8 Shareholding, Jun-23
Adj. BV (INR) 137.0 142.0 181.4 206.3 240.3 Promoters (%) 2.2
Adj. BVPS growth FPIs/MFs (%)
1.4 3.6 27.8 13.7 16.5 22.0/5.5
(%)
RoA (%) 0.6 1.1 2.6 4.0 4.0
RoE (%) 1.5 4.1 9.4 12.8 15.2 Price Performance
P/E (x) 140.0 50.7 20.0 11.6 8.5
(%) 1M 3M 12M
P/ABV (x) 2.1 2.0 1.6 1.4 1.2
Absolute (2.8) 10.8 65.5
Source: Company, Emkay Research Rel. to Nifty (1.0) 13.2 48.8

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 1-Year share price trend (Rs)
sectors (and within that, tech-based sectors) to homogenize data that can support scale 325 70
Rs %
underwriting with low risk. Geographical & product diversity, board structure and even
the AoA mandate hard-coding risk aversion and aligning Management incentives with 280 50
minority shareholders. The underwriting tech model has been stress-tested for severe
235 30
macro-economic dislocations. Notably, this model simply capitalizes on favorable eco-
systems of digitalization and regulatory frame-work – hitherto absent. The model’s 190 10
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 145 -10

rejected portfolio being persistently higher than in those (i.e. customers) on-boarded. 100 -30
Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23
Co-lending with business partners mutually beneficial; offers a big opportunity: UGRO IN EQUITY (LHS) Rel to Nifty (RHS)
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, co-
origination 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
Avinash Singh
UGRO’s approach of growing with a mix of on-book & off-book (Co-lending/Co-
avinash.singh@emkayglobal.com
origination) allows it to compete in various yield spectrums in its target sector by offering +91 22 6612 1327
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 Kishan Rungta
total AUM by ~3x over FY23-26E to ~Rs194bn, achieving its targeted 50:50 on-book:off- kishan.rungta@emkayglobal.com
book mix. This strong AUM growth will drive down the cost-to-income and cost-to-total +91 22 6624 2490
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. Mahek Shah
mahek.shah@emkayglobal.com
We initiate coverage on UGRO with a BUY and Sep-24E TP of Rs425/sh
+91 22 6612 1218
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.

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on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or
Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Investment Thesis
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. Our conviction
about UGRO’s business model and investment thesis is underpinned by three key
factors that reinforce each other geometrically, thus solidifying the MOAT.

 Right Approach at the Right Time: In our view, UGRO is more tech-loaded than most
fintechs. Within MSMEs, UGRO has super-focused on sectors/sub-sectors, and within that
on tech, to homogenize data that can support scale underwriting with minimum risk and less
human intervention. Further, geographical and product diversity, board structure and even
the AoA mandate have hard-coded risk aversion. This model simply capitalizes on enabling
eco-systems (GST, CIBIL, Banking data, AA access, E KYC), while the tech models are now
stress-tested for severe dislocations like demonetization, GST implementation and the
pandemic – i.e. at the right time. Finally, regulatory support for financial inclusion and the
massive credit gap within MSME are massive tailwinds – i.e. in the right place.

 Enough system and processes in place that give comfort on asset quality: UGRO’s
AUM growth looks optically high and needs to be adjusted for a small base and a fairly small
pie of the total addressable market (TAM). Secondly, the kick off in growth FY21 onwards
comes after a period of hibernation since FY18, during which focus was on building the team
and process, and perfecting the tech model. High growth is thus an outcome of skilled
underwriting and not the lack of it. UGRO’s target segment (MSME) is at the heart of its
business model and, hence, focuses equally on disbursements and collections, data-tech
driven underwriting and Early Warning Systems (EWS) capably supported by physical due
diligence and collection efforts. This holistic approach is underscored by the fact that
delinquencies in the rejected portfolio are higher than in the sanctioned one, and in both
categories, delinquencies show good correlation with the GRO Score.

 Co-lending, a mutually beneficial business model for the originator NBFC and the
co-lender bank: Co-lending and Co-origination as a business model, while evidently
capital-efficient for UGRO, is equally attractive for banks. We dwell on long-term credit
experience of the cohort of banks in SME financing and argue that partnering will be a more
profitable outcome for such priority lending, especially for public sector banks and smaller
private banks.

 Operating leverage on the back of superior AUM growth, coupled with stable credit
cost, to drive 54% EPS CAGR over FY24-26E: UGRO’s business model has been built
around scale and, as the AUM growth momentum endures on the back of increasing
productivity of the existing ~100 branches, addition of ~100 micro branches over the next
2 years and acceleration in the pace of Co-Lending/Co-origination disbursements will result
in 47% total AUM CAGR over FY23-26E to Rs194bn. This will lead to cost-to-income
enhancing to 44% in FY26E from 63% in FY23. A stable credit cost of ~2% of on-BS AUM
along with sharply falling operating cost will drive the RoA improvement to 4% by FY26E
from 1.1% in FY23. This will result in EPS CAGR of 54% over FY24-26E.

 We initiate coverage on UGRO Capital with a BUY recommendation, with Sep-24E

TP of Rs425/share (FY25E P/B: 2.1x): On the back of the structural story in MSME
lending and the compelling argument for UGRO’s potential success in this space, we initiate
coverage on UGRO Capital with a BUY and Sep-24E target price of Rs425/share (FY25E P/B:
2.1x), implying an upside of 47%. The unrelenting successful execution of UGRO’s strategy
and its sustained earning momentum, coupled with gradual re-rating, should drive strong
returns in UGRO shares.

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October 23, 2023 |3
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 1: SWOT analysis

Source: Company, Emkay Research

Exhibit 2: UGRO’s valuation metrics appear attractive versus peers

CMP TP Mkt Cap P/BV(x) P/E(x) RoE (%) FY24-26E CAGR (%)
Rating
Companies (Rs) (Rs) (Rs bn) FY24E FY25E FY24E FY25E FY24E FY25E BVPS EPS
UGRO Capital 288 BUY 425 26.7 1.6x 1.4x 20.0x 11.6x 9.4 12.8 15.1 53.5
Five-Star Business Finance 755 NR NA 220.5 4.3x 3.6x 28.5x 22.1x 16.3 17.9 NA 29.3
IIFL Finance 643 NR NA 244.9 2.3x 1.9x 12.4x 9.5x 19.6 21.8 NA NA
Capri Global Capital 755 NR NA 155.6 4.0x 3.6x 44.9x 34.3x 9.3 11.1 NA NA
Mas Financial Services 919 NR NA 50.2 3.0x 2.5x 19.5x 15.1x 16.0 17.8 NA 20.3

Source: Bloomberg, Emkay Research; Note: Emkay estimates for UGRO; For ‘Not Rated’ (NR) companies, estimates are Bloomberg Consensus as on 20-
Oct-2023

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October 23, 2023 |4
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Table of Contents

Contents Page No.

What makes UGRO Capital an attractive investment idea?.................................. 6

Right approach to capitalize on being in the right place at the right time ...................6

Business model designed for scale; asset quality focus paramount ......................... 11

A business case for Co-lending/Co-origination ..................................................... 15

Operating leverage powered by strong AUM growth;

stable credit cost to drive EPS CAGR of 54% over FY24-26E .................................. 20

MSME in Bharat ................................................................................................. 24

Deciphering UGRO’s business model ................................................................. 28

What is unique about UGRO? ............................................................................ 32

UGRO’s Profile & Performance .......................................................................... 37

Comparable Analysis ......................................................................................... 41

Story in Charts: ................................................................................................. 44

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October 23, 2023 |5
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

What makes UGRO Capital an attractive

investment idea?
Our conviction about UGRO Capital’s smart strategy is underscored by three key
factors: 1) UGRO is using the right approach (sectoral focus within the MSME space,
data-tech driven Phygital approach well-diversified geographically and product-wise,
and channel-wise sourcing) for capitalizing on being in the right place (presence in
the structurally high-growth MSME lending sector) at the right time (with major
disruptive events having formalized the sector). 2) UGRO has seen swift growth
within a short time-span. We believe the company has a long growth runway, with
investors bound to draw comfort from i) the company’s teams & processes that have
been designed for scale as well as ii) the high growth—though on a smaller base—
being only a small share of the MSME lending pie at the absolute level. Also, various
related metrics suggest that asset quality continues to hold up well. 3) Co-
lending/Co-origination is a mutually-beneficial business model and banks benefit
from lending in this priority sector with a relatively better credit experience. Against
such a backdrop, we estimate UGRO’s AUM CAGR at 47% over FY23-26E which will
help to reach Rs 194bn AUM with the targeted 50:50 on-book:off-book mix. The
strong AUM growth will lead to cost-to-income improving to 44% in FY26E from 63%
in FY23, driving up RoA to 4% from 1.1% over the same period. We initiate coverage
on UGRO Capital with a BUY recommendation and Sep-24E target price of
Rs425/share (FY25E P/B: 2.1x), implying a 47% upside.

Right approach to capitalize on being in the right place at the

right time
MSME lending has witnessed a choppy past due to largely being part of the informal economy,
with heterogeneity of the different MSME sectors not making it any easier. However, the stars
seem to be aligned for MSME lending. The large credit gap in the sector, the GoI’s and
regulator’s thrust to ensure credit availability for the sector, and the disruptive formalization &
digitalization in the sector post recent years seeing disruptions—such as demonetization, GST
implementation and Covid-19—mean that the time is ripe for long-distance runners to sprint
towards this extended growth opportunity. UGRO is using the right approach to capitalize on
this by focusing on a few sectors within MSME, followed by a Phygital approach to reach and
source customers, and thereafter applying the data-tech driven underwriting and collection
methodology to gain scale. To top this, UGRO’s collaborative approach with larger financial
institutions via Co-lending and Co-origination allows it to grow as per its underwriting and
collection capabilities, without being constrained by its relatively-lower fundraising ability.

Structural growth opportunity in MSME lending amid huge credit gap and policy
thrust

The vast credit gap in the MSME sector (estimated at Rs92trn as of FY23) along with policy
thrust to narrow this gap provides a long growth runway for MSME lenders. About 65mn MSME
units in India employ over 110mn people and contribute to ~30% of India’s GDP. Despite their
critical role in driving the economic engine of the country, MSMEs have lacked access to formal
credit owing to a host of factors, including dearth of formalization in the sector leading to
limited data availability for assessment and underwriting of credit. To address the need for
formal credit availability, the GoI, RBI and other government agencies have been working on
bringing-in policy-level initiatives for improving credit availability to the MSME sector.

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 3: The MSME credit gap remains significantly high at 79% Exhibit 4: MSME credit gap is estimated to widen to ~Rs92trillion
during FY23

MSME credit gap

MSME Credit Gap (Rs trn)
21%
100 92
85
90
Credit demand met 80
70
58
Credit gap 60
50
40
30
79% 20
10
0
FY17 FY22 FY23

Source: Company, CRISIL, Emkay Research Source: Company, CRISIL, Emkay Research

Exhibit 5: Revised classification of enterprises, based on Investment and Annual Turnover criteria

Old MSME classification

Investment in Plant and Machinery or Equipment
Classification Micro Small Medium

Manufacturing Enterprises Investments <Rs2.5mn Investments <Rs5mn Investments <Rs100mn

Services Enterprises Investments <Rs1mn Investments <Rs20mn Investments <Rs50mn

Revised MSME classification

Composite criteria on Investment and Annual Turnover
Classification Micro Small Medium
Manufacturing and Servicing Investments <Rs10mn Investments <Rs100mn Investments <Rs500mn
Enterprises & Turnover <Rs50mn & Turnover <Rs500mn & Turnover <Rs2.5bn

Source: Ministry of MSME, Emkay Research

With major disruptive events behind and the Data-tech ecosystem evolving rapidly,
the time is ripe for riding the MSME lending growth wave

Over the last decade, MSME businesses were tested on multiple occasions by the external
shocks, including ‘once in a century’ pandemic (Covid-19). Disruptive policy changes, such as
demonetization and GST implementation, impacted the sector’s ongoing business models and
practices. However, once such new practices were adopted by the MSME sector, its
formalization saw rapid progress. Post demonetization and GST implementation, data
availability for MSME businesses (qualifying for the GST ambit) in the form of a rich, quality
bank statement and sell/purchase trail in GST statements made assessments of business
income much more transparent and easy. The exceptional Covid-19 incident shook the
economy, especially the MSME sector, which saw extreme adversity. However, Covid-19
challenges also radically increased the digitalization in the MSME sector and brought promotion
and support to the heart of government policy-making for the sector. Overall, the businesses
that successfully transitioned through the policy shocks (demonetization and GST
implementation) and survived Covid-19 proved their business case and longevity. Overall, it
appears to be the perfect time for building an MSME-focused lending at scale, powered by the
trinity of ‘Bank Statement-Credit Bureau report-GST Statement’ in the era post the extreme
policy and the disruptions (demonetization, GST implementation and Covid-19).

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 6: Delinquency data of the micro & small enterprise (MSE) segment during the three
major shock-inducing events

GNPA (%) of Small & Micro Enterprise segment, by lender type

Foreign Private Public

16

14
Demonetization
12
Impact of
10 COVID-19
GST
8 Implmentation

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: RBI, Emkay Research

Exhibit 7: Impact of economic shocks on the MSME sector

2016 2017 2018-19 2020-22

Demonetization Introduction of GST NBFC crisis Covid-19 Pandemic
(ILFS and DHFL)

• The MSME sector, used • The advent of GST • The IL&FS crisis caused • The lockdowns and
to dealing in cash with resulted in increased severe liquidity crisis restrictions on
workers, vendors and compliance costs and an among NBFCs, resulting movement led to
customers, struggled to added compliance significant decline in
in reduced access to
economic activity,
utilize their capacity, burden for small credit among MSMEs.
significantly affectiing
bringing their going businesses. • The crisis caused an
MSMEs.
concern into question. • Further, the reduced tax increase in interest rates • MSMEs faced cashflow
• Many MSMEs operate in arbitrage for MSMEs resulting in increased challenges, as they
the informal sector and given the introduction of financing cost for struggled to cover the
might not have kept GST resulted in MSMEs. fixed costs, including
records that satisfied increased competitve • Overall, the crisis salaries and rent.
financial institutions' pressure. resulted in slowdown in • Given the increased risk
lending criteria. These • The MSMEs faced business activity and and uncertainity, lenders
businesses faced working capital delayed payments tightened their
challenges in accessing challanges, as GST underwtiting criteria
across MSMEs.
which resulted in
formal credit. required them to pay tax
reduced access to credit
upfront while waiting for
for MSMEs.
ITC to be realized.

Source: Emkay Research

Exhibit 8: The total number of GSTR-3B returns filed have increased over FY18-23

Total number of GSTR-3B returns filed (mn)

120 111.99 110.10

103.16 104.84
97.30
100

80 67.09

60

40

20

0
FY18 FY19 FY20 FY21 FY22 FY23

Source: GST Portal, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

UGRO capitalizing on the huge MSME lending opportunity the right way

Focused approach towards 8-9 MSME sub-segments: The GoI and regulators define
‘MSME’ based on investments in plant & machinery and turnover. But from the lending
perspective, these similar-size businesses entail considerably different behavior; hence, a
focused approach is needed. Against this backdrop, UGRO has identified 8 sectors out of the
180 based on a host of filtering criteria, such as being less prone to government policy changes
and lower dependence on exports. The micro segment is sector-agnostic, as at such scale,
geographical clustering is more important versus sectoral factors.

Exhibit 9: UGRO’s target sector and credit exposure, as of Q1FY24

Sector mix - Q1FY24

6%
16% 2%
Auto Components Education
10%

Food Processing Hospitality

3%

Micro Enterprises Chemicals

23%

Electrical Equipment HealthCare 23%

Light Engineering Other MSME

6%
7% 5%

Source: Company, Emkay Research

Focus on the underserved, not on the unserved: UGRO’s business model is drawn around
meeting credit needs of the underserved, albeit also avoiding the unserved or the new-to-credit
(NTC) customers. Here NTC means that both, the MSME business and its promoter/proprietor,
do not have any credit bureau footprint. The main purpose here is to avoid taking the risk with
an untested promoter for a business loan, which is generally of a higher ticket size than
personal or consumer loans.

Huge amount of diversification: Notwithstanding its ‘MSME only’ and focused sub-segment
approach, UGRO has built its vast business model diversification, including geographical mix,
product mix, sourcing mix and liabilities mix. Such diversification provides considerable
protection against volatility in the business model caused by any issue pertaining to a specific
geography, product, sourcing channel or funding source.

Exhibit 10: UGRO has maintained a diverse product mix for the Exhibit 11: UGRO has a widespread branch presence across India,
diverged MSME businesses with dominance in the South

AUM mix 11% Branch mix

10%
29%
Prime - Secured 12%
Loans
South 22%
Prime - Unsecured
50%
Loans North
9%
Micro Enterprise Loan West

Center & East

Supply Chain 17%
8%
Financing

31%

Source: Company, Emkay Research Source: Company, Emkay Research

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October 23, 2023 |9
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 12: UGRO’s prime branches are present in all major cities Exhibit 13: Multiple sources of funding available for uninterrupted
across India, while micro branches are mainly spread in 5 states growth

Number of Prime and Micro branches 2%

Liability Mix as of Q1FY24 4%

23

Prime Branch Term Loan 22%

NCD

Securitization
Micro branch 72%
CP

75

Source: Company, Emkay Research Source: Company, Emkay Research

Powered by the data-tech led approach and yet growing the Phygital way is the key
characteristic of UGRO’s playbook. To build MSME lending at scale, Company first materially
invested in building its central team of technology, data, risk and underwriting, even before its
AUM or disbursement gained size. This capacity-building-first approach led to higher costs, but
also prepared it well for up-scaling and will eventually lend a high degree of operating leverage.
Data-tech focus solves the twin problem of risk selection or identification and gives a quicker
turnaround. However, physical presence is ultimately the key to becoming the leader in MSME
segments due to the on-ground checks while processing a loan application and prompt action
on the ‘early warning signals’, in case of outstanding loans.

Exhibit 14: Analytical default rate using GRO Score across Exhibit 15: Score bands A & B contribute to ~86% of the total
customers since inception disbursements (Jul ’22-Dec ’22)

Disbursed Case Not Disbursed Case 1%

A 5%
8%
4.0% Segments A, B –
3.6%
3.4%
3.5% contributing to majority
share of disbursals 2.7% B
3.0%
2.5% 2.0%
C
2.0% 1.4%
31% 55%
1.5%
0.7% 0.8%
1.0% 0.5% D

0.5%
0.0% E
A B C D,E

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 16: UGRO plans to expand and increase it branch presence Exhibit 17: Dedicated team of 40 employees for data analytics

Number of Branches Business Enablers (no. of)

Sales (FOS)
250
Credit 40 164
198 198
200 Collection and Litgation
20 82
148 Operations 568
32
150
FCU
91 98
100 Technical/Legal 185

IT Infrastructure
50 34
Risk and Analytics 162

0 Support staff 330

FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Business model designed for scale; asset quality focus

paramount
UGRO has grown its AUM at a scorching pace, to Rs76bn as of H1FY24 from Rs13bn as of FY21;
such a growth pace is bound to raise some questions/concerns on the asset-quality trajectory
in coming years, as there is little seasoning of the current loan-book/AUM. However, this
growth has to be seen in the context of the company’s business model as well as from the
perspective of absolute growth rather than lofty growth on a lower base. The company’s core
top-management has been in place since Dec-2017, and it had raised ~Rs9.2bn equity by Aug-
2018 from a number of reputed private equity firms. It was external events such as the
IL&FS/DHFL default-led credit crisis and Covid-19 that caused the company was growing in a
guarded fashion till the Covid-19 Delta wave. So by Mar-21, the company had already been
functional for more than 3 years, with its core senior management team, data-tech team and
underwriting teams & processes in place. Post the Covid-19 Delta wave, the company scaled
up by increasing its branch-count, from 34 to 98 within a year. Additionally, a number of Co-
origination and Co-lending agreements were put in place and continued to be signed over the
quarters. Against this backdrop, the ~Rs63bn AUM addition over 2.5years is not too high, as
the company had piloted its business model over the previous 3.5years and had all the
ammunition in place to fire. Overall, we draw comfort from the fact that: i) the company did
some disbursements during the peak of Covid-19 disruptions and, hence, got first-hand
experience; ii) the asset build-up happening post such large-scale shocks has allowed the
company to build & train its model for better underwriting; iii) its focused (select 9 of the 180
SME sectors) yet diversified (no state contributing more than 20%, along with diversified
product and sourcing channels) approach is likely to ensure that the asset-quality experience
will be almost in line with the modelled expectations.

Exhibit 18: Long-term growth strategy well-planned

Source: Company

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 19: Increasing data availability — Revolutionizing the MSME underwriting framework

Source: Company

Exhibit 20: High AUM growth is due to the small base; at the Exhibit 21: UGRO’s AUM is still a very small portion of MSME credit
absolute level, AUM accretion forecast is ~Rs50bn

AUM (Rs bn) AUM Growth (%) UGRO's share in MSME's outstanding credit

250 140% 0.30%

125% 0.24%
194.5 120% 0.25%
200 0.21%
105% 100% 0.19%
142.1 0.20% 0.17%
150 80% 0.14%
0.15% 0.13%
94.3 0.10%
100 60%
55% 51% 0.08%
60.8 0.10%
37% 40%
50 29.7
13.2 20% 0.05%

0 0% 0.00%
FY21 FY22 FY23 FY24E FY25E FY26E Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 22: At absolute level, growth in disbursements will hover at Exhibit 23: UGRO’s disbursements are still a tiny part of MSME
~Rs20bn credit origination

Disbursement (Rs bn) Growth (%) UGRO's share of MSME origination

120 105% 120% 1% 0.6%

100% 1%
100 0.5%
1% 0.4% 0.4%
80%
80
0.3% 0.4%
24% 60% 0%
60 37%
32% 0.2%
103.7 40% 0%
83.7
0.2%
40
20% 0%
61.2
20 -10% 46.4
0% 0%
25.1 22.7
0 -20% 0%
FY21 FY22 FY23 FY24E FY25E FY26E Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23

Source: Company, Emkay Research Source: Company, Emkay Research

In addition to the aforementioned argument on UGRO’s growth being a natural progression of

its business model and not a concern, the incremental data points on collections, credit cost
and asset-quality developments suggest that the growth is not at the cost of any compromise
on asset quality.

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

UGRO’s business model, absolute AUM growth and asset-quality developments (as indicated
by several data points) do address the concerns on seasoning of the loan book to a certain
extent. Also, we need to acknowledge that Co-lending and Co-origination are key to the
company’s business model for achieving scale and profitability. And, a material deterioration
in asset quality with any of the key Co-lending/Co-originating large banks or NBFC would
eventually infuse discomfort for the partners, who would therefore start turning off the capital
tap. This is likely to ensure that UGRO remains focused on quality of origination and
underwriting, considering it as the paramount factor in its business.

UGRO has always maintained that it is looking at the underserved opportunity and not the
unserved opening; this implies that the company does not lend to completely ‘New To Credit’
customers (i.e. a customer who is neither in the Individual Credit Bureau print nor in the
Commercial Credit Bureau print). Almost 88% of UGRO’s AUM is to borrowers with a >700
Individual CIBIL score; in the Commercial Bureau Score terms, only ~19% of the AUM is in the
CMR-7 band or worse. Such high-standard customer filtering should allay any concerns
regarding customer quality.

Exhibit 24: As of Sep-23, one-third of the portfolio is in the low PD Exhibit 25: Almost 88% of UGRO’s customers have bureau score of
zone, hence leading to stable asset quality >700, thus granting added confidence on its underwriting standard

AUM split, based on CIBIL-CMR score AUM split based on individual CIBIL score

30% 70%
24.9%
57.7%
25% 60%
18.6%
20% 50%
15.7%
13.7%
15% 40%
31.2%
10% 5.9% 6.1% 6.2% 30%
4.4%
3.2%
5% 0.9% 20%
0.4%
0% 10% 4.8% 5.1%
1.0%
CMR-7
CMR-1

CMR-2

CMR-3

CMR-4

CMR-5

CMR-6

CMR-8

CMR-9

NA
CMR-10

0.2%
0%
<600 600-650 650-700 700-750 >750 NA

Source: Company, Emkay Research Source: Company, Emkay Research

Note: The breakup is for ~88% of the total AUM and excludes partnership
AUM (typically having FLDG arrangements) and GeM-SAHAY

Exhibit 26: Collection remains the key growth driver — Consistent and impressive collection
efficiency, considering where the segment operates

Collection Efficiency (excluding overdues)

94.4%

94.0%
94.0% 94.0%
93.6% 93.9% 93.9%
93.8%

93.2%
93.3%
92.8%
93% 93.0% 93.0%

92.4%

92.0%
Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23

Source: Company, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 27: Stage-wise breakup of Total AUM indicating stable asset quality

Stage 1 Stage 2 Stage 3

102%

100%
2.0% 1.7% 2.3% 2.3% 2.1% 1.7% 1.7% 1.6% 1.8%
98%
1.3% 2.0% 2.1% 2.3%
3.0% 1.9% 3.3%
96% 3.2%
5.5%
94%

92% 95.7% 96.4% 96.4% 96.2% 96.1%

95.4% 94.7% 94.9%
90% 92.6%

88%
1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23 3QFY23 4QFY23 1QFY24

Source: Company, Emkay Research

Exhibit 28: On the books, asset quality remains strong, with Stages Exhibit 29: Steady asset quality leading to lower credit cost
1+2 remaining stable at ~98% as of FY23
Credit Cost (on BS)
Stage 1 Stage 2 Stage 3
2.5%
2.6%
100% 2.4%
1.0% 2.2% 2.2%
99% 2.3% 2.3% 2.5% 2.7% 2.8% 2.9% 2.2% 2.0%
98% 2.1%
2.0% 1.8% 1.9%
97% 1.3%
2.8% 2.7% 1.8%
96% 2.8% 2.7%
3.2% 1.6%
95% 1.6%
94% 96.9% 96.4% 1.4%
93% 94.9% 94.8%
94.1% 94.4% 94.4%
1.2%
92%
91% 1.0%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

A business case for Co-lending/Co-origination

In 2018, the RBI came up with the guidelines “Co-origination of loans by Banks and
NBFCs for lending to the priority sector”, to address the credit gap in the priority
sector by combining the strengths of banks and NBFCs (lower cost of funds of banks
and feet-on-street & agility of NBFCs). The RBI further amended and presented new
guidelines in 2020, referred to as “Co-Lending by Banks and NBFCs to the Priority
Sector”. The theme is broadly similar, with increasing flexibility given to the NBFC
for sanctioning and disbursing the loan first and transferring the Co-lending share of
the bank partner to the bank thereafter, depending on satisfactory assessment by
the bank based on their Master Agreement.

In recent years, Co-origination/Co-Lending has started gaining traction after a slow

start in the initial years of the RBI guidelines. These are still early days to declare
the Co-lending model a success, but the business case for this is getting established.
Banks are incrementally partnering with more & more NBFCs for co-lending in the
area of priority-sector loans.

Benefits of the Co-lending/Co-origination model for the originator NBFC

 Leveraging on the lower cost of funds of banks, the originating NBFC can compete with other
banks and larger NBFCs, in terms of interest rates offered to the customer.

 Customer and product diversification for the originating NBFC by being able to cater a wider
set of products to a larger set of customers.

 A stable source of fee income and means to drive operating leverage by better utilizing fixed-
cost resources like technology, underwriting and infrastructure expenses.

Benefits of Co-lending/Co-origination to the bank or a larger NBFC

 Benefits of a wider reach and feet-on-street of the NBFC

 One of the most efficient mechanisms for meeting priority-sector lending targets

 Quicker turnaround time, as the initial sourcing for data collection is done by the originator

 Gaining from the knowledge and understanding of the specialist originator, likely leading to
a better credit-quality experience

 Overcoming the knowhow barriers in many priority segments, by tying up with the sector
and region-specialist smaller NBFCs

Exhibit 30: UGRO’s Co-lending & Co-origination partners

IDBI Bank

Central
Bank Hinduja
Leyland
Secured Finance
BL

SBI
secured UGRO Poonawalla
and
Unsecured Capital Fincorp

- STBL

BOB
Ambit
secured Finance
BL India
Overseas
Bank
Secured
BL

Source: Company, Emkay Research

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October 23, 2023 |15
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Co-lending, the best mechanism available to public sector banks for achieving
priority-sector MSME lending targets

Meeting priority-sector lending targets profitably has been one of the most difficult tasks for
banks. MSME lending has been even trickier owing to the peculiarities based on sectors (CRISIL
divides MSME into 180 sectors) and regions. MSME lending gets further complicated for public
sector banks as, unlike large corporates where a more centralized expertise is workable or
retail lending that is more product-specific, MSME expertise is required locally, that too based
on sectors. This is where public sector banks are too thinly spread which results in lack of
expertise. Additionally, public sector banks lack feet-on-street owing to higher wages at the
entry level. This twin problem of lack of expertise and lack of feet-on-street can be resolved
through partnerships with a number of MSME-focused NBFCs who can provide expertise in their
focus sector and regions, along with agility in service powered by their feet-on-street and Data-
& Technology-focused business models.

Exhibit 31: Number of MSME accounts with PSBs saw a 50% growth over FY16-22

45 No. of MSME accounts (mn) 42.0

38.4 0.3
40
0.3
32.1
35
0.2 26.5
30 26.2
23.4 26.7
0.2 0.2
25 20.5 27.1
0.2
0.2 20.5 11.3
20
14.8
12.0
15 9.6

10
15.1 15.0
5 10.7 11.2 11.1 11.3 11.1

0
FY16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22

Public Sector Banks Private Sector Banks Foreign Banks Total SCBs

Source: RBI, Emkay Research; Note: FY22 saw reduction in the number of accounts due to mandatory
registration requirement on the UDYAM platform

Exhibit 32: PSBs struggled to grow MSME loans over FY16-22, reflecting the challenges they face
in MSME lending

25 Amount Outstanding with MSMEs (Rs trn)

20.1
20 17.8 0.9
16.1
15.1 0.8
13.0 13.2 0.7
15 12.2 0.7 9.7
0.4 0.5 7.9
0.4 5.6 6.5
10 4.3 4.1
3.6

5 8.8 8.9 9.1 9.6

8.2 8.3 8.6

0
FY16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22

Public Sector Banks Private Sector Banks Foreign Banks Total SCBs

Source: RBI, Emkay Research

Exhibit 33: NBFC’s share in origination of MSME loans has been increasing over Q2FY21

Origination of MSME loans, by lender type

10%
20% 24% 20% 20% 22%

45%
51% 49% 51% 47%
51%

45%
29% 29% 32% 29% 31%

Q2FY21 Q4FY21 Q2FY22 Q4FY22 Q2FY23 Q4FY23

PSB Private Bank NBFC

Source: RBI, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

The twin problem of lack of deeper understanding of the wide spectrum of MSME sectors and
lesser feet-on-street has not just led to slower growth in MSME lending of PSBs in the last
decade, but also to fairly poor-quality underwriting, resulting in considerably high NPA levels.
The below-mentioned data on yield and asset quality also clears any doubt about the
differential interest rate arrangement between the originating NBFC and the co-lending bank,
as public sector banks have earned yields (much lower than the typical yields earned by NBFCs)
and held a poor asset-quality track record, as reflected in their GNPAs, thus resulting in higher
credit costs. Additionally, the lower yield and higher credit costs would have come at much
higher operating expenditure. Co-lending will certainly lead to a considerably lower operating
expenditure (as initial data collection, assessment, credit filtering and other work will be taken
care of by the NBFC) and most likely lower credit cost; hence, a yield similar to the typical yield
for PSBs in MSMEs would be a much better proposition in co-lending.

Exhibit 34: GNPA in MSE (micro & small enterprises) — PSU banks witness the highest
delinquency rates among peers

GNPA of the MSE segment, by lender type (%)

Foreign Private Public

16

14
Demonetization
12
9.56
10 Impact of
COVID-19
8 GST
Implementation
6
4.08 3.79
4
1.99 1.69
2
1.66
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: RBI, Emkay Research

Exhibit 35: Trend of weighted average lending rate (WALR) of banks for MSMEs on outstanding
loans

WALR for MSMEs (%)

11.4

12
11.3
11.2

10.9

10.9

10.8

12
10.5

11

10.3
10.1
10.1

11
9.8

9.8
9.7

9.6

10
9.3

9.3
9.3

10

9
Jun-19

Sep-19

Jun-20

Sep-20

Jun-21

Jun-22

Sep-22
Dec-18

Mar-19

Dec-19

Mar-20

Dec-20

Mar-21

Dec-21

Mar-22

Dec-22

Mar-23

Source: RBI, Emkay Research

In the Co-lending space, UGRO plays out as a perfect partner and the NBFC of choice
for banks. What works in its favor:

 A completely priority sector-focused NBFC

 Focused sub-sector approach gives increased confidence to the co-Lending banks

regarding UGRO’s deep understanding of the borrower’s business

 An ‘A’ rated NBFC makes a better case for becoming a co-lending partner for banks,
as the relatively higher cost of borrowing makes them serious about co-lending model
and, at the same time Banks practically don’t want to go below ‘A’ rating when it
comes to co-lending partnerships

 Technological capabilities for undertaking system integration with partner banks

 UGRO’s established track record of co-origination/co-lending with multiple banks and

NBFC partners

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

As regards meeting priority-sector lending (PSL) targets, different banks have challenges of
varying nature to meet the overall and sub-segment targets. Generally, private banks struggle
to meet small & marginal farmers’ lending targets, whereas PSBs struggle to meet MSME
targets even after traditionally ending up with poor underwriting. A number of tools are
available for achieving PSL targets if the bank is unable to do so via organic lending. Some
such tools are: i) Co-lending/ co-origination with NBFCs. ii) Lending to NBFCs for on-lending.
iii) Securitization and Direct Assignment. iv) Investment in Priority Sector Lending Certificates.
v) Specified Deposits with institutions. vi) Inter Bank Participation Certificates (IBPCs). Per this
approach, on-lending faces a limitation—in that, the ticket size of loans by NBFCs should be
less than Rs2mn in non-agri loans to qualify under the priority sector, whereas in Co-lending,
the bank can claim PSL for its share, as long as the entire loan meets the PSL criteria (up to
Rs500mn in MSMEs). Regarding Direct Assignment, though the bank gets the loan on its book
and meets the PSL criteria, it does not underwrite the loan, neither acquires any customer
insights, as it deals with a portfolio approach. Against this backdrop, Co-lending/Co-origination
is certainly a more optimal way for banks for achieving PSL targets.

Exhibit 36: PSLC transactions have rapidly increased

8.0 7.13
6.62
7.0
5.89
6.0
4.68
5.0
(Rs trn)

4.0 3.27
1.05
1.05 1.30
3.0
1.84 1.00
2.0 0.45
1.0 0.20

0.0
FY18 FY19 FY20 FY21 FY22 FY23
PSLC - Agri PSLC-General PSLC-Micro &Small Industries PSLC-Small and Marginal Farmer Total

Source: RBI, Emkay Research

Exhibit 37: Securitization volumes stood at Rs1.8trn during FY23

Securitization volume (Rs trn)

1.9 1.9
2.0 1.8
1.8
1.6 1.4
1.4
1.2
0.9
1.0
0.8
0.6
0.4
0.2
0.0
FY19 FY20 FY21 FY22 FY23

Source: CRISIL, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 38: A comparison of various loan transfer mechanisms

Particular PTC DA CLM1 – Co-origination CLM2 – Co-lending

Forms part of the
No Yes Yes Yes
balance sheet
Three months for loans with original tenure less than 24
Minimum Holding months
Period (MHP) Six months for all other loans Not Applicable Not Applicable
requirement Applicable from the date of Full disbursement/or registration
of security interest with CERSAI (whichever is later)
5% of book value of the loan, with original maturity less than
24 months
Minimum Retention 10% of book value of the loan, with original maturity more If the co-lender originating the loan is an NBFC, an MRR of 20% is
Requirement (MRR) than 24 months required
5% of book value for Residential MBS, irrespective of maturity
Can be waived off in case of full due diligence
KYC requirement Investor/buyer requires to do due diligence
Conducting due diligence is essential at the portfolio level and Due diligence to be done for each contract, involving KYC
Due Diligence can extend up to 100%, in accordance with the investor's verification, policy compliance, and examination of underlying
policy securities documents, is necessary
Funding is done The initial originator provides
Initial funding done by the originator; simultaneously by the customer funding, and the buyer of
post completion of MHP, the buyer of originator and the co- PTC funds the agreed portion of the
Funding Similar to PTC
PTC funds the agreed portion to the originator through an loan to the originator without the
originator escrow account on a pari need for MHP requirements (PTC can
passu basis even be done the very next day)
It is pari passu with banks,
Risk remains with the originator, who
Risk It is pari passu while FLDG can be It is pari passu
provides credit enhancement
provided with NBFCs
The originator may retain a call option
to repurchase high-performing assets
No such option
Clean-up call option when their residual value falls below No such option available No such option available
available
10% of the original pool near the end of
the securitization transaction
Happens throughout the life cycle of the
loan
Illustration: If customer rate is 15% The lifetime income
and buyer rate is 10%, with an MRR of of the buyer’s portion
Income recognition is akin
Income recognition 10%, then interest will accrue normally has to be recognized Income recognition is akin to DA
to PTC
on the MRR portion, whereas a 5% by the originator at
differential margin throughout the the time of DA
lifecycle of the loan will accrue on the
balance portion

Source: Company, RBI, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Operating leverage powered by strong AUM growth; stable

credit cost to drive EPS CAGR of 54% over FY24-26E
Increasing productivity of UGRO’s current ~100 branches, accelerating disbursements under
existing Co-Lending/Co-origination, addition of about 100 micro SME branches over the next 2
years, and incremental Co-Lending/Co-origination partnerships will drive a strong AUM growth
of ~47% over FY23-26E to Rs194bn, with targeted on-book and off-book mix of 50:50. This
strong growth in AUM will drive up utilization of its fixed-cost absorption, leading to
improvement in Cost-to-Income, from 63% in FY23 to under 45% by FY26E. With focus on
achieving higher-yielding Micro Loans on own book to carry on prime lending under its Co-
Lending/Co-Origination model, the spread for the on-book loan will improve. Also, increased
revenue contribution from Co-Lending, Co-Origination and Insurance cross-selling commissions
will help the operating revenue to total assets ratio to improve to ~13%. With operating
leverage playing out and driving down cost-to-income to ~44% by FY26E or ~6% on-BS AUM
by FY26E, a ~2% stable credit cost will lead to ~4% RoA by then.

UGRO’s AUM growth over coming years will be driven by a combination of factors, including: i)
improving productivity of existing branches and employees, as the vintage increases; ii)
increased disbursals under Co-Lending/Co-origination arrangements, as partners’ comfort
increases with the progress in the co-lending book; iii) addition of ~100 micro branches over
the next 2 years; and iv) newer Co-lending/Co-origination agreements to fuel growth as well
as to offset any slowdown in existing partnerships. All these combined will drive substantially
strong growth over FY23-26E, from Rs61bn to Rs194bn. Post such a high growth phase, we
expect growth to taper to ~25-30%.

Exhibit 39: AUM expected to growth >50% in the next two years Exhibit 40: Diverse product mix customised to meet MSME needs

Total AUM (Rs bn) Prime - Secured Loans Prime - Unsecured Loans Micro Enterprise Loan

On Book Off Book Growth % Supply Chain Financing Machinery Loan Partnerships & Alliances
250 140%
125% 194.5 100%
120% 12% 10% 8% 7%
200 18%
12% 12% 11%
105% 100% 80% 12%
9% 6% 6%
142.1 9% 7%
150 10% 10% 12% 14%
97 80% 4% 8%
60%
94.3
100 71 60% 26% 33% 33%
55% 31% 33%
60.8 51% 40%
42 37% 40%
50 29.7
13.2 24 97 20%
71 20% 34% 28% 28% 29% 29%
5 52
0 25 36
0 13 0% 0%
FY21 FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

On the NIM and spread fronts, UGRO will see improvement in the next few years, on the back
of: i) addition of more micro branches that will enhance the share of high-yielding micro loans
in the on-book loan; ii) the improving Co-lending/Co-origination book that will lead to growth
in the related fee income; iii) the corporate agent for insurance being in place resulting in the
cross-selling fee income to increase.

Exhibit 41: Co-lending model leading to improved margins Exhibit 42: Opex to normalize, as operating leverage kicks in

NIM (%) NIM including off book income (%) Opex-to-AUM Opex-to-AUM (on book) Cost -to-Income
25%
85.2%
19.4% 18% 90%
20% 16% 70.8% 71.6% 80%
14.9% 63.4%
16.6%
16.6%

13.6% 14.2% 14% 70%

15% 12.5% 51.9%
12% 60%
10.0% 46.2% 44.4%
9.2% 10% 50%
13.9%
10%
8% 40%
9.6% 6% 30%
7.9%

5% 8.0% 8.4% 8.2%

7.1%
7.1%

7.0%

6.9%

7.1%
6.6%

6.3%

6.2% 4% 20%
5.8%

5.4%

4.0%

3.6%

3.2%

0% 2% 10%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E 0% 0%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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October 23, 2023 |20
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

UGRO’s profitability improvement will be largely driven by the operating leverage playing out
and credit cost remaining stable. The operating leverage will be driven by slower growth of
employee expenses in comparison to the AUM or revenue growth. UGRO’s employee expenses
are two-pronged: i) compensation for the top- & mid-level employees being highly competitive
from the industry perspective, for building and growing the franchise; ii) compensation for
branch- & lower-level employees being at parity with peers. The first part is a fixed cost that
has largely existed since the building phase of the franchise and will see quite moderate
absolute growth going forward, thus driving a huge amount of operating leverage. The branch
& lower-level employee expenses are variable in nature and should not have any material
negative impact even in the next 2 years, when the company is likely to add ~100 branches,
as the running cost of micro branches is lower and breakeven usually happens within ~18
months. On the credit-cost front, the company takes 1% standard provisioning on the on-book
assets and on co-origination loans with NBFC partners and, hence, in the current phase, when
disbursements are material in comparison to the loan book, the standard asset provisioning is
driving credit costs. The actual credit-cost experience, so far, turns out to be in-line
with/better-than the company’s ECL model. So as the loan book grows and the disbursement
growth tapers, the standard asset provisioning cost will moderate and, hence, the overall stable
credit cost at ~2% should sustain.

Exhibit 43: Credit cost to remain stable on account of prudent Exhibit 44: Improved NIMs, normalizing cost leading to improved
underwriting norms profitability

Credit Cost (on B/s) (%) RoA - Reported (%) RoE - Reported (%)
18%
2.5% 15.2%
2.6%
16%
2.4% 12.8%
2.2% 2.2% 14%
2.2% 2.0% 12%
9.4%
2.0% 1.8% 1.9%
10%
1.8% 8%
1.6%
1.6% 6% 4.1% 4.0% 4.0%
3.1% 2.6%
1.4% 4% 2.2%
1.5% 1.1%
1.2% 2%
1.9% 0.6%
1.9%
1.0% 0%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

Overall, the RoA should stabilize at ~4% by FY26E, driving RoE to ~15.2%. Thereafter, the
improvement in RoE will be boosted by gradual increase in financial leverage (assets/equity)
moving towards ~4.5x from ~3.8x in FY26E. Such increase in leverage will be contingent on
establishing the business model and giving confidence to banks and investors who have lent
to the company or have invested in its debt. This RoA/RoE trajectory will drive the company’s
EPS CAGR of 54% over FY24-26E, to reach 4%/15.2% respectively, and BVPS growth to Rs240
in FY26E from Rs181 in FY24E.

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Valuation & Risk

We initiate coverage on UGRO Capital with a BUY recommendation. Our residual income
method-led Sep-24E target price of Rs425/share (FY25E P/BV: 2.1x) implies a ~47% upside.
We build-in Rs5bn of equity raise towards the end of FY24, to support the current strong pace
of loan growth and keep cost of borrowing under control; Company will be required to keep its
financial leverage to a suboptimal level, until it achieves scale and the business model is
established to satisfy its lenders.

Exhibit 45: Valuation at CMP and TP

P/BV (x) P/E (x) RoA (%) RoE (%) Book Value (Rs/sh) EPS (Rs)
CMP/TP Mkt Cap
Upside
(Rs/sh) (Rs bn)
FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E

At current
288 47% 26.7 1.6x 1.4x 1.2x 20.0x 11.6x 8.5x 2.6 4.0 4.0 9.4 12.8 15.2 181 206 240 14 25 34
market price
AT target price 425 26.7 2.3x 2.1x 1.8x 29.4x 17.1x 12.5x 2.6 4.0 4.0 9.4 12.8 15.2 181 206 240 14 25 34

Source: Company, Emkay Research

Key risks
1) Any regulatory changes or external factors that can affect the Co-Lending/Co-origination
model. 2) External economic shocks leading to slower growth and rise in credit cost. 3) Any
major change in availability and cost of capital to fund the growth.

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 46: Key Financial Snapshot

Financials (Rs mn) FY21 FY22 FY23 FY24E FY25E FY26E
Profit & Loss
Net Interest Income 1,036 1,348 1,896 3,516 5,191 6,940
Other Income 52 399 1,944 2,464 3,990 5,038
Total Income 1,088 1,747 3,841 5,980 9,181 11,977
Operating Expenses 770 1,251 2,435 3,101 4,245 5,322
Pre-Provisioning Operating Profit 317 496 1,406 2,879 4,936 6,655
Provisions 196 294 568 1,104 1,325 1,715
Other non-Operating Income 35 58 273 360 493 610
PBT 157 260 1,111 2,135 4,104 5,551
PAT 287 146 398 1,319 2,683 3,671
Balance Sheet
Net Worth 9,524 9,666 9,840 19,564 22,248 25,918
Paid Up Capital 705 706 693 1,078 1,078 1,078
Reserves 8,819 8,960 9,147 18,486 21,169 24,840
Others Capital Instruments
Borrowings 7,657 18,022 31,489 35,273 53,304 77,787
Total Liabilities & Net Worth 17,548 28,549 43,056 56,563 77,277 1,05,430
Advances 12,827 24,511 38,064 49,888 68,536 93,590
Fixed Assets 156 297 374 374 374 374
Total Assets 17,548 28,549 43,056 56,563 77,277 1,05,430
On-BS Loan book 13,038 24,910 36,390 51,872 71,073 97,233
Off Balance Sheet AUM 132 4,780 24,420 42,441 71,073 97,233
Total AUM 13,170 29,690 60,810 94,314 1,42,145 1,94,467

Shares outstanding (mn) 70.5 70.6 69.3 107.8 107.8 107.8

Market capitalization 13,170 20,349 19,992 31,100 31,100 31,100
Earnings per share (Rs) 4.1 2.1 5.7 14.4 24.9 34.0
BV 135.0 137.0 142.0 181.4 206.3 240.3

Growth ratios
ABV 3.4% 1.4% 3.6% 27.8% 13.7% 16.5%
AUM 53.0% 125.4% 104.8% 55.1% 50.7% 36.8%
On Book AUM 99.0% 83.9% 59.8% 55.0% 50.0% 50.0%
Off Book AUM 1.0% 16.1% 40.2% 45.0% 50.0% 50.0%
Loans 54.1% 91.1% 55.3% 31.1% 37.4% 36.6%
Borrowings 200.8% 135.4% 74.7% 12.0% 51.1% 45.9%
NII 58.8% 30.2% 40.7% 85.4% 47.6% 33.7%
PAT 47.2% -49.3% 173.4% 231.6% 103.5% 36.8%
EPS 38.0% -49.4% 176.2% 153.8% 72.3% 36.8%

Capital ratio
Leverage (x) 1.6 2.4 3.7 3.5 3.2 3.8
CRAR 66% 34% 20% 35% 31% 26%
Tier 1 Capital 65.2% 33.6% 19.6% 34.3% 29.9% 25.7%

Profitability and Efficiency

GNPA 2.7% 1.9% 1.6% 2.0% 2.0% 2.0%
Net Interest Margin+fees 10.0% 8.2% 8.5% 7.7% 7.8% 7.1%
Net Interest Margin+fees (on-book AUM) 10.0% 9.2% 12.5% 13.6% 14.9% 14.2%
ROA 1.9% 0.6% 1.1% 2.6% 4.0% 4.0%
ROE 3.1% 1.5% 4.1% 9.4% 12.8% 15.2%
Cost/Income 70.8% 71.6% 63.4% 51.9% 46.2% 44.4%

DuPont Analysis (as a % of avg on-book assets)

NII/Total Assets 7.0% 5.8% 5.3% 7.0% 7.7% 7.6%
Rev/Total Assets 7.3% 7.6% 10.7% 12.0% 13.7% 13.1%
Opex/Total Assets 5.2% 5.4% 6.8% 6.2% 6.3% 5.8%
PPOP/Total Assets 2.1% 2.2% 3.9% 5.8% 7.3% 7.3%
Provisions/Total Assets 1.3% 1.3% 1.6% 2.2% 2.0% 1.9%
PAT/Total Assets 1.9% 0.6% 1.1% 2.6% 4.0% 4.0%

Valuation
Book Value per share (Rs) 135.0 137.0 142.0 181.4 206.3 240.3
P/ABV (x) 2.1 2.1 2.0 1.6 1.4 1.2
P/E (x) 70.9 140.0 50.7 20.0 11.6 8.5

Source: Company, Emkay Research

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analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |23
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

MSME in Bharat
Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India's economy and
contribute significantly to its various aspects:

 GDP contribution: MSMEs contribute around 30% to India's GDP, making them vital drivers
for economic growth.

 Employment generation: Employing over 110 million people in India, MSMEs play a crucial
role in reducing unemployment and fostering inclusive growth.

 Promoting entrepreneurship: MSMEs encourage entrepreneurship by providing opportunities

for individuals to start and run their businesses. They are often the first stepping stones for
budding entrepreneurs.

 Industrial output: MSMEs are involved in the manufacture of a diverse range of products,
contributing substantially to industrial production in the country.

With the Indian Economy inching towards USD5trn, MSMEs are poised to provide a large
number of employment opportunities at a relatively lower cost of capital and, through the
industrialization in rural/backward areas, aid in equitable distribution of income. Favorable
government policies aimed at bolstering agriculture, small-scale industries, and consumer
spending are expected to be enduring drivers, enhancing the demand for MSME and agricultural
credit. Initiatives such as Make in India, Aatmanirbhar Bharat and Start-up India are set to
bolster industrial activity, increasing the need for credit from non-banking financial companies
(NBFCs).

As of 20-Oct-2023, the Udyam portal has seen registrations from ~29.4mn MSMEs. Among
these, ~28.7mn are micro enterprises, 0.57mn small enterprises, and 53k are medium
enterprises. Micro & small enterprises constitute ~99.6% of the total registered MSMEs, as of
20-Oct-2023. Despite this big number, formal banking system penetration in MSMEs remains
limited, presenting a significant opportunity for NBFCs to expand their outreach.

Exhibit 47: MSME landscape in India

Source: Udyam Portal, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Credit Growth driven by retail and growing rural credit.

The positive trajectory of India's long-term credit-to-GDP ratio is supported by rapid economic
growth, strides in digitization, increased banking accessibility, and government-driven
structural reforms. Additionally, the rising participation of individuals in formal banking has
notably heightened the demand for financial products in smaller cities, of recent.

India’s middle-income segment’s household earnings, between Rs0.2mnpa and Rs1mnpa, have
been steadily increasing and are expected to sustain growth, owing to rising GDP and household
income. CRISIL MI&A, forecasts a significant rise in households to 181million by Fiscal 2030
from 41million in Fiscal 2012, indicating a 9% CAGR. This surge in middle-income households
presents lucrative opportunities for retail, MSME financiers, and consumer goods marketers.

Exhibit 48: Middle-income households contributing to the credit expansion

Below 0.2mn Rs 0.2-1mn Above 1mn

250 217
212 209
No. of Households (mn)

200 181
169

150
103
100
60
41 35
50
3 6 10
0
FY12E FY17E FY22E FY30P
Income Level

Source: CRISIL, Emkay Research

Digitalization helping MSMEs grow and avail credit

Digital technologies have the capacity to enhance the productivity of MSMEs, expand their
global presence, mitigate supply-chain risks, and provide immediate benefits such as
streamlined transactions, efficient deliveries, and improved access to financial services. The
post-pandemic era has seen a notable surge in the adoption of digital platforms and payment
methods within the MSME sector. According to a recent report by IBEF, online payments,
including card transactions, UPI, and net banking, now account for 72% of MSME payments.
This technological advancement enables businesses to collect and analyze extensive customer
data, which serves as a valuable source of insights for understanding customer behavior,
preferences, and pain points.

Exhibit 49: Accelerated digitalization seen in Micro and Small enterprises

Pre-Covid Post-Covid

60% 55%

50% 45%

40%

30%

20%
11%
9%
10%

0%
Mirco Small

Source: ASSOCHAM, CIBIL, Emkay Research; Note: (data till Dec-22)

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

New UDYAM platform to boost MSME registrations

In Jun-2020, the GoI widened its definition of MSMEs and revised the investment limits across
each category, removing the difference between the definition of manufacturing-based and
services-based MSMEs. Such reforms resulted in an incremental registration of ~4mn MSMEs
during FY21.

Till Mar-2021, companies were required to provide their GSTIN for registration of MSMEs under
UDAYM; however, many entities were not required to get registered under GST, due to turnover
limit of below Rs4mn, resulting in lesser registrations under UDYAM. During Mar-2021, the
Ministry of MSME expected the requirement of GST registration under UDAYM to lead to the
number of UDAYM registrations jumping, from ~13mn in Mar-2021 to ~29mn in Oct-2023.

Further in Jun-2021, the Ministry included retailers and wholesalers under the definition of
MSME, to extend the benefits of priority sector lending to traders as well, resulting in the total
number of registered traders reaching ~3.2mn (1.9mn Retailers and 1.2mn Wholesalers) as of
Feb-23. As a result, traders are likely to attain easy access to credit in order to modernize and
expand their business, thus bolstering their contribution to GDP and overall economic growth.

As against an estimated 70mn total number of MSMEs across the country, only ~29mn are
registered under UDYAM (including ~9mn registered on the UAP). This is mainly due to: a)
mandatory requirement of GST registration (up to Mar-21); b) limited awareness about various
schemes, programs and their eligibility criteria.

The below-stated reforms/measures by the GoI are expected to increase the number of MSME
registrations under UDYAM and enable entities to participate in government tenders, avail
financing options and other benefits available to MSMEs.

Exhibit 50: Increasing number of MSMEs to boost credit demand

Number of registered MSME (mn)

MSME (Udyam) Registration Udyam Assist Platform (UAP)

350 294 350

300 300
250 92 250
167
200 200
150 13 150
80
100 202 100
0 154
50 80 50
0 0
Mar-22 Mar-23 Oct-23

Source: Udyam registration, Emkay Research

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 51: Various Government schemes / initiatives for giving a boost to the MSME sector

Scheme / Initiative Description

The aim is to generate employment opportunities in rural and urban areas by setting up new self-
Prime Minister's Employee Generation Program
employment enterprises.

Credit Guarantee Trust Fund for Micro and Small The scheme provides collateral-free debt to the micro and small enterprises. Guarantee cover available
Enterprises (CGTMSE) from 75-85% of the credit facility.

Emergency Line Credit Guarantee Scheme This scheme was introduced as part of the GoI’s Covid-19 relief package. The financial institutions
(ECLGS) provide emergency loan facilities to various MSMEs that have suffered during the pandemic.

The scheme provides loans up to Rs10lakh (Rs1mn) to non-corporate and non-farm small or micro-
Pradhan Mantri Mudra Yojana
enterprises

The scheme facilitates a 15% capital subsidy on institutional finance availed for additional investment
Credit Linked Capital Subsidy Scheme
up to Rs10mn for technology upgradation by MSMEs.

The scheme provides term loans to MSMEs on relatively softer terms to meet the required debt-equity
SIDBI Make in India Loan for Enterprises (SMILE)
ratio and also facilitates soft loans in the nature of quasi-equity.

A fully automated web portal provides loans to MSMEs in 59 minutes. Once the approval is done, the
MSME Business Loan for Start Ups in 59 minutes
loan is disbursed in the next 7-8 working days.

All bank loans to MSMEs conforming to specified conditions prescribed therein qualify for classification
Priority Sector Guidelines
under Priority Sector Lending

The government has launched a Self-Reliant India Fund to infuse equity in MSMEs which have the
Aatmanirbhar Bharat
potential viability to grow.

Launch of UAP to bring Informal Micro Enterprises under the formal ambit for availing the benefits under
Udyam Assist Platform (UAP)
Priority Sector lending.

The scheme has 3 components: MSME - Sustainable (ZED), MSME -Competitive (Lean) and MSME -
MSME Champions Scheme
Innovative (for incubation, IPR, Design, etc), to promote competitiveness among MSMEs.

OCEN has created a standard protocol for an interface between registered financers and MSMEs for
Open Credit Enablement Network (OCEN) digital lending. OCEN’s first pilot is GeM Sahay – an e-marketplace for PSU (public sector undertaking)
buyers & MSME sellers

Source: Ministry of MSME; RBI

Increasing credit gap; demanding non-traditional & curated credit framework

The MSME sector is the key driver of India’s economic growth. According to a CRISIL report,
the MSME credit gap in FY23 was estimated at ~Rs92trillion. UGRO Capital was incorporated
on the bedrock that the MSME credit gap in India could be resolved by use of data and
technology. UGRO views data being more powerful than presumed and, within the lending
universe, use of data is fairly low. Given MSMEs’ heterogeneous business model, UGRO has,
with the help of CRISIL, experienced experts, extensive study and research shortlisted ~9
sectors and >200 sub-sectors for its lending business, while maintaining a diversified portfolio
across geographies, sectors and products.

Exhibit 52: SME credit demand at Rs117trn Exhibit 53: Target sectors of UGRO

Sector mix - Q1FY24

6%
MSME credit gap 16% 2%
21% 10%
Auto Components

Education
Credit demand met 3%
Food Processing

Credit gap Hospitality

23%
Micro Enterprises
79% Chemicals 23%

Electrical Equipment

HealthCare 6%
7% 5%

Source: CRISIL, Emkay Research Source: CRISIL, Emkay Research

One of the key challenges impacting growth of MSMEs is difficulty in accessing formal and
timely credit. Traditional lenders rely heavily on collateral-based lending, making it difficult for
small businesses to secure funds that are much needed for growth and expansion. To address
the issue faced by MSMEs, UGRO has transformed its approach and now provides financial
assistance to MSMEs by leveraging advanced data analytics, machine learning, and artificial
intelligence techniques.

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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October 23, 2023 |27
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Deciphering UGRO’s business model

UGRO Capital operates as a data-tech lending platform, utilizing its extensive distribution
network and data-tech methodology to bridge the credit gap for small businesses in India. Its
mission, encapsulated in 'Solve the Unsolved', revolves around the belief that addressing the
challenges faced by small businesses requires in-depth expertise in India's key SME sectors,
coupled with a data-centric, technology-driven approach.

Company leverages its robust Data Analytics capabilities and advanced Technology architecture
to create tailored sourcing platforms for various channels. These include GRO Plus, an
intermediated sourcing module; GRO Chain, a supply chain financing platform with automated
end-to-end invoice approval and flow; GRO Xstream platform for co-lending, facilitating
seamless integration with fintechs and liability providers; and GRO X application, offering
embedded financing solutions to MSMEs.

UGRO’s term-loan programs cater to the diverse needs of MSMEs, providing dedicated offerings
for secured and unsecured loans. The company has collaborated with major OEMs to offer
comprehensive end-to-end solutions. Additionally, UGRO Capital's supply chain program
delivers both, demand- and supply-side solutions, along with customized programs tailored for
Micro companies.

UGRO’s growth path

Exhibit 54: Growth to continue

Set-up phase Investing for Igniting the Accelerating

(2018-19) Growth growth engine faster growth
(2019-21) (2021-22) (2022...)

• Incorporated and • Despite a series of • Built strong distribution • Successfully raised

raised >Rs9bn capital crisis like ILFS, DHFL, capabilities and ~Rs3.4bn equity.
from marquee PE Yes Bank and Covid establishing the
investors (ADV, shutdowns, growth and groundwork for the L-a- • Upgradation of Gro
NewQuest, Samena & business expansion a-S model. Score 2.0 to Gro
PAG). continue for UGRO, • Developed Gro Score Score 3.0, an
with focus on digitizing 2.0, combining two enhanced version,
• Partnered with CRISIL business processes different models - the which leverages data
to identify and shortlist along with product banking-based model from GST in
target sectors diversification. with a bureau-based conjunction with
(shortlisted 9). model. credit bureau and
• Achieved AUM of banking.
• In FY19, disbursed ~Rs8.61bn despite • Despite the continued
~Rs790mn (Jan-Mar a macro-economic impact of Covid and the • Launched the D2C
'19). headwinds. Russia-Ukraine war, customer channel,
Company was able to while scaling the L-a-
clock AUM of a-S Model.
~Rs29.7bn, growing
125% YoY. • UGRO demonstrated
strong growth focus,
doubling its AUM to
~Rs60.8bn in a rising-
rate environment.

Source: Company, Emkay Research

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October 23, 2023 |28
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Customized non-traditional product offering

MSMEs form the core of India's economy, offering a variety of products and services.
Addressing the MSME credit gap demands tailored solutions, involving a profound
understanding of their cash-flows and business intricacies. Conventional uniform approaches
have fallen short of driving the desired impact on their businesses. UGRO Capital has embraced
this challenge, employing technology to effectively meet its capital needs.

Branch Led – Catering through ~98 branches

UGRO’s branch-led channel combines both, Prime and Micro branches. Among these, 23 are
Prime, acquiring high-value customers through DSAs, while the 75 Micro branches are mainly
spread across 5 states, sourcing customers through an in-house sales team (FOS).

Exhibit 55: Branch-led channel

Prime Branch Micro Branch

(23 branches) (75 branches)

LAP, Affordable LAP &

LAP & Unsecured
Unsecured

ATS range: ATS range:

Rs1.5-15mn Rs0.3-1mn
Yield range: Yield range:
12.9-19.6% 20.9-25.4%

Sourced through the 100% in-house

DSA channels sourcing

Targets customers Target Customers

with better banking & mostly in Micro
bureau behavior and Industries, with
loan requirement of typical loan
~Rs50L-2crore (Rs5- requirment of
20mn) in secured LAP ~Rs10lakh (Rs1mn)

Spread across 5
Spread across 10 states (44 in the
major cities in India South and ~30 in the
West)

Source: Company, Emkay Research

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October 23, 2023 |29
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Eco-System Channel

In the ecosystem channel, UGRO operates in two main categories: Supply-chain financing and
machinery financing. It has partnered with >70 anchors for supply-chain financing and with
>50 OEMs for machinery financing.

Exhibit 56: Catering through Anchors and OEM partners

Supply Chain Financing Machinery Financing

Secured
Short term
medium term
credit facility
loan (Avg 48
(Avg 6 months)
months)

ATS: Rs10.3mn ATS: Rs3.5mn

Average Yield: Average Yield:
15% 13.4%

Sourced Sourced
through anchor through >50
network of >70 partnered OEMs

Source: Company, Emkay Research

Exhibit 57: Supply chain finance

Supply Chain Financing

Anchor Led Non-Anchor led

Vendor Financing Invoice Discounting

Dealer Financing Pre-shipment Finance
Retail Financing Post-shipment Finance

A few key anchors:

Titan; Livpure; Whirlpool; Patanjali; Lectix;
Godreg agrovet; Astral Pipes, etc

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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October 23, 2023 |30
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 58: Machinery Finance

Machinery Financing

OEMs as partner Existing customer

Dealership driven
Approved OEMs as Field Staff actively
RMs covering multiple
partners having steady remains connected with
dealers for leads
order book and sales previous customers

A few key OEMs

Tata Power Solar; Arswan; BWF Group; Neelgiri Machinery, Redington Group, etc

Source: Company, Emkay Research

Partnership and Alliances Channel

UGRO operationalized partnerships with multiple new partners across small-ticket secured and
unsecured loans, receivable financing and green energy financing, pulling up the total partner-
count to >40. This channel not only entails low operating cost, but also comes with a First-loss
default guarantee (FLDG) cover. Through this channel, Company is able to build a quasi-
secured portfolio.

Exhibit 59: Catering through fintech partners

Partnership & Joint lending Secured & ATS: Rs0.5mn

Alliances Channel partnerships with Unsecured Loan- Avg. Yield:
NBFCs medium term (Avg 23.6%
(downstream) tenure 40months)

Source: Company, Emkay Research

Direct Digital Channel

In FY23, the company introduced the GRO X App, which provides instant, collateral-free credit
for Indian MSMEs' working capital and financial needs. Using advanced data analytics and
cashflow-based risk assessment, businesses can access short-term credit limits as needed,
paying interest only for the duration of fund usage, ensuring affordability and transparency.

Exhibit 60: Digital small ticket instant loan

Unsecured, small 100% digital ATS: Rs0.1mn

D2C Channel ticket, working sourcing, with
capital loan average tenure of Avg. Yield: 24%
12 months

Source: Company, Emkay Research

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October 23, 2023 |31
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

What is unique about UGRO?

Diverse Sourcing
Since UGRO’s inception, its leadership has held conviction that technology represents the future
of lending in India. Their belief was firm, on technology playing a central role in effectively
distributing credit to the MSME segment and leading to a complete transformation in MSME
lending. UGRO has designed its sourcing & distribution channels to seamlessly blend technology
with conventional & innovative business methods, aiming to achieve financial inclusion.

UGRO acquires customers through four specific channels: the Branch-Led Channel, Eco-system
Channel, Direct Digital Channel, and Partnerships & Alliances Channel. Each channel is powered
by unique technology modules developed in-house by UGRO Capital.

Exhibit 61: Diverse sourcing

Branch-Led Eco-system Direct Digital Partnerships &

Channel Channel Channel Alliances Channel

• UGRO Capital has a • UGRO's Ecosystem • UGRO's in-house • UGRO Capital has
network of 98 channel maximizes Digital Lending formed key alliances
branches, consisting the potential Platform, the GRO X with multiple
of 23 Prime borrower base App, streamlines the FinTech firms and
branches and 75 through specialized borrowing process, NBFCs in a
Micro branches. partnerships with allowing direct credit collaborative lending
Through this branch 'Anchor' and 'OEM' applications and setup. Working
network, UGRO partners within the reducing turnaround alongside more than
serves the complete industry. times. Utilizing 35 partners, these
spectrum of MSME Additionally, UGRO advanced organizations initiate
borrowers Capital has technology, the loan applications,
successfully platform enhances with UGRO sharing a
accomplished full- credit accessibility portion of the loan
scale integration for Indian SMEs, risk on its balance
with the promoting financial sheets. This expands
Government e- inclusion UGRO's reach,
Marketplace (GeM) enabling diverse
Sahay Portal financial solutions
for MSMEs across
India

Source: Company, Emkay Research

Exhibit 62: In-house tech platforms giving fillip to sourcing channels

•Crafted for branch-led disbursements, this platform

seamlessly integrates every aspect of digital
underwriting, encompassing all traditional
Gro Plus
parameters. The system empowers GRO Partners
(DSA network) to secure in-principle approvals
within only 60 minutes.

•GRO Chain serves as a comprehensive end-to-end

platform designed for supply chain financing,
GRO Chain
addressing the needs of ecosystem anchors, vendor
borrowers, and dealer/distributor borrowers.

•An advanced FinTech Platform, enabling seamless

API integrations with partner systems, ensuring
rapid processing times. It supports diverse
GRO Xstream
transactions such as co-lending, onward lending,
direct assignments, portfolio buyout, and
securitization among BFSI partners.

•GRO X App is a Direct Digital channel built to allow

GRO X non intermediated loan applications from eligible
SMEs.

Source: Company, Emkay Research

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October 23, 2023 |32
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Data driven underwriting framework

The significance of data in lending is oft undervalued. UGRO recognizes data as pivotal for
informed decisions and future strategies, and expects the digital revolution, involving India's
OCEN and Account Aggregation Network (AA), to democratize data.

UGRO chose to specialize in MSME lending by focusing on specific sectors. After rigorous
evaluation of >180 sectors over 18 months, involving a comprehensive analysis of macro and
microeconomic factors with the assistance of market experts like CRISIL, UGRO narrowed down
its focus to 9 sectors and >200 sub-sectors.

Exhibit 63: Analytically chosen sectors

Sector AUM mix Q1FY24

Auto Comp. 6%
Chemicals 5%
Education 2%
Electrical Equip. 7%
Food Processing 10%
HealthCare 6%
Hospitality 3%
Light Engineering 23%
Micro Enterprises 23%
Other MSME 16%

Source: Company, Emkay Research

The digital transformation in the financial sector has increased the number of opportunities for
meeting the demand for funds. The perfect balance between digitization and digitalization has
paved the path for creative lending models. UGRO has adopted strong and comprehensive risk
management ability, supported by sector-specific knowledge, expertise in data analytics, and
advanced technology infrastructure.

Exhibit 64: Data to drive business growth

Source: Company

The introduction of GST (Goods & Services Tax) has proven beneficial for smaller entities, as
it simplifies top-line reporting and enhances compliance. GST records, when combined with
other financial factors like bank statements and bureau reports, provide valuable insights into
an entity's repayment capabilities.

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

AI/ML reducing TAT

As more financial institutions gain access to this data and adhere to standard protocols, cash-
flow-based lending models for MSMEs are gaining popularity. This development bodes well
for India’s MSME sector, ensuring easier and more convenient access to credit. UGRO’s credit
evaluation framework and data-driven solutions enable it to swiftly assess creditworthiness,
customize financial products tailored to specific needs, and streamline loan processing for faster
approvals.

Exhibit 65: Leveraging tech to improve bandwidth

Source: Company

GRO Score: The company has introduced its exclusive scoring model, the GRO Score 3.0, an
enhanced version of its proprietary scoring model, GRO Score 2.0 which assesses borrower
creditworthiness by triangulating repayment history, banking behavior and GST. In addition to
scrutinizing banking and bureau behavior, the company also extracts and analyzes crucial data
from GST, which includes details such as sales momentum, purchasing patterns, profit margins,
business scale, relationships with counterparts, product variety, and filing consistency. This
comprehensive analysis enables the company to calculate and predict the probability of the
company repaying the loan.

Exhibit 66: Evolving GRO Score

Additionally
analyzing
Combining banking and
the power of bureau
Look-alike
repayment behavior,
GRO scorecards in GRO history and GRO also extracts
collaboration
bank and
1.0 with credit 2.0 statement
3.0 analyses
bureau
transaction critical
data information
from GST
data

Source: Company, Emkay Research

Additionally, the company has integrated a predictive modeling-driven EWS framework to

generate alerts for portfolio stage collections activities. UGRO has also established a robust
supervisory risk evaluation and capital adequacy framework that comprehensively covers
enterprise-level risks. This includes a detailed Internal Capital Adequacy Assessment Process
(ICAAP) evaluation, which involves identifying and reviewing significant risks, assessing the
forward-looking business model, and operationalization strategy.

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |34
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Partnering in growth by leveraging balance sheet of partners

In 2018, the Reserve Bank of India (RBI) introduced the co-origination framework, enabling
collaboration between banks and NBFCs for loan origination. Later in 2020, these guidelines
were revised and renamed ‘co-lending models’ (CLMs). The CLM aims to enhance credit
accessibility for underserved sectors by leveraging the lower funding costs of banks and the
extensive reach of NBFC/HFCs. This collaboration ensures that affordable funds are available
to the end-beneficiaries, addressing the needs of previously overlooked economic segments.

Under the CLM, banks can partner with registered NBFCs (including HFCs) through prior
agreements. The co-lending bank will take its share of individual loans on its books, while
NBFCs are required to retain a minimum of 20% share of the loans. In terms of risk, both
banks and NBFCs proportionally share credit risks in a back-to-back arrangement, as per their
agreed-upon ratio. If a borrower defaults, both parties bear losses in accordance with their
respective contributions.

In FY23, UGRO implemented several co-lending and co-origination agreements, establishing

its leadership in the 'Lending as a Service' business model. As of Mar-23, UGRO has tied up
with over 10 co-lending/co-origination partners (being large NBFCs and banks) for most of its
product offerings.

Exhibit 67: Co-Lending is a value accretive model

Source: Company

Exhibit 68: UGRO and Co-Lending partner benefitting mutually

Benefits to UGRO

•High growth with lower equity capital

•Improved ROA and ROE due to enhanced leverage and higher spreads compared to
on-balance sheet lending
•Pari passu risk sharing with the partner

Benefits to Partner Institution

•Lower risk weight and more granular portfolio

•Increased returns on a risk-adjusted basis due to no operating cost
•Build-out of the PSL portfolio

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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October 23, 2023 |35
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Fortifying the defense line with strong collections and EWS framework

As its business requirements have increased, UGRO has fortified essential areas within various
defense lines. This involved refining its team structures and increasing its staffing levels in
analytics, credit, fraud control, and collections strategy. UGRO has built a strong dedicated
collection team and Write-off policy, wherein assets are written off either partially or in their
entirety only when the company has stopped pursuing the recovery. The write-off decisions
will be taken by Management which would be based on suitable justification notes presented
by the responsible business/collections team.

Also, UGRO has developed the ‘Early Warning System’ (EWS), which harnesses macro (industry
consumption, regulatory changes) and micro indicators as well as consumer behavior (Credit
score movement, loan defaults, and customer inquiries) for efficient collections. UGRO has
recruited industry veterans for effectually resolving any issues, thus establishing its strength.
UGRO is a highly professionalized entity, and is independently managed by the CXO team.

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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October 23, 2023 |36
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

UGRO’s Profile & Performance

UGRO Capital, a prominent non-deposit taking NBFC regulated by the RBI, transformed from
'Chokhani Securities Private Limited' to 'UGRO Capital Limited' in September 2018. In
December 2017, Poshika Advisory Services LLP and Shachindra Nath took over management
control.

Specializing in MSME lending, UGRO offers diverse financial solutions, including Secured LAP,
Affordable LAP, Micro Enterprises Loans, Machinery Loans, Unsecured Business Loans, and
Supply Chain Financing. Its clientele spans prime segment customers with ~12% interest rates
to micro-enterprises with rates at ~19-25%. UGRO collaborates with banks, fintechs, and NBFC
partners for co-lending, thus expanding its outreach across India.

UGRO's unique underwriting approach focuses on specific sectors. Initially selecting 8 sectors
after an extensive 18-month evaluation of >180 sectors, the company refined its focus on sub-
sectors, emphasizing those with significant credit demand and distinct risk profiles. Recognizing
the influence of cash flow on very small businesses, Micro Enterprises became a key sector.
These sectors represented over 50% of SME credit demand, offering UGRO substantial
opportunities in the MSME lending arena.

Employing a sectoral lending strategy, UGRO identifies commonalities within the diverse MSME
sector. By analyzing cash flow and repayment patterns within sectors, UGRO developed the
innovative AI/ML-based scoring model: GRO Score. This model integrates data from banking,
bureaus, and GST, assessing over 20,000 data points to make credit decisions within 60
minutes.

UGRO has crafted proprietary technology platforms tailored for each distribution channel,
centering on its versatile Business Rule Engine (BRE). This BRE, devoid of product and
distribution biases, relies solely on customer behavior. UGRO's data-driven approach
permeates not only underwriting, but all aspects of the business, thus optimizing operations.
Data analytics guides pivotal decisions; for instance, when selecting locations for micro
enterprise branches, UGRO conducts detailed analyses by state and PIN code, focusing on
business size and portfolio performance.

UGRO has also developed the EWS, which harnesses macro (industry consumption, regulatory
changes) and micro indicators as well as consumer behavior (Credit score movement, loan
defaults, customer inquiries) for efficient collections. To effectively navigate challenges, UGRO
has on-boarded seasoned industry leaders, ensuring the organization's resilience.
Independently managed by the CXO team, UGRO operates as a highly professionalized entity.

Exhibit 69: Performance (overall)

Key On Avg. NIM Opex Credit

Disburse EPS BVPS PER PBR
financial AUM YoY Book Net PAT YoY PPoP YoY YoY (on -to- Cost-to- ROA ROE GS3 NS3
ment (Rs) (Rs) (x) (x)
(Rs mn) AUM Worth BS) AUM AUM
2021 13,170 53% 99% 25,140 9,370 287 47% 317 134% 4.1 38% 135.0 70.9 2.1 10% 7.1% 1.8% 1.9% 3.1% 2.7% 1.7%

2022 29,690 125% 84% 22,650 9,595 146 -49% 496 56% 2.1 -49% 137.0 140.0 2.1 9% 5.8% 1.6% 0.6% 1.5% 1.9% 1.4%

2023 60,810 105% 60% 46,410 9,753 398 173% 1,406 184% 5.7 176% 142.0 50.7 2.0 13% 5.4% 1.9% 1.1% 4.1% 1.6% 0.9%

2024E 94,314 55% 55% 61,174 14,033 1,319 232% 2,879 105% 14.4 154% 181.4 20.0 1.6 14% 4.0% 2.5% 2.6% 9.4% 2.0% 1.1%

2025E 1,42,145 51% 50% 83,739 20,906 2,683 103% 4,936 71% 24.9 72% 206.3 11.6 1.4 15% 3.6% 2.2% 4.0% 12.8% 2.0% 1.1%

2026E 1,94,467 37% 50% 1,03,736 24,083 3,671 37% 6,655 35% 34.0 37% 240.3 8.5 1.2 14% 3.2% 2.0% 4.0% 15.2% 2.0% 1.0%

Source: Company, Emkay Research

Secured property backed MSME Loan

Leveraging its expertise, UGRO has established a robust lending framework tailored for the
MSME sector. UGRO categorizes its secured products into Prime Secure and Micro Enterprise
Loans. Prime loans are facilitated through its prime branches in major cities, whereas Micro
Loans are managed through its micro branches situated across five states (TN, Rajasthan,
Gujarat, Karnataka, and Telangana).

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October 23, 2023 |37
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 70: AUM trend

AUM mix (Rs bn) Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q2FY24
Total AUM 36,570 43,750 50,960 60,810 67,770 75,900
Prime - Secured Loans 11,500 12,940 14,620 17,270 19,860 21,600
QoQ growth 13% 13% 13% 18% 15% 9%
as % of total AUM 31% 30% 29% 28% 29% 28%
Micro Enterprise Loan 1,700 2,400 3,380 4,720 5,480 6,600
QoQ growth 60% 41% 41% 40% 16% 20%
as % of total AUM 5% 5% 7% 8% 8% 9%

Source: Company, Emkay Research

The prime secured product can be subdivided into Prime LAP and Prime Affordable LAP. The
average ticket size for Prime LAP is approximately Rs15.1million, in contrast to around
Rs0.35million for Affordable LAP. On the other hand, Micro Enterprise Loans constitute a distinct
segment with an average ticket size of roughly Rs0.09million. Micro loans are fully secured
against property, with a preference for self-occupied residential properties as collateral, and
they carry a higher interest rate due to the customer profile.

Exhibit 71: Branch-led disbursement

Disbursement (Rs bn) Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q2FY24

Total Disbursement (Net) 9,160 11,010 11,640 14,590 12,790 14,700
Prime - Secured Loans 1,920 2,510 2,940 3,600 3,630 3,000
QoQ growth 31% 17% 22% 1% -17%
as % of total AUM 21% 23% 25% 25% 28% 20%
Micro Enterprise Loan 910 1,200 1,360 2,060 1,510 1,900
QoQ growth 32% 13% 51% -27% 26%
as % of total AUM 10% 11% 12% 14% 12% 13%

Source: Company, Emkay Research

Exhibit 72: UGRO maintains a balanced mix of prime and micro products, leading to stable
margins

Product Lending Rate

Prime - Secured Loans Micro Enterprise Loan

25% 22.3% 22.2% 22.1% 21.3% 21.1%

20%
13.2% 13.6% 13.8% 13.7% 13.7%
15%

10%

5%

0%
Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: Company, Emkay Research

Exhibit 73: AUM – Prime secured Exhibit 74: AUM Mix – Micro Enterprise Loan

AUM On-book /Off-book mix AUM On-book /Off-book mix

(Q1FY24) (Q1FY24)

37%
On Book 48% On Book
Off-Book 52%
63%
Off-Book

Source: Company, Emkay Research Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |38
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Unsecured/Quasi-secured Loans:
Unsecured loans can be sub-divided into:

Prime unsecured (Business Loans): Loan of up to Rs0.2mn through its prime branches
located in major cities across India. The ATS for unsecured loan is ~Rs0.17mn, with average
yield of ~19.6%

Machinery Financing: UGRO builds this business vertical by partnering with OEMs (~45 OEM
partners) across Light engineering, Printing and Packaging, and has recently commenced
renewable energy as part of its Machinery finance. ATS in Machinery finance is ~Rs0.35mn
with average yield of ~13.4%. Keeping in mind the re-salability of assets financed, UGRO lends
only against new machines (no part/spare funding).

Supply chain: In this business segment, UGRO has collaborated with approximately 63
anchors, extending loans to dealers and retailers associated with these anchors, to fulfill their
short-term working capital needs. The supply-chain financing operates as a revolving credit
facility, wherein customers are granted a specific credit limit based on their profile. They can
withdraw funds from this limit for a period of 90 days. Financing in this product is done at an
average rate of ~15%, with an ATS of ~Rs0.1mn.

Partnerships & Alliances: UGRO has partnered with multiple large PSU banks like Union
Bank, Central Bank, BOB, Indian Overseas Bank, etc and leading technology companies like
Poonawalla, Hinduja, Ambit, etc, to leverage its experience and resources.

Exhibit 75: Diverse product mix to serve the heterogeneous MSME segment

AUM mix (Rs bn) Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q2FY24
Total AUM 36,570 43,750 50,960 60,810 67,770 75,900
Prime - Unsecured Loans 10,000 12,610 15,280 18,990 21,090 23,600
QoQ Growth 31% 26% 21% 24% 11% 12%
as % of total AUM 27% 29% 30% 31% 31% 31%
Supply Chain Financing 3,560 3,970 4,580 5,670 5,850 6,700
QoQ growth 24% 12% 15% 24% 3% 15%
as % of total AUM 10% 9% 9% 9% 9% 9%
Machinery Loan 3,610 4,650 5,640 7,010 7,980 8,900
QoQ growth 43% 29% 21% 24% 14% 12%
as % of total AUM 10% 11% 11% 12% 12% 12%
Partnerships & Alliances 6,200 7,180 7,460 7,150 7,500 8,500
QoQ growth 16% 16% 4% -4% 5% 13%
as % of total AUM 17% 16% 15% 12% 11% 11%

Source: Company, Emkay Research

Exhibit 76: Strong disbursement growth.

Disbursement mix (Rs bn) Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q2FY24
Total Disbursement (Net) 9,160 11,010 11,640 14,590 12,790 14,700
Prime - Unsecured Loans 3,050 3,530 3,870 4,180 4,290 5,200
QoQ growth 16% 10% 8% 3% 21%
as % of total AUM 33% 32% 33% 29% 34% 35%
Supply Chain Financing (Net) 660 580 650 1,090 110 850
QoQ growth -12% 12% 68% -90% 673%
as % of total AUM 7% 5% 6% 7% 1% 6%
Machinery Loan 1,190 1,260 1,340 1,730 1,530 1,650
QoQ growth 6% 6% 29% -12% 8%
as % of total AUM 13% 11% 12% 12% 12% 11%
Partnerships & Alliances 1,430 1,930 1,480 1,930 1,720 2,100
QoQ growth 35% -23% 30% -11% 22%
as % of total AUM 16% 18% 13% 13% 13% 14%

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
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October 23, 2023 |39
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 77: High-yielding product mix

Prime - Unsecured Loans Supply Chain Financing

Machinery Loan Partnerships & Alliances

26% 23.6% 23.6%

22.4% 22.9%
24% 22.1%
22% 19.6% 19.6%
19.0% 19.2% 19.3%
20%
18% 16.2% 16.0%
15.5% 15.0%
16% 14.3%
14%
12%
13.2% 13.3% 13.4% 13.5% 13.4%
10%
Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: Company, Emkay Research

DuPont Analysis

Exhibit 78: RoA/RoE expansion led by strong CLM, leading to higher ROE with moderate leverage

RoE decomposition (%;on average assets) FY21 FY22 FY23 FY24E FY25E FY26E
Interest income/Avg assets 10.0 11.8 13.5 15.1 15.2 15.3
Interest expended/Avg assets 3.0 6.0 8.2 8.1 7.5 7.7
Net Interest Income / Avg. Assets 7.0 5.8 5.3 7.0 7.7 7.6
Income from Off B/s assets / Avg. Assets 0.0 1.2 4.3 4.1 5.1 4.8
Other Income / Avg. Assets 0.4 0.6 1.1 0.9 0.9 0.7
Income Yield / Avg. Assets 7.3 7.6 10.7 12.0 13.7 13.1
Op. Cost (Staff cost) / Avg Assets 3.1 3.2 3.9 3.5 3.7 3.4
Op. Cost (Other costs) / Avg Assets 2.1 2.3 2.9 2.7 2.6 2.4
Operating profit / Avg Assets 2.1 2.2 3.9 5.8 7.3 7.3
Total provisions / Avg. assets 1.3 1.3 1.6 2.2 2.0 1.9
Extraordinary items / Avg. assets 0.0 0.0 0.0 0.0 0.0 0.0
Other non-operating income 0.0 0.0 0.0 0.0 0.0 0.0
Pre-Tax ROA 0.8 0.9 2.3 3.6 5.4 5.4
Tax Retention Rate 236.8 72.1 47.4 74.3 74.3 74.3
Post Tax ROA 1.9 0.6 1.1 2.6 4.0 4.0
Leverage = Avg. Assets / Avg. Equity 1.6 2.4 3.7 3.5 3.2 3.8
ROE (Leverage x ROA) 3.1 1.5 4.1 9.4 12.8 15.2

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |40
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Comparable Analysis
Exhibit 79: Comparable companies addressing the diverse MSME industry

Mix of Secured
Company Product suit Target Customer ATS product wise Average Yield Branches/Location
Portfolio
LAP: ~Rs7.5mn 98 branches: 23 Prime and 75 Micro
LAP MSM,E including small USL: ~Rs1.7mn Dominance in the South with 50%
Affordable LAP business owners, Affordable/Micro Secured: Rate of interest branches, followed by the West and
69% secured
UGRO Capital USL retailers, traders, Rs0.9mn ranges at 13- the North, with 22% and 17%
portfolio
Machinery finance professionals, small Supply Chain: ~Rs10.3mn 24% Micro branch presence in TN,
Supply chain finance manufacturers Machinery Loan: ~Rs3.5mn Rajasthan, Gujarat, Karnataka, and
Partnership: ~Rs0.5mn Telangana

Micro Enterprise Loan:

Micro Enterprise Loan 155 branches, with strong
Small business owners, ~Rs44k
SME Loan dominance in the West at ~57%,
retailers, traders, SME Loan: ~Rs2.18mn Average
MAS Financial CV, Used Car & Two- followed by northern and Central 75.6% secured
professionals, small CV & Used Car: ~Rs0.4mn computed yield of
Services wheeler Loan India at ~38%. portfolio
manufacturers, small road Two-wheeler Loan: ~Rs55k ~12%
Salaried PL Major states being Gujarat, MP,
transporters, Farmers Salaried PL: ~Rs0.13mn
Home Loan Rajasthan and Maharashtra
Home Loan: ~Rs0.74mn

100% secured
Dominance in the South with ~386 portfolio, with
Small business owners, Rate of interest branches in 9 states. Top states 99% of the
Five-Star Average ticket size for loan
Small ticket secured loan Micro entrepreneurs, self- ranges at 22- being TN and AP with more than mortgage
Business Finance is ~Rs0.35mn
employed individuals 25% 100 branches each, followed by collateral being
Telangana and Karnataka residential
property

Consumer Loan
Personal Loan
Auto Loan Individuals (Salaried &
TW Loan Self Employed) Ranges from small ticket Branch network spread across all
Gold Loan Small Business consumer loans like PL, Average regions, with marginally higher 75.8% of the
HDB Financial
Unsecured BL (Manufacturing & consumer durables and computed yield of concentration in the North. Top 5 portfolio is
Services
LAP Services) higher loan for mortgage ~14% states being TN, MP, UP, Rajasthan secured
LRD Fleet owners LAP & LRD and Gujarat
CV & CE loan
Tractor Financing
Micro Loans

Vistaar Business Loan - Operates through its 205 branches,

Vistaar Business Loan
Loan ranging at Rs1-5mn with presence in 12 states
(working capital need) Small business with prime Average
Mortgage Loan: up to (Karnataka, UP, Gujarat,
Vistaar Financial Mortgage Loan focus on Rural and Semi computed yield of 100% secured
Rs5mn Maharashtra, Rajasthan, TN, MP,
Vistaar Property Loan (for Urban ~17.5%
Vistaar Property Loan: up to Odisha, AP, Haryana, Delhi and
purchase & Construction)
Rs5mn Telangana)

MSME Secured Rural:

Rs0.1-1.5mn
MSME Secured Semi Urban: For secured
Operates through its 287 branches,
MSME Secured & -Rs1-3mn Product, ranges
with presence in 8 states and 1 UT 90.3% of the
Unsecured MSME customers in semi LAP – Construction: Rs0.5- at 16-27%
Veritas Finance (TN, West Bengal, Karnataka, portfolio is
Working capital TL urban and rural locations 1.5mn For unsecured
Odisha, MP, Telangana, AP, secured
LAP - construction loan Working Cap. Secured: product, ranges
Jharkhand and Puducherry)
Rs0.2-1mn at 28-31%
Working Cap unsecured:
Rs0.05-0.2mn

MSME: ~Rs1.4mn Total 171 non gold branches spread ~95% of the
MSME loans MSME, including small
Affordable HL: ~Rs1.1mn across Southeast and the North portfolio is
Gold Loan business owners,
Construction Finance: Average yield Gold loan branch network of 680 secured against
Affordable housing retailers, traders, Private
Capri Global ~Rs93mn ranges at 12- across India, with top-5 locations tangible property
Construction finance schools, restaurants, Self
Gold Loan: ~Rs93.6k 17% being Rajasthan, Haryana, MP, and ~4.5% is
Indirect lending Employed non-
CAR Loan: ~Rs1.17mn Gujarat and Maharashtra, secured against
Car loan distribution professionals
contributing ~85% book debt

97% of the
MSME: ~Rs98.4mn Operates from 162 branches spread
Secured MSME MSMEs, entrepreneurs Average yield on portfolio is
SBFC Finance Gold Loan: ~Rs85k across 16 states, with presence in
Gold Loan and individual customers loan is ~16.2% secured against
120 cities and 2 UTs
property and gold

Small Income generation

Entrepreneurs, small Average Business is operated from 220 97.3% of the
loan Ticket size ranges between
Paisalo Digital business owners and computed yield of branches and 1,052 touch points, portfolio is
Mobility Loan Rs10k to Rs0.5mn
individuals ~15% spread across 18 states secured
Entrepreneurial Loan

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |41
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 80: AUM growth remained strong for all comparable companies, with UGRO leading the
pack, led by product mix and strategic partnership

AUM (Rs bn) FY22 FY23 YoY growth

UGRO Capital 29,690 60,810 105%
HDB Financial Services 6,14,440 7,00,840 14%
SBFC Finance 31,922 49,428 55%
MAS Financial Services 62,468 80,926 30%
Capri Global 66,329 1,03,204 56%
Five-Star Business Finance 50,671 69,148 36%
Vistaar Financial 24,200 31,320 29%
Veritas Finance 21,874 35,337 62%
Paisalo Digital 26,973 34,928 29%

Source: Company, Emkay Research

Exhibit 81: Disbursement for UGRO was accelerated on account of the company’s diverse
business sourcing channel – In-house/Channel/Partnerships

Disbursement (Rs bn) FY22 FY23 YoY Growth

UGRO Capital 22,650 46,410 105%
HDB Financial Services NA NA NA
SBFC Finance 13,328 22,768 71%
MAS Financial Services NA NA NA
Capri Global NA NA NA
Five-Star Business Finance 17,562 33,914 93%
Vistaar Financial 8,995 13,835 54%
Veritas Finance 11,883 22,447 89%
Paisalo Digital 16,343 25,996 59%

Source: Company, Emkay Research

Exhibit 82: Despite high CoFs, UGRO Capital is able to maintain NIM at ~8%, on account of ~4% excess spread earned on its off-book lending
portfolio

Yield CoFs Spread NIM +Fees Opex-to-AUM Credit Cost GS3 NS3
UGRO Capital 15.8% 11.8% 3.9% 8% 5.4% 1.3% 1.6% 0.9%
HDB Financial Services 13.6% 7.8% 5.8% 21% 7.3% 0.3% 1.4% 0.7%
SBFC Finance 16.1% 6.8% 9.3% 14% 7.5% 2.0% 2.7% 1.0%
MAS Financial Services 11.8% 9.3% 2.4% 12% 6.2% 1.1% 3.8% 2.4%
Capri Global 13.8% 9.3% 4.4% 18% 8.2% 1.6% 2.2% 1.3%
Five-Star Business Finance 25.0% 9.3% 15.7% 11% 7.1% 0.8% 2.7% 1.4%
Vistaar Financial 17.3% 8.3% 9.1% 11% 5.7% 0.8% 2.4% 1.4%
Veritas Finance 22.8% 9.5% 13.3% 7% 2.4% 0.7% 2.2% 1.5%
Paisalo Digital 15.2% 11.5% 3.6% 9% 2.6% 1.8% 0.3% 0.02%

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |42
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 83: DuPont analysis

Five-Star HDB MAS

UGRO Vistaar Veritas Capri SBFC Paisalo
DuPont (FY23) Business Financial Financial
Capital Financial Finance Global Finance Digital
Finance Services Services
Interest income/Avg Assets 13.5% 19.9% 13.5% 15.6% 19.4% 12.3% 12.7% 11.8% 15.4%
Interest expended/Avg Assets 8.2% 3.5% 5.3% 6.5% 5.0% 5.6% 5.4% 6.9% 6.8%
Net Interest Income / Avg. Assets 5.3% 16.4% 8.2% 9.1% 14.4% 6.7% 7.4% 4.8% 8.6%
Other Income / Avg. Assets 5.4% 0.4% 5.3% 1.9% 0.8% 3.1% 1.5% 2.0% 0.1%
Income Yield / Avg. Assets 10.7% 16.8% 13.5% 10.9% 15.2% 9.8% 8.9% 6.9% 8.7%
Op. Cost (Staff cost) / Avg Assets 3.9% 4.6% 6.1% 4.3% 5.0% 4.3% 3.1% 1.0% 1.1%
Op. Cost (Other costs) / Avg Assets 2.9% 1.2% 1.3% 1.3% 2.0% 2.1% 1.4% 1.4% 1.5%
Operating profit / Avg Assets 3.9% 11.0% 6.0% 5.3% 8.2% 3.5% 4.4% 4.5% 6.1%
Total provisions / Avg. Assets 1.6% 0.3% 2.0% 1.0% 1.4% 0.7% 0.6% 0.7% 1.8%
(Extraordinary + Non-operating
0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.1% 0.0% -0.1%
income) / Avg. Assets
Pre-Tax ROA 2.3% 10.7% 4.0% 4.4% 6.9% 2.8% 3.9% 3.8% 4.1%
Tax Retention Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Post Tax ROA 1.1% 8.0% 3.0% 3.2% 5.2% 2.2% 2.9% 2.9% 3.1%
Leverage = Avg. Assets / Avg. Equity 3.7 1.9 6.3 3.7 2.2 3.5 3.4 5.0 2.8
ROE (Leverage x ROA) 4.1% 15.0% 18.7% 12.0% 11.8% 7.5% 9.9% 14.5% 8.6%

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |43
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Story in Charts:
Exhibit 84: Declining CoFs to support profitability Exhibit 85: Higher NIMs on off-book lending

Yield % CoFs% NIM (%) NIM including off book income (%)

20% 25%
16.8% 17.2% 16.7% 16.7%
18% 15.8% 19.4%
16% 14.3% 20%
13.7%
14% 12% 12% 14.9%
11% 11% 13.9% 13.6% 14.2%
10% 11%
12% 15% 12.5%
9%
10% 10.0%
9.2% 8.4%
8.0% 8.2%
8% 10% 7.1%
6.2%
6%
9.6%
4% 5%
2%
0% 0%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 86: Opex-to-AUM normalizes, as operating leverage kicks in Exhibit 87: Superior underwriting to keep credit cost in control

Opex-to-AUM (%) Cost-to-Income Credit Cost (on B/s) (%)

85% 2.5%
90% 2.6%
80% 71% 72% 2.4%
2.2% 2.2%
70% 63%
2.2% 2.0%
60% 52%
46% 2.0% 1.8% 1.9%
44%
50%
1.8%
40% 1.6%
1.6%
30%
16.6%
1.4%
20%
7.1% 5.8% 5.4% 4.0% 3.6% 3.2% 1.2%
10%
0% 1.0%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 88: Leveraging partnerships with banks and NBFCs to Exhibit 89: ROA/ROE expected to expand with business growth
improve margins

Leverage RoA - Reported (%) RoE - Reported (%)

Leverage 18%
15.2%
3.8x 16%
3.7x 3.5x 12.8%
4.0x 14%
3.2x
3.5x 12% 9.4%
3.0x 2.4x
10%
2.5x
1.6x 8%
2.0x
6% 4.1% 4.0% 4.0%
1.5x 3.1% 2.6%
4% 2.2%
1.0x 1.5% 1.1%
0.5x 2% 0.6%
1.9% 1.9%
0.0x 0%
FY21 FY22 FY23 FY24E FY25E FY26E FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |44
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 90: Superior underwriting and strong collection & EWS Exhibit 91: Diverse product offering for every need
leading to stable asset quality

GS3 NS3 AUM mix

Prime - Secured Loans 11%
3% 2.7%
Prime - Unsecured Loans 29%
3% 12%
2.0% 2.0% 2.0%
1.9%
2% 1.7% Micro Enterprise Loan
1.6%
1.4%
2% 1.1% Supply Chain Financing 9%
1.1% 1.0%
0.9%
1% Machinery Loan
8%
1%
Partnerships & Alliances
31%
0%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 92: Lending based on expertise Exhibit 93: Expanding reach to cater to the underserved

Sector mix - Q1FY24

Branch mix
6%
16% 2%
Auto Components 10%
South 10%
Education
3% North
Food Processing
22% 50%
Hospitality West
Micro Enterprises 23%
Center & East
Chemicals
23%
Electrical Equipment 18%

HealthCare
6%
7% 5%

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 94: Partnership business model to reach 50% by FY26E Exhibit 95: Dedicated team of analytics supported by ‘others’,
leading to improved productivity of the business team
On Book Off -Book
Business Enablers (no. of)
100% 1%
90% 16% Sales (FOS)
40
164
80% 40% 45% Credit
50% 50%
70% 20
Collection and Litgation 82
60% 32 568
50% 99% Operations
40% 84%
FCU 185
30% 60% 55% 50% 50%
20% Technical/Legal
10% IT Infrastructure 162
0% 330
FY21 FY22 FY23 FY24E FY25E FY26E Risk and Analytics

Source: Company, Emkay Research Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |45
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Quarterly Performance

Exhibit 96: Growing yield led by increasing mix of high-yielding Exhibit 97: Spread on off-book portfolio improving overall NIMs
product

Yield % CoFs% NIM (%) NIM including off book income (%)

20% 17.3% 16%

16.6% 13.6%
18% 16.2% 12.5% 12.9%
15.5% 14%
16% 13.9% 10.8%
12% 9.8%
14% 12% 12% 11%
11%
11% 10%
12% 7.4%
10% 8% 6.0% 6.2% 6.4%
5.8%
8% 6%
6%
4%
4%
2% 2%
0% 0%
Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 98: Cost-to-Income expected to improve with increasing Exhibit 99: Credit cost to remain stable at 2% over the longer term
scale

Opex-to-AUM (%) Cost-to-Income Credit Cost (on B/s) (%)

90% 78% 2.4% 2.2%

80% 68% 69% 2.2% 2.1%
2.0% 2.0%
70% 60% 57%
2.0%
60%
50% 1.8%
40% 1.6%
1.4%
30%
1.4%
20%
6.2% 5.5% 5.8% 5.1% 4.3%
10% 1.2%

0% 1.0%
Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 100: Prudent underwriting leading to better asset quality. Exhibit 101: Co-lending results in improving margin, leading to
RoA/RoE expansion

GS3 NS3 RoA - Reported (%) RoE - Reported (%)

3.0% 2.7% 12%

2.5% 2.5% 9.5%
2.5% 2.1% 2.2% 10% 8.7%

2.0% 1.6% 8%
1.6% 1.5% 1.5% 5.5%
1.3%
1.5% 6%

1.0% 4% 3.0%
2.2% 2.2% 2.2%
1.4%
0.5% 2% 1.0%
0.6%

0.0% 0%
Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24 Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Source: Company, Emkay Research Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |46
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 102: Distribution of shareholding

Shareholding pattern

Investment Fund for Developing Countries

New Quest acquired by TPG

16.49%
ADV Partners 22.96%

Samena Capital

Promoters

Body Corporate 1.48%

16.35%
2.21%
Foreign Portfolio Investors 1.76%
1.90%
Go Digit General Insurance Limited
8.26%
SBI Life Insurance Co. Ltd
2.19%
Other Insurance Companies 16.35%
10.04%
Other Public shareholders

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |47
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 103: Experienced management in place, set to deliver growth

Managing Team Designation Details

Mr. Mande, drawing from his extensive experience in profitable asset businesses and
technology, aims to establish a diverse MSME lending franchise using digitization and
data analytics. Amit oversees business scaling and manages teams across various
Amit Mande Chief Revenue Officer
product verticals. With a career spanning 22 years at institutions like Standard
Chartered Bank, ABN AMRO Bank, and Barclays Bank, he brings invaluable expertise
to the role.

Mr. Pandey, a founding member of UGRO Capital, specializes in creating practical risk
models using analytics and technology. With over 20 years of experience from
Anuj Pandey Chief Risk Officer renowned companies like Barclays Bank, ABN AMRO Bank, GSK Consumer, and
Religare Finvest, he focuses on developing innovative products and programs to
streamline credit access for SMEs.

Mr. Lodha, brings with him >20 years of experience and, has been associated with
organizations like Future Group and SREI Infrastructure. In his previous role he worked
Kishore Lodha Chief Financial Officer as the CFO of Hinduja Leyland Finance. He has held various offices in the finance
domain ranging from managing accounting, taxation, financial controller, RBI
Compliances and Treasury function.

Mr. Lotke, UGRO Capital's Chief Officer – Legal, Compliance & Secretarial, possesses
20 years of experience in Legal, Compliance, and Corporate Secretarial matters. He
specializes in Financial Services Legislations, Capital Market transactions, Corporate
Sunil Lotke Chief Legal and Compliance Officer
Restructuring, and Securities Regulations. Formerly with InCred Financial Services, he
led the Legal & Compliance function and has worked with notable organizations such
as Reliance Group, Future Capital Holdings, IIFL Group, and StarAgri Finance.

Mr. Sathiayan, a finance and banking expert, brings over two decades of experience in
SME & Business Finance, Retail Liabilities and Assets, Third Party Products Distribution,
and financial services. In his role as Chief Business Officer at UGRO, he is instrumental
J. Sathiayan Chief Business Officer
in expanding the company's presence across India. Previously, he held significant
positions such as Vice President at ABN Amro Bank N.V. and Director at Religare Finvest
Limited.

Mrs. Shome, UGRO Capital's Chief People’s Officer, brings over 19 years of expertise
in HR, Change Management, Organization Transformation, and Culture Building. With
Pia Shome Chief People Officer leadership roles at SMEcorner, IDFC First Bank, RBL, DBS Bank, Barclays, and TCS
eServe International, she has gained recognition for her result-oriented approach,
being named an HR 40 under Forty by Jombay and ET Now.

Mr. Garg, UGRO Capital's Chief Technology Officer, brings over 20 years of diverse
technology experience, including senior leadership and entrepreneurship. He co-
Rishabh Garg Chief Technology Officer founded GramCover, a rural insurtech firm, and served as VP Technology at Biz2Credit,
specializing in SME Financing. His expertise extends from roles at Agnity, SAP Labs,
and Infosys.

Mr. Das, UGRO Capital's Chief Innovation Officer, is dedicated to data-driven decision-
making and creating innovative customer solutions. With over 17 years of experience
in financial services, he has worked at Standard Chartered Bank, India Infoline Finance,
Subrata Das Chief Innovation Officer and Fractal. His expertise lies in setting up and scaling analytics teams, developing
solutions for various business aspects including credit scoring, risk assessment,
portfolio management, and more, covering both consumer and commercial sides of
retail lending.

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |48
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

Exhibit 104: Board members

Name Position Details

Mr. Mishra, former Chief Information Commissioner of India (December 2010 to
September 2013), boasts of over 40 years of distinguished service in the Indian
Administrative Services (batch of 1973). He held significant roles, including
Non-Executive Chairman and Chairman and Non-Executive Independent Director at the Multi Commodity
Satyananda Mishra
Independent Director Exchange of India Limited (November 2013 to November 2016) and Director at
the SIDBI until 2018. He also served as Secretary for key government
departments, such as the Department of Personnel & Training, Public Works
Department, and Department of Culture (MP Government).
Mr. Nath took on the role of an entrepreneur by acquiring control of a listed NBFC
called Chokhani Securities. Currently, he serves as the Vice Chairman & Managing
Director of UGRO Capital. Prior to his entrepreneurial venture at UGRO Capital,
Mr. Nath played a significant role in establishing insurance companies, global asset
Shachindra Nath Vice Chairman and Managing Director
management businesses, capital markets, and lending institutions. He has notably
built two insurance firms, a large asset management company, and an NBFC.
Among his achievements are the creation of new business verticals, successful
joint ventures, and partnerships for the group.
Mr. Singam, with a strong background in economics and banking, held the position
of Executive Director at the Reserve Bank of India (RBI) and served as the RBI
Karuppasamy Singam Independent Director Nominee Director at Indian Bank. He played key roles in prominent working groups
related to areas like urban cooperative banks, cross-border supervision, and
integrated alert systems.
Mr. Sen acts as an External Advisor for E&Y in Banking and Financial Services. He
serves on various boards, including Kalyani Forge Ltd, Manappuram Finance Ltd,
and Tata Investment Corporation Ltd. Additionally, he chairs the Audit Committees
Abhijit Sen Independent Director
at Kalyani Forge and participates in several other Board Committees. Previously,
he served as the CFO at Citi India for over 18 years and was on the Board of
National Securities Depository Ltd, also advising General Atlantic.
Mr. Sekar is a seasoned banker with extensive experience in various aspects of
Indian Banking, having served at a senior level. He started his career as a
Karnam Sekar Independent Director Probationary Officer with SBI and advanced to the position of Deputy Managing
Director. He was also appointed as the Managing Director of a Public Sector Bank,
where he led two public sector banks during crucial periods in their history.
Mr. Bhargava, who served LIC for 38 years, retiring as Managing Director in July
2019, demonstrated diverse expertise in roles both in India and abroad, building
Hemant Bhargava Independent Director
multi-dimensional experience in different capacities, especially in Marketing,
Internal Operations, and new ventures.
Mr. Agarwal, with nearly three decades of experience in the Indian financial
services sector, held prominent positions at organizations including the SEBI and
the Forward Markets Commission, his term as Whole Time Member at SEBI ended
Rajeev Krishnamuralilal Agarwal Independent Director in Nov-16. He has a strong ability to build and maintain relationships within the
community. He played a key role in framing regulations for the liberalized
Commodities Markets during his tenure as a Member of the Forward Markets
Commission.
Mrs. Aggarwal, a renowned fintech investor, is regarded highly in the industry.
She possesses extensive expertise in venture capital, financial inclusion, digital
banking, and micro-insurance. Currently serving as the Global Investments
Advisor for Flourish Ventures, she spearheads investments in innovative fintech
Smita Aggarwal Independent Director startups that enhance financial health and inclusion in Asia. With three decades of
finance experience, she has played pivotal roles at organizations such as Omidyar
Network, Fullerton India Credit, Reserve Bank of India, and ICICI Bank,
demonstrating a track record of building businesses and driving growth through
innovation.
Mr. Gupta, a Partner at TPG NewQuest in Singapore, supervises TPG NewQuest’s
businesses in India and Southeast Asia, along with investments in the financial
services and power sectors across the Asia Pacific. With over 18 years of industry
Amit Gupta Non-Executive Director
experience, he previously directed Bank of America Merrill Lynch’s Asia Private
Equity Group, focusing on India and investments in energy and financial services
across the region.
Mr. Gupta, Senior Executive Officer at Samena Capital Investments Limited in
Dubai, focuses on sustainable and profitable long-term growth by balancing the
interests of the company, shareholders, and stakeholders. His background
Chetan Kulbhushan Gupta Vice Chairman and Managing Director
includes roles as an Equity Research Analyst at Tricolor India Fund and
participation in the General Electric Financial Management Leadership Program,
specializing in financial planning and analysis.
Mr. Sehrawat, Partner at ADV Partners, has 22 years of experience in financial
services, specializing in private equity, distress debt acquisition, and corporate
restructuring in India. He excels in building new business relationships and
Manoj Sehrawat Non-Executive Director
adapting to diverse environments. Previously, he was MD at ADV and VP at JP
Morgan's Asia Special Situations Group. He also played a key role in acquiring
Non-Performing Loans at ARCIL from banks and financial institutions.

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>.Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research
analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
October 23, 2023 |49
UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

UGRO Capital : Standalone Financials and Valuations

Profit & Loss Balance Sheet

Y/E Mar (Rs mn) FY22 FY23 FY24E FY25E FY26E Y/E Mar (Rs mn) FY22 FY23 FY24E FY25E FY26E
Interest Income 2,721 4,829 7,571 10,239 14,016 Share capital 706 693 1,078 1,078 1,078
Interest Expense 1,373 2,933 4,055 5,047 7,077 Reserves & surplus 8,960 9,147 18,486 21,169 24,840
Net interest income 1,348 1,896 3,516 5,191 6,940 Net worth 9,666 9,840 19,564 22,248 25,918
NII growth (%) 30.2 40.7 85.4 47.6 33.7 Borrowings 18,022 31,489 35,273 53,304 77,787
Non interest income 399 1,944 2,464 3,990 5,038 Other liabilities & prov. 861 1,726 1,725 1,725 1,725
Total income 1,747 3,841 5,980 9,181 11,977 Total liabilities & equity 28,549 43,056 56,563 77,277 1,05,430
Operating expenses 1,251 2,435 3,101 4,245 5,322 Net loans 24,511 38,064 49,888 68,536 93,590
PPOP 496 1,406 2,879 4,936 6,655 Investments 694 601 848 1,159 1,581

PPOP growth (%) 56.2 183.6 104.7 71.4 34.8 Cash, other balances 1,884 2,118 3,434 5,056 7,582
Provisions & contingencies 294 568 1,104 1,325 1,715 Interest earning assets 27,089 40,783 54,171 74,752 1,02,754
PBT 202 838 1,775 3,612 4,940 Fixed assets 43 38 38 38 38
Extraordinary items 0 0 0 0 0 Other assets 1,417 2,235 2,354 2,487 2,639
Tax expense 56 441 456 928 1,270 Total assets 28,549 43,056 56,563 77,277 1,05,430
Reported PAT 146 398 1,319 2,683 3,671 BVPS (Rs) 137.0 142.0 181.4 206.3 240.3
PAT growth (%) (49.3) 173.4 231.6 103.5 36.8 Adj. BVPS (INR) 137.0 142.0 181.4 206.3 240.3
Adjusted PAT 146 398 1,319 2,683 3,671 Gross loans 24,880 38,677 51,872 71,073 97,233
Diluted EPS (Rs) 2.1 5.7 14.4 24.9 34.0 Total AUM 29,690 60,810 94,314 1,42,145 1,94,467
Diluted EPS growth (%) (49.4) 176.2 153.8 72.3 36.8 On balance sheet 24,910 36,390 51,872 71,073 97,233
DPS (Rs) 0.0 0.0 0.0 0.0 0.0 Off balance sheet 4,780 24,420 42,441 71,073 97,233
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 Disbursements 22,650 46,410 61,174 83,739 1,03,736
Effective tax rate (%) 27.9 52.6 25.7 25.7 25.7 Disbursements growth (%) (9.9) 104.9 31.8 36.9 23.9
Net interest margins (%) 9.2 12.5 13.6 14.9 14.2 Loan growth (%) 91.1 55.3 31.1 37.4 36.6
Cost-income ratio (%) 71.6 63.4 51.9 46.2 44.4 AUM growth (%) 125.4 104.8 55.1 50.7 36.8
PAT/PPOP (%) 29.3 28.3 45.8 54.4 55.2 Borrowings growth (%) 135.4 74.7 12.0 51.1 45.9
Shares outstanding (mn) 70.6 69.3 107.8 107.8 107.8 Book value growth (%) 1.4 3.6 27.8 13.7 16.5

Source: Company, Emkay Research Source: Company, Emkay Research

Asset quality and other metrics Valuations and key Ratios

Y/E Mar (Rs mn) FY22 FY23 FY24E FY25E FY26E Y/E Mar FY22 FY23 FY24E FY25E FY26E
Asset quality P/E (x) 140.0 50.7 20.0 11.6 8.5

GNPL - Stage 3 564 957 1,401 1,990 2,820 P/B (x) 2.1 2.0 1.6 1.4 1.2

NNPL - Stage 3 415 499 560 637 790 P/ABV (x) 2.1 2.1 1.8 1.5 1.3
GNPL ratio - Stage 3 (%) 2.3 2.5 2.7 2.8 2.9 P/PPOP (x) 41.1 14.3 9.1 6.3 4.7

NNPL ratio - Stage 3 (%) 1.7 1.3 1.1 0.9 0.8 Dupont-RoE split (%)

ECL coverage - Stage 3 (%) 27.0 49.0 60.0 68.0 72.0 NII/avg AUM 7.1 6.2 8.0 8.4 8.2

ECL coverage - 1 & 2 (%) 0.0 0.0 0.0 0.0 0.0 Other income 2.1 6.3 5.6 6.5 6.0

Write-off ratio (%) 0.8 0.3 0.8 0.8 0.8 Securitization income 0.0 0.0 0.0 0.0 0.0

Total credit costs (%) 1.6 1.9 2.5 2.2 2.0 Opex 2.8 3.4 3.0 2.9 2.6

NNPA to networth (%) 4.3 5.1 2.9 2.9 3.0 Employee expense 3.8 4.6 4.0 4.0 3.7
Capital adequacy PPOP 2.6 4.6 6.5 8.0 7.9

Total CAR (%) 34.5 20.2 34.8 30.3 26.0 Provisions 1.6 1.9 2.5 2.2 2.0

Tier-1 (%) 33.6 19.6 34.3 29.9 25.7 Tax expense 0.3 1.4 1.0 1.5 1.5

Miscellaneous RoAUM (%) 0.8 1.3 3.0 4.4 4.4

Total income growth (%) 60.6 119.9 55.7 53.5 30.5 Leverage ratio (x) 2.0 3.1 3.1 2.9 3.5
Opex growth (%) 62.4 94.6 27.4 36.9 25.4 RoE (%) 1.5 4.1 9.4 12.8 15.2

PPOP margin (%) 2.6 4.6 6.5 8.0 7.9

Credit costs-to-PPOP (%) 59.3 40.4 38.3 26.8 25.8 Quarterly data
Loan-to-Assets (%) 85.9 88.4 88.2 88.7 88.8 Rs mn, Y/E Mar Q1FY23 Q2FY23 Q3FY23 Q4FY23 Q1FY24

Yield on loans (%) 14.3 15.8 17.2 16.7 16.7 NII 400 463 515 507 688

Cost of funds (%) 10.7 11.8 12.1 11.4 10.8 NIM(%) 9.8 10.8 12.5 13.6 12.9

Spread (%) 3.6 3.9 5.0 5.3 5.9 PPOP 197 324 389 511 566
PAT 73 53 131 140 252
Source: Company, Emkay Research
EPS (Rs) 1.04 0.75 1.89 2.03 3.06

Source: Company, Emkay Research

This report is intended for team.emkay@whitemarquesolutions.com use and downloaded at 10/24/2023 10:37 AM
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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

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Emkay Rating Distribution

Ratings Expected Return within the next 12-18 months.
BUY Over 15%
HOLD Between -5% to 15%
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UGRO Capital (UGRO IN) India Equity Research | Initiating Coverage

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Digitally signed by SESHADRI KUMAR SEN

SESHADRI
DN: c=IN, o=Personal,
pseudonym=133422712594461905DSVUy8kk9un4ET,
2.5.4.20=1217a0ac22644d6a490a50ef35978ca2cbcf94e3
9548b678bafc1f29f6e1ced7, postalCode=400011,

KUMAR SEN
st=Maharashtra,
serialNumber=07837cb61a11364e9d2229a78d0af55d5d
599551e83b808ee76a10dbb491f06e, cn=SESHADRI
KUMAR SEN
Date: 2023.10.23 04:33:35 +05'30'

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