Ugro Capital Ltd Q3 FY23 Earnings Conference Call Insights

Key highlights from Ugro Capital Ltd (UGROCAP) Q3 FY23 Earnings Concall

Management Update:

• [00:05:34]UGROCAP recorded the highest ever disbursement in 3Q, which stood at INR1,874 crore for 3Q23, up 13% higher than last quarter.

• [00:08:56] UGROCAP said it is committed to build India’s largest small business financing platform and aim to double its bottom line over the next financial year.

Q&A Highlights:

• [00:09:15] Satish Kumar from Choice Equity enquired about the reason behind the recent increase in incremental disbursement to the supply chain financing segment vs. other prime unsecured and secured segments in last 2 quarters. Shachindra Nath MD said UGROCAP has invested in multiple distribution channels over the past few years, such as prime segment, micro enterprises branches, machinery financing, supply chain financing, partnership analysis and digital. Data analytics and GRO Score are used to better assess investments, and these investments are now beginning to show benefits with higher yields and more secured investments.

• [00:13:28] Satish Kumar with Choice Equity asked when the cost-to-income ratio of the company will normalize going forward. Shachindra Nath MD replied that the capital market should be aware that the company was established from scratch and has invested heavily in its operations. It has been profitable since inception and is aiming to achieve a cost-to-income ratio of 45% by 2025, which would be the best in the market.

• [00:16:07] Shital Gawade at ULJK Financial queried about the yield of a portfolio, focusing on the off-balance sheet portion and its future outlook given that it is currently at 17.4%. Shachindra Nath MD answered that the yield of a portfolio does not change when transitioning from an off-book to an on-book arrangement. Yield is independent of who the lender is and remains the same no matter who is lending the asset.

• [00:17:56] Shital Gawade from ULJK Financial asked about the yield on the portfolio going forward in FY24. Shachindra Nath MD said UGROCAP’s lower-yielding business currently makes up around 50% of its monthly volumes. UGROCAP expects to double its profitability by keeping operating expenses and credit costs flat, increasing portfolio yield, and growing its AUM. UGROCAP expects increase in yield to happen.

• [00:19:21] Shital Gawade of ULJK Financial enquired how UGRO’s growth in AUM will impact its NNPA by 2025. Anuj Pandey CRO answered that the expected GNPA for the portfolio is expected to remain at or below 2%, with a balance of 70% secured book and 30% unsecured book.

• [00:20:45] Shital Gawade with ULJK Financial queried if UGROCAP plans to raise capital in the next year given its focus on off-book AUM. Shachindra Nath MD replied that URGOCAP will be doing a capital raise by the end of 4Q23 or 1Q24, but the form and size are not yet determined.

• [00:21:42] Ankur Kumar at Alpha Capital asked how UGROCAP can manage its fast growth, NPAs and safety given that it has grown to INR5,000 crore in 3.5 to 4 years. Shachindra Nath MD said that UGRO is a NBFC that specializes in micro-enterprises. It had a higher initial capital of INR950 crore than Five Star and took 15 years to reach its current level. UGRO expects to grow at 15-20% per annum post its inflection point due to its infrastructure, which includes 1,500 people, 100 locations, 150 people in technology, and 40 plus people in data analytics by 2022.

• [00:26:10]  Ankur Kumar at Alpha Capital asked what risks UGROCAP may face in achieving its guidance of doubling PBT and growing AUM in next 12 months. Shachindra Nath MD said UGROCAP is seeing healthy growth in unsecured loans up to INR25 lakh despite rate hikes and reduced liquidity in the banking system. UGROCAP’s growth rate is still steady despite competition from other lenders.

• [00:35:55] Akash Jain from Ajcon Global asked about the GNPA and NNPA ratio, if not for AUM growth what could have been UGROCAP’s GNPA and NNPA ratio. Anuj Pandey CRO said that UGROCAP is monitoring static pool delinquencies by vintage and have found that, since it implemented its new GRO Score 2.0, which takes into account banking behavior and repayment behavior by sector, the book quality remains consistent even after 12-18 months.

• [00:37:33]  Nirvana Laha enquired about guidance on what percentage of the remaining INR 17 crores from a demerger is likely to lapse and affect UGROCAP’s PBT. Kishore Lodha CFO said the company expects to absorb the deferred tax liabilities of INR7 crore next year with a deferred tax asset of INR2.3 crore not impacting profits until 2029 or 2030. If profitability is not enough to cover the liabilities in the next quarter, any remaining portion will be then taken.

• [00:47:01] Joel Ilias asked if the company has any KPIs for evaluating customer stickiness, customer satisfaction and customer retention. Shachindra Nath MD replied that UGROCAP is a young business focused on providing credit quickly and meeting customer needs, and it has published an impact study with 36,000 customers. UGROCAP is working to offer more services for its loan customers.

• [00:49:11] Tulsi Badrinath asked that of the current 100 branches, how many have broken even and when the remaining will turn profitable. Shachindra Nath MD answered that the company has 100 branches, 25 of which are in main cities and serve the prime customer segment. Most of these branches break even quickly, except for a few added this year. 35 plus branches in Tier 2 and 3 towns originate direct business and require brand establishment for secured loans. Every quarter more branches become profitable and contribute to positive cash flow.