Ugro Capital Ltd (NSE: UGROCAP) Q2 2025 Earnings Call dated Oct. 23, 2024
Corporate Participants:
Shachindra Nath — Vice Chairman and Managing Director
Anuj Pandey — Chief Risk Officer
Kishore Lodha — Chief Financial Officer
Amit Mande — Chief Revenue Officer
Deepak Khetan — Head of Investor Relations
Analysts:
Amit Jain — Analyst
Nirvana Laha — Analyst
Arpit Agarwal — Analyst
Anil Tulsiram — Analyst
Questions and Answers:
Operator
[Starts Abruptly] Investors Forum. Please go ahead. Mr. Ansari, your line is unmuted. Please proceed with your question.
Shachindra Nath
Can we go to the next question, please?
Operator
Sure. As there is no response from the line of current participant, we’ll move on to the next question. And next question is from Sahil Bambade from Sirius Advisors. Please go ahead.
Shachindra Nath
Sahil ji, can we have a question, please?
Operator
Sahil sir, we have unmuted your line. Please proceed with your question.
Shachindra Nath
Sahil — operator, I don’t think so that we are — we have clear voice, can we go to the next question, please?
Operator
Sure. We’ll move on to the next question. Next question is from the line of Amit Jain from Citi Advisory. Please go ahead.
Amit Jain
Am I audible, sir?
Shachindra Nath
Yes, you are, Mr. Jain.
Amit Jain
Yeah. Yeah. So, sir, my question is regarding our micro branches. So we have taken an ambitious target and we are indexing a lot on micro branches to grow our AUM further. In fact, if you look at our growth in micro, it has been significantly higher than other segments. My question is, how are we so confident that we’ll be able to maintain the credit quality in this channel?
Considering the number that we are seeing right now, — just give me a sec, I’m just pulling up the numbers. So, in micro, our GNPA is around INR40 crores and Q4 AUM was around INR813 crores, so closer to 5%. I’m assuming that there would be no NPA for loans in the last two quarters. So, what I think is mostly INR40 crores GNPA is coming on INR813 crores, which is 5%, significantly higher. So, what gives us confidence that we’ll be able to scale this channel at a good credit quality?
Anuj Pandey
So the way we have modeled this is that in micro-enterprises, also the peak delinquencies happened between 18 to 24 months. And then because we only do secured loans, there is a repossession and then a time about five to six months to sell that property off. So eventually, the peak delinquencies in month 18 to 24 will reach around this percent and then start coming down. So the way — currently our GNPA is about 3.8%, and we already have started seeing success in repossession of properties.
Also, as we expand and as we learn, we keep tweaking our policy. And that has been the journey. So if you recall, our first set of 75 branches operated for a year, and then we took a break on expansion of branches because we wanted to learn the business in its full intricacy. Now that once the learning is there, all the new branches roll out is as per them. So if you see — and we closely monitor the early delinquency indicators for all the new branches, which is basically the bounce rate, 30-plus in six months and the first 12 months NPA rates, et cetera, they are all within the range. So all this put together, we think at a steady-state level, the delinquencies or the GNPA in micro-enterprises will hover around 3 — between 3% to 3.5%.
Shachindra Nath
In addition to that, I mean, what Amit I would add that the mainline financial institution or large banks or NBFC, the degree of difficulty to understand micro-enterprises by state and cluster have been a huge challenge. Even within the listed world, we have two micro-enterprises, NBFC, which are listed, and there are a few more which will come to the market. You will see majority of them are very state-focused or too state-focused because the micro-enterprises cluster behavior or state behavior of the customer type is fairly unique depending upon the geography.
So Tamil Nadu is a different geography than UP. So as Rajasthan to Telangana. So we took time to learn this. So we experimented first with 25 locations, then 50 locations. And that’s why we run — while we say one business, but we run product policy cluster by — designed by the unique cluster. So the way the collateral policy in Tamil Nadu will work is very different than what would be in UP and MP and Maharashtra.
So I think so the size of the platform, which we have built and our rapid expansion is a function of that we have invested early on very heavily both in technology in understanding the credit process, understanding the type of collateral, and then augmenting senior management across the length and breadth of the country. So it’s a company in its own. And that’s why we’re fairly confident that this business can be run at the overall GNPA levels of 3%, 3.5% and credit cost of 1%. And the payoff of that expansion is to us.
Amit Jain
Okay. Yeah, this is it from my side. Thank you, sir.
Shachindra Nath
Thank you.
Operator
The next question is from the Nirvana Laha from Badrinath Holdings. Please go ahead.
Nirvana Laha
Hey, am I audible?
Shachindra Nath
Yes, Mr. Laha.
Nirvana Laha
Yeah. Thanks a lot. So Kishore sir, question is to you. So in the P&L, the net gain of derecognition of financial instrument that has DA income and co-lending income, right?
Kishore Lodha
Yes.
Nirvana Laha
Is it possible to give a split between the two for this quarter?
Kishore Lodha
So I would not remember the number exactly off-hand. So you can assume that 70% of it would be coming from co-lending and 30% would be coming from DA.
Nirvana Laha
Okay. So just trying to understand that number, sir. So 70% would be like about INR70 crores or even then above that. Whereas if I look at your presentation, the co-lending AUM in this quarter has increased by about INR400 crores, from INR1,830 crores something to about INR2,200 crores something. As I understand, the co-lending income that you report is upfronted for the credit spread, the interest spread for the entire delta in this quarter, right? So [Speech Overlap].
Kishore Lodha
This understanding is not correct. So what happens that 16 days has come in 2017 which says that if any asset is derecognized in your book then the risk and reward has been completely transferred to the counterparty. You don’t have the option to do an accounting on EIR basis.
If you remember that prior to 2017 when the DA and BTC were quite in existence as it exists now at that time the accounting on DA was also on EIR. But post 2017 when NBFCs were to migrate to Ind AS, that optionality was snatched away from [Indecipherable] system. Everyone needs to account for the DA and co-lending income for the lifetime income at the NPV they have to account for. They don’t have any other [Indecipherable].
And in our case what happens that now since we are doing it for almost 2.5 years now and where the product cycle is roughly around 3.2 years, gradually it is the funnel is getting settled down. So whatever we are upfronting in a quarter, almost in one or two quarter we will see that similar amount would have come in in the form of interest income had we not done this kind of accounting. But this aberration will continue to remain as long as we are into Ind AS scenario.
Nirvana Laha
Okay. Okay. Sir, I’ll connect with you separately to understand that in more detail. I have two short data points that I want to know. One is what is the LTV in our micro enterprises portfolio? And out of a total AUM, how much is on fixed interest rates and how much is floating?
Shachindra Nath
So on the LTVs on the broad portfolio level in micro-enterprises, we would be closer to 50%. And overall, all our secured loan book, which is prime secured, micro secured and machinery loans, they are on floating rate.
Nirvana Laha
They are on floating. And sir, in terms of reposition, what — can you give us some statistics like how many loans have been made and how many cases of repossession have had to be enacted?
Shachindra Nath
So life to date, we would have repossessed about 100-odd properties out of our total loans, which will be — which would have crossed about INR4,000 crores, INR5,000 crores number in number.
Nirvana Laha
And this is for the micro-enterprises segment only?
Shachindra Nath
No, no, all put together. In micro, it is very small that part yet because there’s not too many. But now as we move forward, in the coming year, we anticipate much more repossession.
Nirvana Laha
Okay. Okay. Thank you so much.
Operator
Thank you. The next question is from the line of Arpit Agarwal. Please go ahead.
Shachindra Nath
Yes, Arpit.
Operator
Mr. Agarwal, your line is unmuted. Please proceed with your question.
Arpit Agarwal
Am I audible?
Operator
Yes, sir.
Shachindra Nath
Yes, you are. Sure.
Arpit Agarwal
So my question is basically that we have had a good AUM growth, but the profit has not grown with a similar proportion. So the AUM has grown upwards of 30%, but due to credit cost, the profit growth is in the middle of 20%. So what is your forecast regarding this? Do we — will we have operating leverage going ahead, or would the situation be same?
Kishore Lodha
So I will take the question in two parts. As far as operating leverage is concerned, if you look at the number, it has already kicked in. So if you remember our data for 2022 our cost-to-income ratio was 73%. Then it came down to 63%. Last year it was 64% and if you look at this quarter’s data, this is 53%. This is 53%, probably you may look at it as 1% saving on the previous quarter, however, you have to take into account that we have opened 46 branches — micro branches during this quarter and almost 100 branches during this year. So despite opening new branches, it takes time to deliver the operating other metrics. We have been quite better off in terms of operating leverage. So that means then all the entire engine is firing well, and operating costs are going down vis-a-vis the overall asset side and income side. So this is first part of the question.
Second part is that how does — you are right that the AUM has grown by almost 30%, the profits have grown by 22% largely on account of credit costs going up. As we are seeing that the complete cycle of the books are completing one cycle we are completing. As we stated earlier in our several other calls that our model suggest that overall credit cost would be closer to 2%, we would be inching towards that. Meanwhile we are making our model — we have figured 2%, projected 2% cost — credit cost. If you look at this quarter which looks higher, but it is still 1.8%.
So for four to six quarters time, it is likely that we will settle closer to 2% and then it should remain that way unless some micro or macroeconomic event happens. So broadly, we are in line. So probably the other parameters like the increase in the yield or reduction in borrowing costs will take some more time to settle in. However, directionally, we are in the same path which we have directed all of you in our previous conversations.
Nirvana Laha
Okay. Thank you.
Operator
Thank you. We’ll move on to the text questions. The first question is from Arshay Agarwal and the question is, UGRO Capital achieved a record net loan origination of INR1,970 crores in Q2 FY ’25. Could you explain the key factors behind the strong growth? Was branch expansion the main contributor to this increase? Moreover, do you see this loan origination figure as setting a new base level for the future quarter?
Amit Mande
So partly to this first question — Arshay yes you answered part of the question. The branch expansion in quarter one and quarter two is really the — is one of the drivers to this growth, but you may have also seen that all other business lines have also shown their growth. This is typically also that quarter two is a little better quarter and the businesses start picking up in quarter two across the country, pre-festive businesses. And so one would see that growth coming in quarter two.
Rightly said, this is the new base level for future quarters and the next quarters will be, in fact, the pace will continue. Our exit run rates in September were upwards of INR700 crores, which means that the next quarters will see higher than those run rates and therefore this is the new base level for us.
Shachindra Nath
Sagar, please.
Operator
The next question is from Manoj Bhatia. And the question is, are you planning to get a strategic investor in the company?
Shachindra Nath
Mr. Bhatia if you have bought shares of UGRO, you are the strategic investor. Our aspiration is to build an institution of size, scale and solve the problems of the credit. For us, from day one we got backing of serious private equity investors and we got a global DFI to back us. In last round, we saw participation from multiple family offices. And our aspiration is that the way we are growing and what we are building that larger, broader institutional public market, retail high net worth and family offices continue to participate in our growth journey and all of you become our strategic investor. Your support is key to our success. And at this point in time, other than you we have no insight or no plan to bring any other strategic investor.
Operator
Thank you. The next question is from Sunesh Khanna and the question is, can you please elaborate as to how and when the operating leverage will play out?
Shachindra Nath
Yeah. I mean, I guess we have already answered this question. Kishore has answered this so we can move on to the next question, please.
Operator
Thank you. And the next question is from Aradhana Singh. And the question is good afternoon, sir. First of all, congratulations for such a good quarter. My straightforward question is about not so good effect being reflected in the stock price.
Shachindra Nath
Mrs. Singh, it’s a very difficult question for management to answer. While our job is to build business for you and continue doing putting our earnest effort in building and delivering to the metrics what we are promising. Now stock price sometimes is a reflection of the broader market and sometimes it’s very hard for us to understand the reason and rationale for that.
But whatever I understand at this point in time, the broader narrative of RBI talking about credit ballooning happening in retail market, RBI commentary on saying banks should not lend to NBFC. And we’ve seen periodic episodes of few NBFC getting banned, a few segments of the market showing pressure. In that, for public market investors, institutional, retail, high net worth have little motivation incentive to call out a particular NBFC and say, this is different than the other, but it’s just a matter of time for any medium to long-term investor.
I think so it is difficult to avoid the size and scale creation of an institution which is happening in UGRO. In 3.5 years time, we have built a INR10,000 crores of business, which has never been done in India before. And it is very hard to avoid us. You can look at us, you can be sceptic about us, but eventually, it is going to be very difficult for any one of you not to look at us and invest into us. And when that happens, I think so we would have a very good run on us.
Operator
Thank you. The next question is from Deepak Yadav and the question is, number one, when will the SCF be completely out of your books and out of INR355 crores SCF outstanding, how much is recoverable?
Second question, was the credit cost of INR44 crores in this quarter was the peak and now onwards, this will ease out? And the INR16 crores write-off regarding SCF was in this quarter or in the Q1?
Anuj Pandey
So on the supply chain book, out of the total INR355 crores outstanding, most of it is our very good customers. The NPA within that at this point of time is about INR35 crores. And most of that NPA is also in regular course of business through collection, effort and mitigation it is likely to be — most of it is likely to get recovered. So no big write-offs from that is anticipated.
As far as running down is concerned because it is an evolving business, we do that in consultation with the end customer. And that is why we will eat it out in next few quarters. Some of it is with green assets which we may not wind down and it will continue.
As far as absolute credit cost of INR44 crores is concerned, I think the better way and the correct way to look at credit cost is as a percentage of AUM. We have been modeling that and our models tell us that we will peak and then stabilize at about 2% or a little below 2%. So on an absolute number of credit cost, it won’t be fair to comment whether we have peaked or not because we are growing and we will be doubled of our AUM in next two, three years. So that the question should be seen in the right perspective. Yes, the INR16 crores write-off in SCF was taken in this quarter and not in Q1.
Operator
Thank you.
Shachindra Nath
Operator Mr, [Indecipherable] question, we have answered in multiple other questions, so we can move on to the next question.
Operator
Sure. The next question is from Subavel Murugaiah and the question is what will be the profit growth for second half?
Shachindra Nath
I would say Mr. Subavel that we have given enough data point in terms of how we are progressing. So we will not pick out a number to give it to you. We believe that we are in a trajectory to achieve our long-term objectives. When we are confident that our total profitability for this year is significantly higher than what last year. If you look at our first two quarter performance of previous year versus first two quarter performance of this year, we are at a very healthy run rate. So I think so there are a lot of sell-side coverage analysts are there. It’s their job to moderate and give guidance to you, but it should be much better than what it was last year.
Operator
Thank you. The next question is from Arpit Agarwal, and the question is, in total, you mentioned four parameters on which you would focus to improve ROA. How has each of the parameter turned out from last quarter?
Shachindra Nath
I would say Arpit this bridge to ROA is not a quarterly bridge. It’s more directional of what we would like to achieve over a period of when we will be exiting 2026. And on each one of them, you will see a gradual improvement, what definitely you can track. So the bridge is 150 basis points yield increase, 75 basis points cost of borrowing reduction, 0.5% of operating leverage and a negative parameter of credit costs going up by 0.5%. So from what was at that point in time, March ’24 of 2.3%, it will go to 4%.
Obviously, what is very easily monitorable by quarter is the portfolio yield enhancement and that we are definitely seeing that. And that is sheer function of our contribution for micro-enterprise business and that has doubled quarter-on-quarter. As we have said that we have not seen the reduction on the liability side, and we have to wait out for a certain more period. And I have explained that we probably have another two to 2.5, three quarters when we start seeing the benefit of that. Operating leverage because we are — we’re seeing, but actually also simultaneously we are heavily investing in our new branch infrastructure. I think as we see the maturity curve of another eight to nine months, that will kick in. The credit cost, we are seeing setting into where the target is. So from a 1.5% this quarter, we saw a little bit of uptick. And I think it will settle down at 2% as we come to near the end of FY ’26.
Operator
Thank you. The next question is from Deepak Yadav. And the question is, number one, there are many micro and prime branches in AP and MP, but the percent of AUM is merely 2% per state. Why so?
And the second question is, ROI of partnership and alliance is 15% quite lesser than micro-enterprise. It was a size of assumption that if the ticket size is less, then ROI is higher. Could you please explain?
Amit Jain
So two questions, and I will take it one by one. And I think partly Shachindra answered this question earlier. The micro and the prime branches, if you look at the evolution, the first set of 75 micro branches were in the states of Tamil Nadu, Telangana, Karnataka, Rajasthan and Gujarat. However, this set of branches which we’ve opened now have branches in AP and MP. And that is why the AUM is now building up and it will steadily build up. So it is not that it’s lower, it’s nearly 2%. It is just the evolution of branches and the opening times of these branches.
On the partnership and alliances, this is the net revenue or the rate to UGRO. The way this works is we work with multiple partners. There is an end-customer rate that the partner offers to the customer. And these are the hurdle rates on which we work with. Basically, these rates are sort of 15% is net of any opex or very little opex and net of losses. We earlier also expressed that this partnership and alliances business is backed by a first-loss guarantee. And so there is no — further to 15%, there is no drain to the revenue. And so these are extremely good rates. Practically, this is 4% clean ROA business for us, and that is why it is at 15%.
Shachindra Nath
Next question, please.
Operator
Thank you. The next question is from Deep Shah, and the question is, where does the company account for income from co-origination? Is it under income from co-lending/DA? Second question, can you please explain the ESOP vesting conditions for the management?
Kishore Lodha
So on the co-origination side, the income is accounted in interest income. So whatever is the differential interest that we get in the partnership. So to give you an example, if we have originated a loan at 15% and if we have co-originated the partner at 11%, then 4% differential interest would be accounted as interest income throughout the life cycle of the loan. So this is the accounting on co-origination. It is quite different from co-lending and direct assignment.
As far as ESOP vesting is concerned, it is part of our presentation and we have earlier stated as well that whatever ESOPs are vested in the management, it is linked with the performance of the equity. So if the equity investors make money, then only the management can exercise its ESOP which are vested in there. The next cycle of ESOP listing would be coming sometime in 2025, 2026 subject to our stock pricing performing at the agreed level with the management.
Shachindra Nath
Next question.
Operator
Thank you. We have a voice follow-up question from Mr. Anil Tulsiram from ContrarianValue Edge. So, please go ahead.
Shachindra Nath
Okay.
Anil Tulsiram
Yeah. Thank you for the opportunity again. Sir, my question is again on micro-enterprises. Since we are operating in Tier 2 cities and below, how do you manage the risk associated with the collateral valuation? And is it in-house or outsourced?
Anuj Pandey
So the collateral valuation is done by our empaneled valuation engineers and closely supervised by an internal in-house technical team.
Amit Mande
I must appreciate your question because it seems like you are aware that certain micro-enterprise businesses, the valuation is in-house. We practically as an NBFC are not experts of what valuations are. And so we rely on the experts, which are third-party valuers.
Shachindra Nath
That’s right.
Anil Tulsiram
Got it. And last question is, see, as from the NCD prospectus, around 25% of the advances are the ticket size of more than INR1 crores. So I couldn’t correlate this with our business model, why 25% advances are more than INR1 crores. Can you explain at this point?
Kishore Lodha
So actually, it is not like that. 30% of our AUM is into prime secured where the average ticket size is about INR70 lakhs. So based on the conversion on balance sheet, the disclosure may have gone into the prospectus.
Anil Tulsiram
So will we continue to do in this high-ticket size because I think even if in co-lending, there not be much spread or income which we have been generating in this?
Shachindra Nath
No. So I guess, look — if you look at the total volume of our business, our prime secured business, which is a higher ticket size would broadly remain static in absolute volume term. So theoretically, if we have done, let’s say 100 — out of our monthly volume of INR700 crores, if we did INR150 crores of prime secured business, over a period of next two years, that INR150 crores would remain in the range of INR150 crores, or it will go maximum INR200 odd crores. But what will you grow from this point onward in our micro enterprises loan, right?
So I think, once the mix — you start seeing the mix. So today if you look at exit of FY ’24, our prime business was roughly around 50%, both between the secured business and unsecured business. And our micro-enterprise secured business was around 10%. And then this mix would change, this 10% would go 30%, you keep seeing the transition to lower value secured business happening.
But also, you remember that one of the drivers, both on the credit cost plus on the driver for co-lending is a little higher ticket secured business because banks like to do that. So what you are saying is that there is a lesser spread. I agree with you, but also there is a lesser associated credit cost, and also, it is also a driver of liquidity and overall portfolio quality to maintain in a certain manner. So you have to mix, create a balance around all of that. We have to create a balance around high profitability, high ROA, high ROE, but you have to keep — as a builders of the institution, we have to keep in mind what would happen over a period of three years, two years so on and so forth.
Anil Tulsiram
Got it, sir. My last question is on co-lending. What’s the progress on co-lending with Tata Capital, Godrej and Mahindra? And how much we are able to scale up the book, technical integration and all other things?
Shachindra Nath
No, look, we don’t — neither we disclose it because they are all very large, listed companies. So we don’t know what their public disclosures are. So it’s very hard for them without their consent to give you that disclosure. What I would say, broadly say that look, we would like to have the — what we take pride in that large leading banks of India, all of the public sector banks, SBIs and Central Bank, the Bank of Baroda, the IDBI, all of them, UCO, all of them are our partners. We have all of our large NBFCs in this country which has been in existence, they have approved our organization and credit quality as our partners, and we are now seeing the order of big private sector bank also being our partner. We would like to maintain the mix. We’d like to have active six, seven partners and we’d like to build the business with each one of them. Over a quarter-by-quarter, some would be higher, some would be lesser, but that is all okay with us.
Anil Tulsiram
No. Let me put this question in a different manner. What I meant is earlier top three, four were accounting for more than 70%, 80% of the co-lending book. So if the situation persist like that or has it changed?
Shachindra Nath
No, it is getting more diversified, sir. So there are two very clear and distinct trend. So our co-origination volume, which was largely with NBFCs is coming down, and co-lending volume in the banks is going up. It is happening because the segment — one segment of the market which is business loan was earlier not being done by banks, but after the application of credit guarantee scheme on co-lending, banks have started taking business loan also under the co-lending.
So broad commentary is that our business — participation of business with NBFC has gone down, but we’d like to maintain certain percentage of our business with NBFC as well. Second, the concentration with only business with few banks are very well diversified. I think so over a period of next few quarters, no bank would be more — bank or an NBFC would be more than 25% of our total co-lending volume.
Anil Tulsiram
Got it, sir. Thank you. That’s it from my side. Thanks a lot and all the best.
Shachindra Nath
Thank you so much.
Operator
Thank you. The last question is a text question from Mr. Deepak Yadav and the question is, number one, you have sold INR50 crores worth of loan to ARC. Were they predominantly SCF loans? How much haircut you took here? And do you plan to sell more in the fiscal? And number two, on a conservative basis, how much should be the AUM and ROA by the end of this financial year? All the best for the next quarter.
Anuj Pandey
So on the ARC question, it was a combination of business loans unsecured and supply chain. And we haven’t taken any haircut. And we don’t plan as of now to do any more of this kind of a transaction.
Shachindra Nath
It was done in cash.
Anuj Pandey
It was an all-cash deal. And on the AUM and ROA forecast.
Shachindra Nath
I guess, our trajectory is given. As I have said earlier that our job is to guide all of our shareholder partners, investors, existing and prospective on our long-term vision growth plan what this company plans to achieve and how we are building an institution. As we have six, seven sell-side coverages, analysts actually do deep analysis and project what would be our AUM’s growth, ROA growth and they also give comparative.
So I would urge all of you when they do the coverages, when they do the quarterly analysis, please look at and read with them and take a mean of that. And they are more appropriate. We have deep conviction and commitment of what we are building, and we continue to do that. Sometimes, we have to look away from quarter-to-quarter performance and keep remain our focus on what we are building for long term. And we are hoping that we will have shareholder partners who would also look at in the similar fashion as we are looking at this business.
Operator
Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. Deepak Khetan for closing comments. Over to you, sir.
Deepak Khetan
Thank you, Sagar. Thank you all for the queries and your continued support. Please feel free to reach out to me and my colleague Viral, if we have not answered any of your query or you have additional queries. I would like to thank Chorus and JM Financial who helped us organize this call today. We look forward for your continued support going ahead and thank you. Have a good evening.
Shachindra Nath
Thank you.
Anuj Pandey
Happy Diwali.
Shachindra Nath
Happy Diwali.
Operator
[Operator Closing Remarks]