UGRO Capital Limited (511742) Earnings Call Transcript & Summary

So good afternoon, and welcome to all the attendees. ICICI Securities takes great pleasure in hosting the Q4 FY '22 Results Conference Call for UGRO Capital Limited. We have with us from the management, Mr. Shachindra Nath, who is Chief -- Executive Chairman and Managing Director; Mr. Amit Mande, Chief Revenue Officer; Mr. Anuj Pandey, Chief Risk Officer; Mr. Amit Gupta, Chief Financial Officer; Mr. Rishabh Garg, Chief Technology Officer; Mr. Subrata Das, Chief Innovation Officer; and Mr. Nirav Shah, Chief Strategy Officer and Head of Investor Relations. So without further delay, I would now like to hand over the floor to the management for their opening comments. Thank you, and over to you, sirs.

Good afternoon. Thank you, ICICI Securities for hosting us. As a matter of information, as of yesterday in our last Board meeting, we have appointed Mr. Satyananda Mishra as Non-Executive Chairman of our Board. And I have taken the re-designation as vice chairman and managing director. We did that because at the scale at which we are operating now and the scale which we would like to achieve, it is our considered view that in financial institution, the Board governance should be headed by an independent director. As you would all have seen that majority of large financial institutions, the Board chairmanship is in the hands of independent director. This is what regulators also expect us. All of you know SEBI has come up with an advisory of voluntary acceptance of the segregation of the post of managing director and the chairman, and we have done that much prior to when it becomes a regulatory obligation. So in that context, actually, we are completing third year of our full operation. It has been a journey, which has been both rewarding and also of great learning. In July 2018, when we raised significant amount of capital, the aspiration was to build UGRO as India's largest financial institution solving the problem of credit for small businesses. This problem has been in existence for many number of decades. Large number of lending institutions have been trying to solve for this problem. With every passing year, the credit gap has been increasing. While the contribution of SMEs to the GDP of India is increasing, but the simultaneous off take of credit for SME has been a challenge. And our view was that within the lending institution outside the bank, there is an opportunity to use deep specialization and data analytics and combined with technology can gradually solve the problem of credit. When we started, obviously, some of our embedded thinking, we thought that we have to first use it, test it, implement it and be successful, and then we will bring it at forefront to public market for them to understand what we have done and delivered. There are many number of players in the market who actually start with the promise of what the data analytics and technology can do. We have taken the conservative route of first establishing ourselves, build portfolio, proved through our portfolio performance what data analytics can do. We generally believe that the future of credit for small businesses in India is a function of how data can be used to disseminate the credit. Now it is actually proven that the entire SME credit industry, the ecosystem of data is going to power the credit. Historically, when it comes -- used to come to SME, it was genuinely believed within the lending facility that this is a segment of the market wherein the information flow is very poor. The formal to informal economy gap is very high, and the credit can -- [ disseminating ] can only be done with a physical footprint driven touch and to be done on a collateral basis. We continue to believe that this is changing with every passing day. And this is happening because the 3 core layers of credit, which is the identity layer, the payment layer and the data layer is all maturing at a rapid pace. Once the OCEN will get fully implemented and the ONDC also get implemented, we can see that the future generation of lenders would be able to do -- give the credit decisioning purely on the basis of data. And that would evolve into all the 3 forms of credit -- embedded credit, flow based credit, and buy now pay later kind of credit. This is also a function of what you -- we have many number of fintechs. Their payment platforms have been growing. There is a large amount of VC funding coming for that. We differentiate ourselves -- or we differentiate between tech and data. Our view is that data is more powerful. And actually, within the lending universe, the uses of data is very less, use of technology has become prominent. And sometimes we combine and understand that tech is the data, but that's not true. Data is your ability to look at its information, analyze and use it for decision, monitoring, and future performance, where tech is enabling the process flow. And that's why we say at completion of 3 years, we are presenting UGRO as powered by data and tech. What does data do for us is very unique. We have an underwriting scorecard, which is an effort of last 4 years of deep data analytics platform, which we have built. Now which is called Version 2. This is our machine learning algorithm platform which provides the decisioning through a rule engine and faster rollout of credit and find the different kind of customer and risk rank them. Our data also helps in origination, which in -- finding new locations, mapping our sales forces, tracking them and making sure that they reach their right target. Our technology platform provides the efficiency, which means that at every point -- credit industry in India is highly manual and physical. Obviously, we use our physical footprint to do the last mile work in distribution and also support collection. But the intermediation of -- from the point of origination to decisioning is largely digitized through our tech platform. And also, we are using data plus technology across our operation and collection. And last but not least, we have seen within the lending universe the use of data for early warning signals and future portfolio performance is not extensively used, but we believe that with the advent of deep bureau footprint, multiplicity of information flow coming from different open sources can also provide for deep inside of how the customer would behave in the future. And that's why we are here to present and say UGRO has in the last 3 years evolved as a data tech company since its inception. So we have -- as we said, we have our Chief Revenue Officer, Anuj, and we have Subrata, our Chief Innovation Officer. Last 4.5 years, they have spent 24/7 their time in thinking through and designing this. So I'm living this into good hands of both Anuj and Subrata to tell what is this data-driven proprietary score model and why we are -- we have become -- this become as core to us when it comes to decisioning of credit.

Thank you, Shachin. Good evening, everyone. So next 2-3 slides. I'll spend some time to take you all through what all we have done, which is at the heart of the innovation we are undertaking in lending to small businesses. So typically, as one understands, lending is primarily based on the prior repayment behavior of the customer. And what we were trying to do, which we think is the right way to underwrite a small business customer is to do a cash flow-based underwriting. So through data analytics and machine learning platform, what we have done with our proprietary scoring model is to combine these 2 elements. So our GRO Score today is a combination of the repayment behavior score of the customer and over that the banking behavior score of the customer. Typically, you can see on the screen -- and this has come after a lot of rigorous analysis of more than 25,000 parameters, which can be seen and extracted from a normal bank statement and a bureau track record of the customer. We have customized that to our target segment. And this is the innovation which in this kind of scale and with this kind of execution, almost no one has attempted in India before. This has given us a lot of directional sense and a window, because this goes hand in hand with the way data ecosystem is getting evolved across the SME businesses in India. So today, when a customer applies to us, all we ask is his GST number, his GST statement and his bank statement, along with the KYC documents, and post that the system takes over. And it goes into a very deep and extract various kinds of parameters, for example, the borrowing mix, the frequency and magnitude of defaults, history of high-cost cost debt, obligation as a percentage of turnover, et cetera, which have all been customized to our kind of target segment. And this has been back tested and is administered in real-time. So in terms of giving a credit decisioning to the customer, we are right on the cutting edge. Next. So just to show you all the glimpse of what we have already evidenced through the initial administration of our score. Typically, our scorecard categorizes the customer into 5 bands, A, B, C, D. A, being the least risky and E being the most risky. And already in our analysis for the customers whom we have given loan and on customers who we haven't given loan, we have applied our scorecard, and we have found that this risk ranks beautifully. So if score band A customer has negligible default rate and if score band E has relatively higher default rate. So depending on the kind of customers we have, we now have a template, which of course, we are using, but eventually, the thought process is that it can democratize SME lending in the country. Just to reiterate. When we started, we said that we want to focus on 8 sectors within the SME industry. We added in 9 sector called micro enterprises for very small loans. We continue to build more momentum and gain more insights in these sectors. So whatever statistical work we have done, right, sits on top of our sector selection. The idea is eventually to have operational and facility-related insights also from customers depending on which sector or subsector they belong to and make a policy and underwriting very easy for them.

Amit -- Rishabh, you want to take this?

Let me take this, Shachin. With Rishabh -- I'm here with Rishabh and we would [ recommend ]. So having said that, the data and our GRO Score is at heart of our ability to decision customers and moving towards complete database underwriting. I think that is also at heart of our entire tech platform. And in the center of the slide, we will all see GRO-Protect, which is our rule engine, which houses this decision engine, which houses this data power that actually is the fundamental to all our tech platforms that support business. To this core are connected multiple platforms. Our GRO-Plus is a platform that powers our prime branches. I will come to those -- that distribution later, but our prime branches is essentially the last ticket products. Our GRO-Direct is what we have built to go direct to the customer. Again, takes its underwriting power from the BRE that we've built called GRO-Protect. This is the large growing business, which is the supply chain business, its powered by our platform called GRO-Chain, which not only does the supplier side of the business, but also the buyer side or the dealer side of the business and that's also again powered by GRO-Protect. And finally, our partnership and alliances, where we harness multiple ecosystems is the fourth platform. So our entire full suite -- the SME lending platform, as we call it, from the intermediary distribution to direct distribution to our supply chain and partnerships are all built around this one single thought process of being able to underwrite the SME and MSME on basis of data tripod -- the GST, banking and the bureau, which rest inside our GRO-Protect engine and, of course, is supported by our Data Lake. So what is exactly -- what exactly are these platforms powering? Nirav, I think next slide will tell us what exactly are these platforms powering. The GRO-Plus powers our prime business, as we call it, or the prime branch business, where we do large tickets, secured loans, the unsecured loans and also our entire micro business. We are now 75 branches on micro across the country in 5 states and growing at a very rapid pace and we've tested initial success on the high yield secured product here, and we believe that this will be our growth engine. Our ecosystem business, essentially the supply chain and the machinery business, which is fundamentally runs on the ecosystems of 45 anchors in supply chain and about 30 OEMs in the machinery finance business. Again, works on the GRO-Chain platform. We continue to harness multiple ecosystems to reach to the last mile of the MSME and the SME with multiple partnerships, essentially co-lending and fintech partnerships. We found this is a very rewarding business where we, our partners and -- are together in collaboration, are able to reach the last mile and provide them with credit. Fundamentally -- and GRO-Direct powers our -- the digital platform where we go direct to the customers. Fundamentally, all this distribution is built on our tech platforms, which then again go back to the core of our GRO-Protect engine, which is our tripod of underwriting. Over to you, Nirav.

You can take this one as well, Amit?

Sure. What has also been essentially our driving force of our growth has been our partnerships on the other side with the large banks and the NBFCs. This has been our liability engine, and we have been able to -- I think we have this unique advantage and leadership position in being able to have multiple relationships across all the large PSU banks for our co-lending business. Right from whether it's been Bank of Baroda, Central Bank of India, State Bank of India, IDBI and another about 7 banks in pipeline. These will continue to fuel our growth ambition by providing us the necessary liability through co-lending. If one were to look at how successful are we? Yes, we did take time initially, but now 16% of our book in quarter 3 -- quarter 4 of last year did come from the co-lending business and the co-origination business. As we go forward, this will be our essential pillar of growth. And then by next year-end, we will look at about 35% of our business of book through these partnerships.

I must just add this. Our view is that the NBFC or the fintech lending is systematically changing in India. Conventionally, most of the lending institutions have succeeded in leveraging their balance sheet from 5x to 7x. Managing their portfolio not on contractual like asset tenor, but on average asset tenor and then creating some type of asset liability mismatch. But that era is receding. I think so systematically financial institutions in India and globally would like to use our power of data analytics technology and asset origination and use us as an intermediation partner. And that's why those who would succeed in creating a marketplace kind of platform, which is co-lending, would have both very high profitable growth and as well as liability would not remain a constraint or concern. And I think so directionally, we are very strong on that. The return reward ratio of -- if you were to lever your balance sheet only 3x or 4x and you have to earn the same margin, to get to a double-digit return on equity is very challenging. But in our model, which we'll show you, I think so this becomes a reality very, very quickly. Yes. So one of the things which we have been hearing in the last few years, we are a little odd the way we started our business. Most of the businesses in lending industry would start as a private company, would build under a private umbrella, and then once they've matured, then they will go to public and raise capital that is significant premium to their equity base. Our view was that good -- companies like ours, which are providing a growth opportunity should start as a listed company. In U.S., we have seen multiple SPACs getting very successful where they start with a blank capital and then build business around us. We did the same. In 2018, we took over a very small listed NBFC, we raised significant amount of capital, and we expected the capital market to benefit from the growth momentum which we are building. But sometimes in the marketplace, we are compared to legacy or very established 10-year, 15-year, 20-year old organization -- all of our peer set, which are still private -- to get the benefit of high multiple or very high value realization, because private investors can see what would happen in the future and they provide a value to that. And this is about an effort to give public market the visibility, because a lot of people we have heard this question that we understand what you guys are building. When we compare it to legacy or established player, our return metrics looks very muted. But obviously, there is a heavy amount of investment and capitalization which has happened. And that's why first -- last year, we gave our 2025 guidance, and we felt that would be sufficient. But we now think that given the level of transparency, which we provide to all our public shareholders, we have given the bridge of how we would move year-on-year. And we are hopeful that this would help you in understanding our company. So as of if you look at AUM as of FY '22, we have an AUM of INR 2,969 crores. We are targeting as of FY '23 in AUM of INR 7,000-odd crores. We had an off book asset under management of 16% and that we are increasing 35%. We would like it to even go further, but this is our conservative estimate. We think that our yield band would remain in the 14.3% to 14.5%. Please remember that UGRO operate across the yield band in its product portfolio. So we do a highly secured business, starting at 9% yield versus business loan segment and 18% yield, and we create a healthy mix so that our portfolio quality remains stable, and we are not only in high-yield businesses and that gives sustainability. We have taken a conservative view in terms of our cost of borrowing. We believe that the lending market -- the institutional bank lending market is highly gravitated, because financial institutions are still suffering from the impacts of IL&FS and then pandemic. And that's why it's not natural to lend independent company and cost of borrowings to come down. There are a set of 5 or 10 NBFC, which have deep parentage, and that's why they have the cost of lending, borrowing advantage. And that's why we think it would come down as we mature, but we have projected to remain in the same cost of borrowing band and same net interest margin. We have also -- our portfolio is now seasoned and our GRO Score prediction is also coming to very strong. But the change which you are seeing that given the heavy investment which we have already done and now the output into the business is coming, and we have multiple co-lending partnership, which gives both on-balance sheet borrowing and off balance sheet borrowing. We are seeing that our return on assets should move from 0.6% of FY '22 to 2% and then the target of 4.5% by 2025. And our ROEs would also improve from 1.5% to 6% to 8%. This ROE could have been better, but we are also -- keeping our -- given our initial years, we are still keeping our leverage below 3. So there is a capital infusion also planned that is depressing our ROE. But we will see. If we continue to grow the way we are growing and if the capital comes at a later part of the year, so ROE would be much higher.

I'll quickly take you through a snapshot of our portfolio as of March 2022. So you'll see that across products, across geographies, across the sectors which we have, it is pretty well diversified. We started with 9 branches of our prime loans in 2018. And later on, we have expanded now to close to 20 branches in prime loans and close to 75 branches for -- exclusively catering to micro SMEs. So now we are well established across pan-India. Our original 8 sectors are pretty well distributed. The light engineering sector, we are seeing a lot of positive movement, thanks to manufacturing buoyancy, which we are seeing in the last 2 quarters. We think that, that will continue for some more time. Across our product categories, the prime loans are the largest, currently accounting for 54% of our total portfolio. As we go forward, we don't see much change in the overall mix across sectors or geography. We'll continue to remain well diversified. On the overall collection efficiency trend over the year, it has improved at every quarter last year as we move forward and now has stabilized at around 94% at ending March '22. Out of our total portfolio, 96.4% of the portfolio is in Stage 1. Our total restructuring owing to COVID was about INR 136 crores, which is 4.6% of our AUM as of March '22. Within that restructured portfolio, maximum amount of restructuring was done for schools, for hospitality business and for light engineering. And we are already seeing a lot of green shoots come in. Education and light engineering sectors are back. Hospitality continues to be a little sluggish, but we expect that in the next 1 or 2 quarters, it will again be back. Our end gross NPA number as of March 2022 is 2.3%. And this includes -- if you recall, RBI had come out with a circular in November of 2021 on reclassification of assets, and we have adopted that fully. Although RBI had given time -- more time to NBFCs till September 2022, we have decided that we will continue to remain adopted.

Yes. So I guess, most of other things, it has been uploaded. You have all the metrics. We would like to use the time for answering the question. These are all published set of information, and through the question we can address some of this. I think with this we have -- mostly we have covered in the previous slide, so -- but this result presentation is uploaded on both exchange website. It is available on our website. Please feel free to download and read it through. But we are here and happy to answer any questions.

Rushad, there are a few questions in the chat in Q&A session. So maybe you may want to take those questions one by one?

Sure. So we had a question from [ Gaurav Agarwal ]. Nirav, you'll have to unmute his line so that he can speak out his question.

Yes, sure. One second.

[ Gaurav ] you can unmute your line and speak out your question now. [ Gaurav ], can you hear us?

Just wanted to understand as to how are we planning to grow in the different sectors of our loan portfolio in the coming year? And what is the target that we have?

So can you go back to the slide when we have done FY '23 projection? Yes, so [ Gaurav ], this is what we have projected that our current AUM is roughly around INR 3,000-plus crores is going INR 7,000 plus crores. Our asset engine is across. It is from our channels, which is prime wherein we do prime secured customer we microenterprises, there is a big thrust in focus. We have now 75-plus physical location, and we want that to grow. Most of our machinery supply chain business is also growing. And our partnership alliances channel would be steady state. If you have anything specific to ask, we're happy to answer.

Yes. So in terms of cost of borrowing, you mentioned that you will keep the same cost going in line next year and...

That's what we are projecting. We are hopeful that it should come down, what we are projecting.

So when do we see like the metrices that you mentioned in the listed markets and investor interest coming in. I mean, what is the kind of threshold that you plan to achieve?

So both are given here, sir. So FY '23 and FY '25. So as we said that we are hopeful that like private market, our peers set -- private investors, especially the P investors are providing very high multiple for a similar set of performance or within lower performances. I think so at this point in time, our view is that the public market is over weighted by what is -- right now, we're not -- be able to provide the premium or being able to give any kind of momentum or growth for growth-oriented companies. So majority of the lenders who are listed have 3 sets of the problem, problem of growth and problem of legacy portfolio and wherein their credit performance is unknown. And that worries public market investors because they are not sure of what would be the real balance sheet. Versus we have crossed that hurdle and we are growing. So given our lower base and the base -- from that base, we are growing at this speed, I think so we would be much more valuable. And we are hopeful that some of you would recognize that and find it attractive.

We have the next question from the line of [ Chinmay Wadhwa ]. Nirav, if you could please unmute his line too, please.

I have now. Maybe [ Chinmay ] you can go ahead with the question.

Congratulations on the set of results. I have a few questions on the proof-of-concept as well as the QIP. So just going to tell you them one by one. So on the proof-of-concept, banks in the West, for example, when they've implemented machine learning models, they've complained about how they have to keep updating the set of rules that go into this model to stay on top of customer behavior. So for our model, how often do we need to keep on top of this and how often do you update the GRO metrics with your data set?

Very, very good question. So we have Subrata who is our Chief Innovation Officer, and our entire data analytic team have been working tirelessly for the last 4 years. Subrata, this is something for you.

So we are well leased to monitor and govern the performance of the score card as for a very well-defined structured framework. Through our experience, score card such as these in our market have been seen to hold their level of performance for anywhere between 20 months to 24 months or more if you're lucky. But given the nature of the underlying -- the diversity of the underlying customer segment, if we need to tune them faster than that, we are in a very good position to do that. But as of now, the scorecards are holding. The early indicators are very encouraging. And we have put in place a robust framework to keep on monitoring this, so that the moment we see the need of a refinement, we are able to do that.

And [ Chinmay ], if I may add that majority of the scorecard, which are in existence in Indian market, including the consumer financing segment are largely bureau dependent. So bureau has a lot of data and people do added work on the -- what they get from the bureau. But when it comes to small business, bureau cut off or a bureau behavior may not necessarily be able to be able to predict the cash flow analysis and the future behavior and what would be the future profile of the business. What we have found is unique and that what we are saying the transformation, which is happening into the SME market in India, that both GST, which gives you the turnover data and 400 parameters around turnover and digitized banking, can predict -- can do 3 things. The intent of the customer, the eligibility and the ability to pay. So all 3 -- and bureau is behavior and analysis, and that's why it is very unique. So today, for roughly around INR 350 plus crores or INR 400 crores of monthly disbursement, UGRO doesn't ask anyone a balance sheet or an income tax return or profit and loss statement. And we'll be amazed to know that the top 10 lenders in the country, including the largest of them, State Bank of India and Bank of Baroda and likes have accepted that because they have seen the result of that. Because at 6 months or a 10-month or a 12-month old balance sheet-led financial statement is not the true representation of what is the ability and eligibility of the customer.

If I could ask 2 quick questions as well. On the next slide, could you please explain why we disperse at all to score band D and E customers? Like why not just focus on A, B, and 3?

So I'll answer that. So it is also a function of the kind of product you are doing. So if you see our GRO Score is a predictor of probability of default. But there are other element of loss given default in case of a secured loan. And a lot of times, one can draw a little comfort. So in the spirit of testing the score card in terms of risk band through our live portfolio and also taking into account the loss given default parameter, we have done some disbursals. But in unsecured loan where there is no security, we don't do disbursals in GRO Score D and E.

Am I right in assuming that D and E would also have higher yield loans? And the data point to the right suggests that A and B have the highest disbursals and you disperse lower amounts to D and E?

That's right.

Another quick question. Could you shed light on the QIP that you have planned? You've told us for years now that in FY '23 reaming through QIP, but INR 500 crores that you're planning to raise translates to a significant percentage of our shareholding. So could you shed some light on the plan?

So I think, sir, the QIP resolution, if you're looking at that outcome, QIP resolution is an enabling resolution. As you know that every year, when you go to the shareholders, you keep an enabling edition and depending upon how the market performs and there is an opportunity, you do that. I think so where we are trading right now and at that level, this would lead to a significant dilution. And that's why we would raise capital is our -- that's our endeavor because the kind of growth which we have to get capital is a necessity. But the timing, the form and the kind of investor, we are yet to decide. So I think so by next quarter, when we'll come and meet up with you, we'll give you a much more concrete answers to this question. This is not necessarily you should take that QIP regulation, this that we are going to do a QIP itself.

We have the next question from the line of [ Anil -- Tulsiram Anil ].

My first question is on your GRO micro loan. So I want to understand like what is the customer profile here? So is it like someone who has a credit score or new to credit customer or how is it? And also any of your scoring model is helpful here? So basically, I'm trying to understand how our business model is different to 5-star, because I think 5-Star is mostly into 5 to 7 like ticket sizes, but mostly into the secured loan. And I think if I'm right, we are into unsecured loan for the GRO micro?

I would get both Anuj and Amit to answer. But I'll just give you -- since you have taken name -- one name, I will give you one input. First and foremost, I think so, around 6 months back, there was a change wherein the retail trade industry in India has been classified as MSME. The unique proposition -- only for priority sector loan purposes. The one unique proposition means that the entire bank financing, which requires 40% to be priority sector and of that 7.5% has to be MSME, retail trade industry, which means in a small town a shopkeeper is MSME for priority sector, so that's why the opportunity set is fairly unique. Number 2, with most of our peers set, which do that business, including the 5-Star from -- because that is the only segment of the market which they operate, they largely are in the loan bank sub INR 7 lakh or INR 8 lakh. Given that we are large and diversified player, we have scores, we have data analytics prowess, technology and distribution, and we also do secured loan up to INR 3 crores. Our ability into the same cluster and geography to do even a little higher ticket size loan is a very unique advantage to us. And that's why in our micro enterprises channel, we don't do loans up to INR 25 lakhs secured. And gradually, we have a product which is INR 75 lakhs to INR 1 crore in our priming branches will be also rolled out in our microenterprises, resulting into a faster breakeven and much larger volume of business. Anuj and Amit, type and customer and credit profile you sort of take that.

So I'll quickly just add. So we don't do new to credit customers. So primary eligibility of customers is that he should have some kind of credit record. Although it might be very thin. And because the profile of the customer, the banking and credit history might be very thin. So the efficacy of applying the core give at this point of time is relatively lower but we are working on that. But alternatively, what we have done is we have applied a lot of analytics in selecting the geography from which we want to source these loans. And hence, we have done a pin code wise analysis across all the states, and we have picked depending on the future portfolio performance as of the market in which kind of pin code we want to do business with.

Got it. And I have just one more question, and it's a very broad question. See, we have been repeating our target of reaching INR 20,000 crores by 2025, for which it's obvious that we need to grow at a higher growth rate. So I think we will face 3 challenges in this. First, maintaining the corporate culture. Second, having the right set of people and giving enough incentive for the people to stay for a longer period of time. And third, maintaining the credit culture. So any thoughts on these 3 aspects?

I will try quickly responding to that. First is our corporate culture. I think UGRO has a culture. This is an institution, which is wherein the ownership is institutional. -- supervision in governance is by an independent board. And we would like to have people who think of this as a long-term home for themselves. Now having said that, the culture which we have to still install of a culture of ownership. So as you know that we have a 5.8% of equity ownership of this company is in the hands of the management. We would like that ownership to go up. And like we have seen many other institutions like of HDFC and ICICI, wherein people join the institution and benefited by creating shareholders' value. This institute there, you will also give people the same opportunity. Second is about maintaining the credit culture. I think our credit culture is maintained by our data because our credit is controlled by what our data is, and there is no -- nothing beyond that. We are in to highly granularize, templated data decision loan business, and that's why -- and strategically, we have to only think of the segment of the market and what could be the potential loss ratio. I think that we are in a very good place where we have achieved in few years' time. And pandemic has proven that all of our models are working. And what is the third question?

So adding the right set of people and incentivize to stay them longer.

Yes. So sir, it differs at the stage of the people who come. First and foremost, I think that this room and the set of people who are sitting over here, they are owners of this business, they are incentivized by long-term shareholder value creation and they're benefiting from that. And also their next level. Second, we try to see our business as a niche business where it's broken in multiple pieces and parts in each part being run by a strong leader who is responsible for its own P&L. And once the PE performs for the P&L, it did benefit. You'll be amazed to know that right up to our L3 levels and the business had and the credit people, they are incentivized for their particular vertical delivery. And that is also one of the reasons people like to come and work for us because they think as if they are quasi CEOs for their respective businesses. So and when you go to the bottom of the pyramid, where in your compensation or the fixed cost is low, you'll incentivize people by providing them shorter-term variable structure so that what they do in the near term is what they get paid for. So we are building the hybrid culture of equity-based ownership for senior management, variable pay basis structure on P&L performance and monthly and quarterly incentive plans for the sales and collection forces.

Yes. And just one small clarifying question. This micro loan below INR 5 lakh ticket size is entirely unsecured loan, right? My understanding is right.

No. Our micro enterprises business, 80% of that portfolio is secured.

No, I'm talking below INR 5 lakh.

Yes, absolutely.

We have the next question from the line of [ Bhavesh Jain ]. Nirav, please unmute his line.

I have given him the permission. Can we move to next question.

Yes, we have the next question from [ Manish Agarwal ].

First of all, congratulations on a good set of numbers. I have just a couple of questions. First of all, going through the quarter-on-quarter performance, I observed that the AUM growth is falling down every quarter. For example, in September, from June to September, the growth was 45% from September to December, the growth was 30%. And from December to March, the growth has come to 15%. So could you please give any reason why there is the fall in growth of AUM?

So when you compare AUM, you would also should consider the base effect. Every -- in each quarter, the base has grown a lot. So cumulatively, if you see on a year-to-year basis, you will see a very high growth. But when you compare quarter-to-quarter, obviously, the growth would be somewhat muted.

Okay. And I want to ask the…

So we started in predominantly in April '19 as our first full year. So that was INR 850 crores of total asset under management. FY '20 -- '21, we were roughly around INR 1,300 crores. FY '22, we are roughly around INR 3,000-odd crores. So I think we are growing the…

On a year-on-year basis, we have actually grown 127%.

Yes.

And what you were actually talking about that was quarter-on-quarter sequential growth. So in that way, you actually want to see. The first quarter, we had actually started doing disbursement only in the end of June. And in that quarter, our AUM growth would have been by INR 150 crores only. So in that between quarter on and quarter 2, we would have grown the highest. But over a period of time, after our business engine actually started kicking on, you would obviously, on a sequential basis, you would not see that kind of a growth.

And what was the disbursement? The disbursement has fallen in this quarter. Like last quarter, we had a disbursement of around INR 1,050 crores, and it has come down to INR 960 crores. So what would be the reason behind the falling disbursement?

2 reasons, sir. First and foremost, as you know, as soon as we ended the month of December, the fourth wave of COVID came in. That disrupted the first 20 days of business, while it's received very fast, but it was unknown to us that what would be the expansion and how far it would hit. As a lending institution, obviously, you go in a contraction mode very quickly. When you see that is happening, and then you restart that business. So in our first month of January was a complete wash. And by the time we restarted resist was mid of Feb. So actually, we did -- in the Q4, we had roughly around 45 days to 50 days of operating threshold. Second, also, as you know, that we are a business where in on one side of this business, you have liability engine, which is banks and financial institution who give us the money. And other side, we lend the money to customers through our different channels. Most of the banks and financial institution also because of the fourth round of pandemic was slower in giving disbursement to us, for us to onward lend. And this is -- you would -- I must tell that you please expect some volatility on quarter-on-quarter because depending upon where we are also impacted by macroeconomic and financial institutions response to us in terms of giving money is dependent upon that, not necessarily related to us. But as a constant strategy, that's why we are heavily focused on off balance sheeting and partnership with partners who can do co-lending and also co-origination so that we have uniformity in our disbursement engine.

One question is regarding co-lending, sir. In co-lending, we have a percentage of 80/20, if I remember. So if the 20% which we are showing, is there any waterfall mechanism in that?

So sir, there are 2 types. So when the co-lending, which is under the RBI circular of 2020, it is at Pari-passu level, and there is no waterfall mechanism. There is and rewards are shared in Pari-passu nature. We have now also entered into some co-origination partnership with some of the large NBFCs. And also we have done, as you might see in the slide, when we see arrangement with a small finance bank, those have waterfall mechanism. But most of them when you see our balance sheet, they are disclosed. But most of them are within our tolerance band of credit cost, which we expect, and they are fully provisioned for in terms of what we expect to come from there.

Okay. So going forward, what can we expect? Like more contracts will be in waterfall mechanism or will be pari-passu?

Our expectation is, Amit, do you have that number? How much of that is…

It would be around 50-50 because when we are actually talking about our AOP plan, the co-lending and co-origination. I'm actually saying co-origination there, we would probably be providing some kind of credit enhancement. Co-lending mostly would be with the bank. So the numbers are actually similar in next year. So 50-50, you can assume on places.

By next year-end, we would be at 37% of our portfolio will be off book -- 36.5%, out of which about 16% is in co-lending, 11% to 12% is in co-origination and the rest is on direct assignment. So co-lending still forms the higher percentage of the off book, co-origination would be just about near double digits.

Rushad, you may want to take a couple of questions, which people have asked on the chat box. I think people have been…

We have questions from [ Pramod Jain ]. So the first question is, does UGRO have any mechanism of forecasting sectoral scenarios to realign its lending policy and avoid NPAs and sectors undergoing downtrend cycle?

Yes, Anuj.

Yes, we do that. So we have a partnership with CRISIL and we keep getting macroeconomic indicators from them and also because the distribution and the portfolio is sector-focused, the portfolio performance of our own is also a good early warning signal in case something is going wrong. Just to give you one example, pre-pandemic, we have seen -- started seeing slowdown of auto component sector. And we had proactively slowed down our own distribution. And as a result of that, our auto component sectors portfolio performance as of today is amongst the best in the industry. So both are a constant monitoring of our own portfolio and quarterly updates on the macroeconomic indicators across the sectors in which we are. These are the twin mechanisms, which we follow.

Next question from [ Pramod ] itself is very few NBFCs have which withstood and survived the entire cycle. So how does UGRO cushion itself and assure investors of its long-term survival and growth?

I disagree with the question itself. So I want it is proven, 3 things. One, nonbank finance sector have done -- have provided outline performance in capital market vis-a-vis banks. If you look at a set of broad banks, public sector, private sector, except to the 3 private sector banks, majority of the combination of public and private sector bank and now even SFBs, vis-a-vis the NBFC sector, NBFC have outperformed the banking as a sector. Number 2, there are at least of the top 10 listed companies, at least 7 of them have been in existence for more than 3 decades. And so you have the likes of Chola, Sundaram, Mahindra Finance, independent company like Muthoot, Manappuram. They have all succeeded, survived, grown over a very long period of time. And actually, if you look at those who had either a deep specialization into a segment of the market or have the ability to underwrite a customer on a unique set of information or underwriting criteria have actually provided much better performance. The uniqueness, and that's what regulator and the policymaker also recognize. The bank model is a broad-based model and their ability to go to a deeply specialized under sub-segment is what NBFCs doing. And when now that's why this whole approach of collaboration. Banks are custodial of the liability side. They get money from saving and retail investors to hold the money, NBFC are unique set of being able to find and serve the market which are not being severe, that's why they should collaborate. So I think generally, if you look at I don't look at the wrong examples of companies which have been in the real estate wholesale credit have been done with a very short-term approach. Obviously, they would not survive. But those who are in segment of the market, which is either retail or SME or consumer and have an ability to design it a little longer time horizon would definitely be able to succeed survive. And this is not a phenomena just in India, it is a phenomenon globally.

The third and final question from [ Pramod ] is, is it correct to say that UGRO's main business will always be a zero-sum game as UGRO's borrowing costs shall always be far higher than its peers. And therefore, cross-selling or company lending is the only space where the company is going to make its profits.

Again, I would say that please look at go back in a decade's history. I think so if you're comparing NBFC to NBFC peer costs, as the business matures, the cost of borrowing keep coming down very dramatically. Please go and look at a bank like AU, which was a NBFC. Look 10 years back, look at their starting cost of borrowing and as they mature, it came down dramatically. So with vintage, the cost of borrowings keep coming down. For us, actually, our cost of borrowing is going down at an accelerated pace because why on the face of it, you may see that our average cost of borrowing is 10.5%. But when we originate assets with a borrowing of 10.5%, we are down selling that asset into co-lending anything between a 7% to 8.5%. So actually, we have the same pricing advantage, which a large bank have because that large banks money is coming to us. And as we mature our cost of borrowing and, you know, we coming down and third and most we operate in the segment of the market, which otherwise mainline lenders have found it difficult. On the face of it, actually, they should also be able to do it. I can see somebody on the call asked about a 5-Star credit, which is a micro lender for very small MSME and they have shown an outlier performance. Theoretically, all banks should be able to do it. But banks have many other things to do with simultaneously. And that's why to build that deep focus and be able to find opportunity wherein you have a higher-yielding customer, and that's why your margin is much higher. So this is not a business wherein the cost of borrowing matters. It is a business where in your cost of lending matters. And the NBFCs generally have a cost of lending, which will be higher than what banks can get our mainline large NBFCs can get, and we are in that play.

We have the next question from [ Tejas ]. He has asked, in the last phone call, a monthly disposal target of INR 600 crores was provided and what caused us to fall short of that? And what would be the month-on-month disbursal expectations going forward?

Yes, we talked about the capacity. Our distribution is set for a capacity of roughly around INR 600 crores to INR 700 crores. Now of that, what capacity we are utilizing is a function of 3 things. What we can get on balance sheet borrowing? How much of funnel is getting created out of our co-origination and coal ending? And what is our risk appetite given the broader macro scenario, right? So our capacity and our disbursement is a calibration of all 3. So as you see that we have done INR 1,080 crores of disbursement in Q3, it came down because all 3 were falling short. The market was still volatile pandemic was about to hit big time and this is a sector which gets affected very, very quickly. So we calibrated it down. But what we have provided you is a very clear guidance of what we will be doing. So we said we have touched just INR 3,000 crores. Our AUM with both INR 7,000 crores of that AUM, what would come on our balance sheet, what would be off balance sheet is all provided and please be guided by that. I must still say the disclaimer is, most of the companies don't stick their neck out and give this kind of yearly guidance. We have provided that so that at the early stage, some of investors can really understand how we are growing. But obviously, it is subject to all the macro factors. How the liability market is functioning? What is happening in the macro? And hopefully, the COVID is not a concern anymore. Amit, Anuj, anything you want to add, Mande?

So rightly put 3 factors that define our growth, and they are essentially the -- ones that feed the distribution and the asset growth. But the asset growth engine has been really -- has really been cranked up, like Shachin said to about INR 550 crores to INR 600 crores a month kind of disbursals. This quarter, as guided, we should look at INR 1,000-plus crores of disbursals and it will keep growing to touch our INR 7,000 crores AUM by margin.

So the next part of the question is when can we expect the expenses pertaining to branch expansion cooling down?

So as you might have seen in some of our previous quarters, we have said that for most of our incremental expense was coming in our branch expansion. We have a target to grow to 280-plus location in 5 of the identified states where we think there is the highest degree of opportunity. And we have been building -- we have been on the path of rolling out newer branches by every quarter. However, we have taken a pause because we realize that we have to simultaneously we can -- we have to invest into our business for long-term growth, but we have to simultaneously prove to all of our shareholders that what we have invested also reserve because we have taken a pause on first 2 quarters of any further branch expansion. And what -- that's why you're seeing, if you look at our FY '23 guidance, it tells you the guidance that our expenses are fully baked in, and now we are focusing on growth and bottom line creation. And that's why our income to OpEx ratio is coming down from 73% to roughly around 63-odd percent.

Rushad, you can take one last question. I think there's one question from [ Sanjeet ].

So [ Sanjeet ] is asking that, considering the fact that we operate in the MSME sector, have we got any interest from foreign institutions for sustainable financing? Or are we looking at this as an option?

Very good question. Thank you so much. So I think, yes. If you look at our source of financing mix, obviously, we divide some financing on our balance sheet, co-lending and co-origination and securitization of assets. Within the term financing, we pride ourselves being able to attract all sources of financing. Most of the public sector banks are lended to us. But within them also, as you know RBI has a framework of onward lending which qualifies the priority sector. We take money from public sector banks in that. We take money from private sector banks, we take money from capital market, and we also have started taking money from most of the multilateral and DFIs. Actually, we have done the first trade with responsibility and now we are in discussion with many of the -- many of them. And that is also happening. And I think so on 3rd of June, our impact financing report would go public. We have analyzed serious impacts on different SDG goals, which we are creating through our network. And that's why we have an ability to do what we call specialized directed financing. As you know, most of the multilaterals BFIs an impact fund would like to provide capital for some form of a directed financing. So which can be a wash financing, which can be clean energy financing, which can be on moment environment financing. UGRO actually represent a unique opportunity where -- once we analyze top 45 lending is usually within the multilateral and EFI's world, at least 80% to 90% of their mandates get covered within the UGRO network framework. And that's why we have roughly around $75 million to $100 million target this year within the DFI community itself.

That was the last question for this interaction. I would like to thank the management for patiently answering all the queries, and congratulations on a good set of numbers. I would also like to thank the participants for making this an interactive session. Thank you very much, and have a great day ahead.