UGRO Capital Limited (511742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UGRO Capital Limited Q1 FY '24 Earnings Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Vinay Pandit from Kaptify Consulting. Thank you, and over to you.

Thank you. Ladies and gentlemen, I welcome you all to the Q1 FY '24 post earnings conference call of UGRO Capital. Today on the call from the management, we have with us Mr. Shachindra Nath, Vice Chairman and Managing Director; Mr. Anuj Pandey, Chief Risk Officer; Mr. Amit Mande, Chief Revenue Officer; and Mr. Kishore Lodha, Chief Financial Officer. As a disclaimer, I would like to inform all of you that this call may contain forward-looking statements, which may involve risks and uncertainties. Also, it's a reminder that this call is being recorded. I would now request the management to detail us about the business, the performance highlights for the quarter that went by, the growth plans and the vision for the coming years, post which we will open the floor for Q&A. Over to you, sir.

Thank you, Vinay. Good evening, everyone. I'm Shachindra Nath. When I -- this is a Q1 FY '24 -- but for me personally and for UGRO's team, what is the most exciting that we are demonstrating our capabilities to be the India's largest small business financing platform, which is in making. Actually, small business financing, which has been an excluded segment from the mainline credit industry is between the main line. The growth, the explosion of credit, which you have seen in the consumer financing business, the power of the data supported by technology is on the verge of an explosion in terms of the credit. I would actually -- before we go to the financial numbers and what we have done in quarter as the business builders, we always look businesses from a 5-year and 10-year view. But for all of you, it is important to understand that why this segment of the market is at the inflection point for this explosion of credit, which we are talking about. We go to the Slide 1. So in fact, when we were building up our investor relations presentation and rather than going straight to our numbers, we always like every quarter to reassess the market and where we are. When we prepared this, we ourselves were extremely surprised. If you look at the expansion of credit, which has happened between '22 to '23 for MSME, it was INR 52,800 crores and the negative expansion, which is the reduction of the credit which happened in '21, '22 was INR 61,000 crores, which means that we have still not reached to the level of pre-COVID time when it comes to MSME. That is just one part of it. But what is more the stock, if you look at the FY '17 data and FY '22 data, during this period of time, a large number of new MSME financing players have emerged. Banks have refocused in India on MSME credit from a wholesale credit, everyone is going retail. But the gap of the formal credit availability have grown. In FY '17, the gap -- the total MSME credit demand, and this is the data which comes from IFC and few other public sources, was INR 69 trillion which means that if you divide -- reduce by the credit, which was made available, it was INR 53 million of the credit gap. And in FY '22, it has moved to INR 106 trillion, which is INR 85 trillion gap. We view this that the opportunity and the need is for not just one euro, but hundreds of euros to emerge to fulfill this gap because the existing credit system of the India is completely undercapitalized and insufficient to fulfill this gap. If we go to next slide. Why we think so that this would accelerate now? I keep saying that there was a point in time when consumer financing in India was similar to what the MSME financing is today. 10 years or 15 years back, if you want to go and buy a car or a fridge or a TV, the credit was roughly coming in 30 days' time. Today, it comes in on tap. That has happened because some of the large players emerged and also the data around CIBIL and the personal data of the consumer behavior, the repayment capability got established starting between 2008 to 2012 and exactly same revolution in terms of data repositories happening in India. The number of GST payer in last 5 years have increased by 50%, the UPI volume, which is also demonstrate the repayment capability and cash flow assessment has gone up 12x. The Udyam registration, which we still feel is 1 single data repository, which you catapulted the MSME credit has gone up by 13x. Then the formalization of economy is happening at an accelerated pace. So total ITR filed has gone up by 37%, and large number of that new income tax returns is around MSME business. The MSME registration, which we see also a sign of formalization of economy has gone up by 80% and linked account which is 1 single method through which credit underwriting and cash flow underwriting would be possible. So on account aggregation through which you can fetch the financial data has -- in a very short period of time has gone up to 4.1 million linked data accounts. And from there, we in our last conversation, explained you around our capability of what we are doing around data and technology. How our growth score is designed and run. How our growth score has an ability to say, both yes and no to the customer. And why we think so that we have a superior capability of both improving the turnaround time for the customer, but also maintain credit cost, revive customers. And before it goes to the funnel of what conventionaly we understood is the conventional underwriting funnel, which is the Credit Officer, how he does it, where we have it on specialization. So all of that was explained in great detail in our last quarterly results. Those who are joining us for the first time, the recording of that is still available on YouTube, you can go and look at it. But I would request Anuj to now take you through that. How that engine is extremely superior because that engine has been built on capability of machine learning, Anuj.

Thank you, Shachin. Good evening, everyone. So as Shachin was saying, we have been demonstrating the effectiveness of our internally developed underwriting scoring model based on GST banking and Euro for some time now, and we have been presenting the risk ranking, which is coming out of that. But today, in this slide, we wanted to take you to a little more detail on what all the back-end work and investment, which has happened, which has resulted in this. And also during the course, we would like to give you a glimpse of what all is possible in future. We have already seen the kind of evolution of data ecosystem and some of the numbers in the previous slide, where they are literally quite large and amazing. And we all are very clear on what the potential is. To encash that potential from day 1, we were very clear that the platform has to be cutting edge. And the machine learning platform, which we have built, we are very proud of that. Just to take you through the platform itself and our approach in a little more detail, you would see there are 4 modules of our machine learning platform. The first one is Data Ingestion. It is primarily a design of the system where the input data itself is in digital form. It is very logical and intuitive thing but for legacy large banks and other financial institutions, this is the biggest problem they are facing at this point in time. And when we were designing the system, we were very cognizant of that. So we have designed a system where all the critical data is sourced through APIs from validated sources outside and we host all that data in a cloud infrastructure, where it will be very easy to deposit and retrieve. So our data ingestion module is by far one of the most modern models in very similar industries. Then comes the second module, which is the Feature Engineering. The most critical part of this is to store data in a format where the machine learning codes can derive features in a centralized process data layer. And that data layer then pulls out in a feature library, which is quite proprietary in nature. This has been designed keeping in mind our end target segment and all the data features are extremely relevant to the GST returns, the banking behavior and the repayment behavior for small and medium enterprises. Also, there is a very large integrated network of this with other applications so that real-time information is exchanged. For this, we are on AWS platform and the idea is to look -- to use the most modern databases and the most modern infrastructure, which is available. So this we have done right from the design stage. On the most critical Model Development stage, Today, we are -- we have more than 10 models inventory. We use not only the traditional predictive modeling and machine learning algorithms, but we have started using the natural language processing codes as well. In addition, the time series analysis and forecasting, which -- features are being used and we use all the leading model development languages for machine learning, including Python, SaaS and SQL. This is the area where we have done the most investment, the talent acquisition and the people who are required for this have been taken from the most premium institutes and now we have -- we have created a separate office for them so that there is less distraction. So this is going to be the intellectual property builder for the company in years to come. Lastly but not least is the capability to deploy the models during BAU and running businesses. Here also, we have internally developed the central rule engine, which can be configured and the models can be deployed in real time. So overall, in all the 4 modules, during the course of last 4, 5 years, there have been tremendous insights and going forward, we will not only use this as a credit underwriting tool, which is the GRO score, which is our flagship GRO score, but in other phases of business as well. For example, applying network science analytics for our supply chain business or for trigger-based questions to be asked when we meet the customer, et cetera. We have also made available our flagship GRO Score on our website for small businesses to apply and see for themselves where they stand and what are their insights on how to make it better. So I would encourage you and your known people and other MSMEs to come to our website and see for themselves. Next slide. This is a standard feature now which we have been covering for last many quarters. Here, what we do is we check the efficacy of the interim developed GRO Score and how it is doing. Just to recap, what we do is out of approximately every 100 cases which applies for a loan, we give -- end up giving loans to about 30 but our proprietary GRO Score is well for all 100 people. And we keep going back and see how they are performing even when they have not got the loan for us. So the -- there are 2 lines on the graph, which you can see. The lower ones are the ones, the performance of customers whom we have disbursed and the higher ones are the performance of the customers who we couldn't disburse, but we keep checking whether their repayment behavior got in line with what our internal GRO score had defined for them. And so far, for last more than 2 years, the risk ranking of our classification has been steady, and this result is very encouraging. This helps us to increase the width and to keep checking whether the GRO score is directionally working well or not. And I'm very happy to share with you that it is working quite well. On the right-hand side, you can see a pie chart. This is the composition of our overall portfolio. You would recall, GRO Score gives risk classification in 5 banks, A, B, C, D, E. A being the best and E being the worst. Today in our portfolio, A and B combined is about 86% of the portfolio, which is where we want it to be. This is the top quartile customers from everyone who have applied with us. So now I'll invite Amit to take you through on what all this holds in near future and how the business parameters are likely to be impacted and give some direction.

So all of you who would have been tracking us over the last few quarters, you would have seen we have been tracking against a milestone goals in 2025 and we've been wanting to -- we've been giving guidances, we've been wanting to get to a particular number. And so -- and the results have been encouraging between tracking absolutely as per plan. This is -- as we continue, we will keep strengthening or rather we are very strong pillars and we'll keep strengthening our 3 pillars essentially that will help us get to our plan. First, of course, is our Data Tech back to our risk assessment, which I will explain. Second, which is a core to our organization is the lending against service model. So we will continue to do an on-book and off-book kind of hybrid AUM and we are tracking well on that plan as well. And third, of course, is a very diversified product portfolio and distribution where we do -- where we actually service every need for every MSME, which means by 2025, we will want to get to about a 30% loan growth on a sustainable basis. Our off-book AUM on back of co-origination and co-lending will be at about 50%. With the cost to income ratio, and I will come back -- I'll comment a little more on this in some of the next slides. We want to get to a 45% cost-to-income ratio. Credit cost, thanks to our very robust risk models currently are far lower, and we want to even keep it below this 2% mark. Thereby by delivering to the investors and the stakeholders, an ROA of 4% and ROE or return on equity of 18%. [indiscernible] we want to go next. And how are we actually doing this? So we've kind of tried to plot this over the last few quarters. And firstly our disbursements, there has been a steady growth on disbursements quarter-on-quarter. Currently, we are disbursing about INR 1,200 crores to INR 1,400 crores -- about INR 1,300 crores to INR 1,500 crores in the quarter, and this will continue to grow steadily. Look at our off-book AUM mix, we have given the guidance of about 50% on the last slide by 2025. We are already at 43%. We will end this year close to 47%. So that helps us sweat our capital better. Credit costs, of course, are way in control at 1.3% quarter-on-quarter. Coming to the cost-to-income ratio, sometime last year, when we were at 72%, we explained that we put in a lot of infra during the post COVID times to really build organization to scale. And now that this whole infra and the machinery has started delivering on our AUMs, on our revenues and on the controlled credit cost, we are seeing a sustaining decline on our cost-to-income ratio. We are already at 55%. Our aim is to be at 45% by 2025. In my judgment, we should get there even before that. But at this point in time, we are tracking very well on our cost-to-income ratios. All this has only led to a better ROA this quarter, we are at an ROA of 2.2%. So having said this, overall, the business matrices look very encouraging and quarter-on-quarter, we will be only getting better. Next, to give you a quick brief of the performance highlights, Kishore, I invite Kishore to do this. Kishore, our CFO, who obviously has been here for the last 3 quarters will take you through this. Kishore?

So as far as the asset under management is concerned, we have closed this quarter at INR 6,777 crores, which is 85% growth compared to last year in the same period and 11% growth compared to the previous quarter. Gross loans originated is about INR 2,036 crores during the quarter, which includes a supply chain financing. And if we exclude that, then we are closer to INR 1,300 crores, which is a 50% year-on-year growth. Compared to last quarter, it is -- like there is a slight dip, however, we are quite confident that as the time progresses, so we'll surely catch on that. Portfolio yield is 17.3%. It has slightly increased over the last few quarters, and it is consistently increasing because of our focus on high yielding products as well as increasing some amount of it on the existing products. On profitability side, total net income during the quarter is INR 125 crores, which is 82% Y-o-Y. Pre-operating -- pre-provision operating profit is INR 56.6 crores, which is 187% of Y-o-Y and 11% quarter-on-quarter. Pretax profit is INR 35.6 crores during the quarter. On the same quarter last year, it was closer to INR 10 crores. So it is almost 243% of the last same comparable period. Last quarter, we were close to INR 33 crores to 36% quarter-on-quarter increase as far as pre-tax profit is concerned. On the asset quality side, as Anuj and Amit has explained that we have a very robust underwriting mechanism, which is managed by both machine and man. So we have a hybrid model where our GRO score do the first level of assessment, then we have credit officers who do the PD and do the physical check on the customers, including the fraud control unit, which is resulting into a robust portfolio. Our gross NPA is closer to 1.8% and net NPA is about 1%. Collection efficiency is hovering around 97%, which is consistent over the last 5 quarters. On borrowing, we have been -- our total borrowing is about INR 3,342 crores during the period ended 30 June. Total net worth is to INR 1,300 crores. So our leverage is close to 2.5x as of now, which has steadily increased as we increase our total book during the year. Cost of borrowings is about 10.66% during the quarter, which has marginally gone up compared to the previous quarter. These numbers, actually, we have already explained that the AUM has gone up by 85% compared to the previous period. Net disbursement has gone up from INR 917 crores to INR 1,284 crores during the quarter, which is 40% growth. Off-book, as Amit explained, that has almost doubled compared to the last year. So it was -- we were at 21%. Now we are at 43% of the total book, and our targeted off-book is about 15% in next 6 quarters. Total income -- net total income is about 12.5%, which is 22% growth over the corresponding period. Cost-to-income ratio has steadily going down. By the year-end, we should achieve about 47%. As of now, we are closer to 55%. Adjusted return on total asset is about 2.2%, which was about 1%. So we have done significantly well here and return on equity is about 8.7%, which was 3% last year. And capital adequacy is about 27%. Out of this 27%, primary debt is coming out of Tier 1 capital, there is hardly any Tier 2 capital. So we are well capitalized at this moment and total leverage is over 2.5x. On the -- this quarter, our EPS was closer to INR 3 per share. So if we just do the total comparable as we progress our profitability will increase, but based on the current quarter profitability, our EPS -- annualized EPS would be roughly around INR 11.34. Our book value is INR 145. At many places, we observed that post our equity in season, it has been stated at INR 110 because people have added the number of shares that we have issued during the quarter, but not added the quantum of money that has come into the equity. So at many places, you will find that our book value is reflecting INR 110, actually, it is INR 145. Our price to earning ratio based on the current quarter, I think, is about -- roughly about 24x based on yesterday's facts.

So we will stop here because the objective is -- because our investor presentation is quite extensive. It covers portfolio equality, it covers our shareholding structure. It covers our management. It covers our Board. In fact, we have -- just before we invite for questions, we have just added a new Board member. Our previous Board member, Smita Aggarwal has been appointed as Director United Nation for Global Financial Inclusion. And that's why her full-time capacity to United Nation have to move off our Board. And given that over the last 2 years, we have seen a large number of public market shareholders coming into the company, some of the new institutions have come and some of the market -- public market investors have also come. And we wanted to add, as you know, in terms of the governance, our articles provides that the majority of this company's board would be independent. So we are -- that's why we call we are independently supervised. We are professionally managed. And we are institutionally owned, independently supervised and professionally managed. So a large portion of our ownership is in the hands of private equity, which is now getting in hands of much broader population and in order to make sure that the company and its management delivers to what is comparable to the market, we added a capability or a person who has been tracking financial services industry for very long. So Tabassum Inamdar, who was the Head of Financial Services and BFSI Research for Asia PAC of Goldman Sachs, have joined our Board as an independent director. All of these details are in our further [indiscernible] but I welcome participants to ask questions. Management will be happy to answer. Thank you, over to you, Vinay.

Thank you, sir. We can begin the Q&A.

[Operator Instructions] We have a first question from Anil Tulsiram from Contrarian Value Edge.

Can you hear me?

Yes, Anil, welcome back. We can hear you very well.

Sir, my first question is on prime unsecured book. I understand that ticket size is INR 17 lakhs and the interest is around 19%. So I have interacted on this question earlier, and I was told, the customers are same as the prime secured customer we turn about INR 200 crores and healthy banking habits and owned residents, et cetera. What I'm unable to understand is why these customers are willing to pay 19%, 20% just because it's a short-term loan and faster processing time. Will the customer pay such higher interest rate? And the related question on this is what exactly do we mean when we say prime customers.

So I will answer the second part of the question first and then come to the first question, which is an age-old question. The way we have defined prime customers is through 3 parameters. One is the quality of cash flow. Second is the quality of repayment behavior and third is quality of collateral. So in the quality of -- and my quality of cash flow in MSME towns, basically, we mean whether all the cash flow can be evidenced in the reports which customer files, for example, in GST or in banking, et cetera. If there are some cash businesses, which are not in GST or banking, then the quality of cash flow is not prime as per our definition. Quality of repayment behavior is defined by our proprietary GRO score. So if the customer in the top 2 quartiles of repayment behavior, we consider him prime, otherwise not. And for secured loans, if the quality of collateral is a prime property with a very clear and marketable title then it is a prime property. So depending on these 3, we classify our customers within degree of primeness. For unsecured loans, we only do prime customers, which basically means the cash flow is prime and the repayment behavior is prime. Now coming to your first part of the question, Yes, there is a clear premium to command if one is able to give loans to customers within a stipulated short period of time. For MSME customers and typically our set of MSME customers, which are micro and small, time is of essence. And most of them because they have smaller turnovers and don't have too much collateral to offer, only can avail unsecured loans. There have been many large success stories in India who have built their businesses -- lending businesses in this field, Bajaj is the prime example. Unsecured loans pricing has been pretty inelastic. The amount of demand doesn't go up or down with change in interest rate. This has been pretty set up historically. So yes, there is a very large market of MSMEs in India who pay unsecured loan for a short tenure between 2 to 3 years at 19% or more rate.

Yes. Sir, actually, I was told these customers have a turnover of up to INR 200 crores, and that caused the confusion. So can you describe your customers in more detail. What is the profile of these customers, their typical turnover and loan limits, et cetera.

So our sweet spot of customers is micro and small. And within that, more than 80% of the customers in our portfolio would have turnovers between INR 50 lakhs and INR 10 crores. So this is our target profile.

Got it. And sir, one last question, if I can. The last part of our AUM is again focused on ticket sizes of INR 30 lakhs and more. And we are focusing the way we underwrite is, we use the digital stack in GST and banking, which is like entirely can be digitized. So what I want to ask is if you look at the majority of the NBFCs, they are focusing on lower ticket size and difficult to underwrite a segment like where cash flows are not very visible in the banks and you have to do surrogate and others. So why have we chosen this strategy where banks can compete very easily rather than the strategy where banks are finding it difficult to compete. So can you explain the rationale?

Okay. Sorry, I will and this is also is an age-old question. In theory, yes, all this data is pretty democratized and everyone has access to that but the trick is to apply it smartly to the target segment, which gives a demonstrable results. We have chosen to be in underserved segment, not unserved because our way of underwriting relies a lot on statistical platform templated underwriting. For that, you need some history of repayment behavior and banking behavior. But that doesn't mean that these people have many choices today. So the way this is operated is people who have been able to apply these models and are able to give a constructive solution or a loan to the customer with a very reasonable turnaround time, there's a very large market still to capture.

And I would add, Anuj jee, the other thing to consider that what you are seeing today is not what you will see in 2 years or 3 years of time. We, through 4 of our channel services, all type of customer profiles. So we also focus on micro enterprises customer wherein the GST and the banking data is thinned where you have to build massive physical infrastructure, you have to underwrite manually and where we are seeing the improvement in the data capture in terms of the banking behavior and GST behavior is coming up. But that's a slow build. In the last 2 years, we went to 5 states. We opened 75 branches. Those 75 branches are delivering us roughly around INR 70 crores, INR 75 crores per month and we don't want to increase OpEx, we have seen the maturity of that. Over a period of time, for mainline banks to break through that segment of market continues to be difficult. So we will keep expanding that. So the color of this would change, but as Anuj said that even in the segment wherein you think the data is available to every one, first, the gap, which I showed you on the first slide itself is widening. So there is an opportunity for everyone. Generally banks like to do even much bigger ticket size. Second, the 5 year of journey and the hard effort we have put for any financial institution to catch up there would take a few years. And by the time, we will again go ahead by a few years. And that is also one of the reasons why largest financial institution of this country partnered with us and do core lending because I think we have created a mode, which people realize that, that mode is difficult to replicate immediately. Some of them would, which is okay. But otherwise, they are partnering with us.

We have a next question from Chinmaya Bhargava from Badrinath Family Office.

I have a couple of short questions. The first is in our quarterly disclosures, there's a hit of about INR 6 crores under cash flow hedging losses. Could you just say a little bit about what this is and the nature of these losses.

So actually it is not in P&L hit. So whatever ECB borrowing that we do, these are fully hedged, but technically, you have to report it this way that whatever in the rupee differentiation come between the quarter, you have to disclose it that day, but there is no P&L hit per se. So the entire principal plus interest [indiscernible].

Okay. The second question is looking at the annual report in FY '23. In your breakup of your segment under machinery finance loans, it looks like 59% of your AUM there was the hospitality segment. Could you describe a little bit about why the breakup is this concentrated.

No, I think there is some confusion. Most of our machinery loan portfolio would be under life engineering and not hospitality.

Okay. But the breakup was about 59% to the larger segment. Right?

No, no. Where you are seeing this?

It's in the annual report.

The annual report is in front of us. We'll check that, but no. But I would request you to go through the investor presentation and look at the portfolio construct there. And if you can point out where in the annual report you found it, we will then surely check that.

My last question then here before I jump back in the queue, is if you could share a little bit about GRO X since we launched how many users we've managed to onboard their, what we've disbursed under that platform and how it's going?

Yes. So on the GRO X, we are not yet disclosing numbers. The reason for that, that is still what we call is the beta test 1 version. We expected -- we don't want to grow exponentially while the total number of download, the response, the approval rate has been exponentially high. But given the nature and the type of the customer, we are controlling the total portfolio, which we'll generate over there. We are also testing, and as you know, the credit was on the UPI. RBI is supposed to come back with the regulation on the UPI, so we are waiting for that to happen. Now as we have said, I can say at the beginning of the launch, that this is the demonstration of our data plus tech capability but over a period of one year, the total book we want to create is not more than INR 100 crores in the initial period of time till the time, we fully tested out the credit behavior of that, I think so, we achieved around 5% of that target.

We have our next question from Rucheeta Kadge from iWealth LLP.

Congratulations for a good set of numbers. Sir, my question was regarding your income on co-lending, which has kind of gone down from what it was last quarter. So if we look at the yield on that book that has also gone down as a percentage. So if you could just explain on that a little bit?

So last quarter, we have done that the volumes on co-lending as well as DA was significantly higher compared to this quarter. That is why you would see that last quarter, our total co-lending plus DA upfronted income was closer to INR 63 crores, which has come down to closer to INR 43 crores this quarter. It is [ shear ] factor of volume that we have done, and there is no change as per se on the rate side because these are all prenegotiated rates that we agree with on co-lending side for most of the banks. And on DA side, rates don't vary quarter-on-quarter that much. So you see a factor of volume. We have done large volume of DA and co-lending in the previous quarter, especially in the [ fake ] end of the last quarter. This quarter, typically, if it gets pick up from the quarter 1 and then gradually build up till quarter 4. So this quarter, the volumes were significantly lower compared to the previous one.

Also this is the market construct, Rucheeta. As you know that 100% of our asset is private sector asset. Generally, the banks are always in dire need of adding more private sector asset by end of the financial year. And so as there is a lot of customers who want to borrow before the close the financial year. So you will see this in the cycle that Q4 of lenders like us would be a little ramp-up and Q1 will be a little lower. But on a normalized curve basis, we would achieve what we have targeted for the year.

But at the same time, you should appreciate the bank that despite having upfronted income lower by almost INR 20 crores, our PBT has gone up.

Yes, yes. One more question that I had was on the AUM. So earlier, your target was around INR 20,000 crore AUM by FY '25, right?

Yes.

FY '25 -- by FY '25 end, so are you like going to trim the guidance? Or how do we look ahead?

Ma'am, look we give guidance to ourselves and to the market, right? This guidance are based in what we want to achieve. This guidance, I think -- actually, for shareholders and investors, more than the area which is the bottom line performance, which actually deliver the value. But AUMs give you a size sense of the kind of institution is getting created. There we are right now, if you look at our average monthly AUM increase by INR 500 crores or disbursement run rate of INR 500 crores, half of that we will achieve this year. And by the time you will be ending the year, our exit runway should be around double of what we are doing right now because that's the way the capacity would get, which means '24, '25, we should add another INR 12,000-odd crores. So this year [indiscernible] last year of INR 6,000 crores of AUM added for this year is roughly around INR 10,000 crores and the net incremental INR 12,000-odd crores. If we will be, God Willing, we should be at INR 20,000 crores or INR 80,000 crores, we really don't know. It's too difficult in our markets to create that but all said and done, we will deliver the bottom line performance of what we have showed in our first few slides in terms of return on asset, return on equity and cost-to-income ratios and sustainable growth rate.

We have a next question from Vijay Chauhan from RH PMS.

I just had one question regarding the asset quality. So there is some marginal increase on the quarter-on-quarter basis, so if you can shed some light, that will be helpful. And also like we have done fantastic execution, and we have been tracking this business for a long period of time, almost since the -- from the older days and the execution had been fantastic. So we also would like to understand what are the like risk measure where we are applying additionally once we hit the, let's say, the INR 10,000 crores and INR 20,000 crores mark because now our execution engine has robustly shown the successful execution in terms of loan book growth. So how we will do on the asset quality side.

Question is that why there is a marginal deterioration in asset quality. Second question, I will take that, that what additional risk measure will apply once it reaches scale because your execution to date has been good. I see these are only 2 questions, right?

Yes, correct.

Okay. Okay. So on the marginal utilization of asset quality, so we were -- and if you're referring to gross NPAs, et cetera, we were at around 1.6% to 1.7% in last 2, 3 quarters. In this quarter, it is 1.8%. The plan which we had for the year, we are actually -- we had projected that we will end the year at around 1.9%. And this is for the very statistical exercise, which we have done, which takes into account the seasoning of the book. So in the long term, the budgeted losses and gross NPAs by product are pretty well defined. And as the seasoning of the book grows and its contribution in the overall portfolio grows, it is likely to go up a little. So this is very well calibrated. And we had forecasted that. Internally, we have been estimating this, so the -- so in steady state by end of the year, the idea is to be around 1.9% or lower. This has primarily happened because the greater than 12 [ MOB ] contribution in overall portfolio is steadily increasing, which is the real client. So there is no need to worry. We keep observing this in very great detail, and this is as per plan. On the second question on what are the additional things which we're doing once we reach the large scale of INR 10,000 or INR 20,000 crores. I must tell you we either came up with an ICAAP guideline for NBFCs to be implemented by September of 2022. And we were among the first NBFCs to have a very, very robust framework on internal capital adequacy by clearly quantifying both Pillar 1 and Pillar 2 risks. So we have done a very exhaustive exercise. We all know that credit risk is the primary risk in NBFC business. But around that, from a governance perspective and operational perspective, we have pretty well defined large risk areas and have tried to quantify them for the next 3 to 5 years period, and that all has been documented formally. So this is one of the primary steps as a large NBFC be happy.

I would add in addition to what Anuj has just said. In my 25, 27 years experience in financial services industry, and creation of an institution, which started in 2018 with a listed NBFC, with only INR 40 crores of total capital and on the day 1 without having any business raised roughly around INR 940 crores -- INR 950 crores of capital from 4 of the largest Asian private equity institution set up a governance framework where in its article provided that the majority of the board would be independent. The company will not lend more than 1% of its net worth. Any shareholder, which is more than 10% through primary route would get a reservation on the Board. I as the founder have relinquished my right in terms of the governance, how people will be hired, how people will be terminated. And also not many other things in terms of the policy and formulation, is the first step. In India, lending businesses, whether banks or NBFC have not failed because of the underlying size of the customer type. They have failed because of the governance itself. You can have cyclical risk, but you cannot have a failure risk. So that was the first step. Second, this is the first company which heavily invested in it's people infrastructure where in 8% of equity was given to a management team, which came from diversified background. When we have only INR 1,000 crores of AUM, still the management team was fully capacitized, 5 senior CXOs having 25-year-plus experience, almost 25 people reporting into them, they all have 20 years plus experience and physical branch infrastructure, multilayer credit infrastructure and data analytics and technology, which is around 275 people. We are designed to build this scale. And last but not least, we have been conscious that this is a business of credit and capital and that's why at the appropriate time, we have raised capital. So if you look at our last capital raise, which was done on 11th of April, while we were at the lowest point of our share price point, which means that there was always a temptation to wait out and raise capital when the price improve, which then from there, improved to almost INR 158 to INR 250, INR 260, I don't know. But given that we said that we are nearing to a capital base, which is going around 20%, we avoided the temptation to it, but raised our capital from some of the finest institutions in the world. Denmark government put in INR 240 crores, we did a QIP and we brought some of the [indiscernible] investors. So I think so we are in making of an institution and they -- by their -- the design itself make sure that they pre-invest when the scale comes out.

Mr. Chauhan, does that answer your question?

Yes. Thank you for detailed explanation and congrats for again executing on the benchmark that you yourself set. And best of luck for the future.

We have our next question from Omkar Salgaonkar from Vasuki India Fund.

Sir my first question is on the co-lending income. So if I see for FY '23, as a percentage of off-book AUM this was around 6.3%. So how do you see this going ahead? And like what should be the sustainable rate?

It is a factor of volumes and rates. So as the volumes would go up, the total income would go up, but our margins would remain stable in this portfolio because as I explained in earlier question that our rates in most of the bankers from whom we do co-lending are prefixed and it varies only when benchmark rates vary. So there, our margins on the overall co-lending will remain almost similar what we have delivered last year. And on direct assignments side, again, it is expected to be similar. So it is a function of volume that how much volume we will do during the period. And as our -- we have given a guidance to the market in the first quarter that we will touch INR 10,000 crore of the AUM and certain level of almost 3.1% of ROE -- 10% of ROE and 3.1% of ROA is an important cog in the wheel to achieve those numbers. But on the broad line numbers, we expect that last year to this year, co-lending and DA income put together should remain flattish. This is why we have presented to our internal Board.

Okay. And my second question is on the credit cost. So for this quarter, it is around 1.3%. But so this credit cost, we calculate as a percentage of total AUM, right?

Yes.

But if my understanding is correct, we don't have any credit cost on the off-book part because that is taken up by the bank.

Sorry, they are two part of balance sheet, one is co-origination and other is co-lending and in our presentation, we have bifurcated. Co-origination till recently was only with the large NBFC, where will we cover a certain percentage of the credit cost and often first loss cover and that's why for that portfolio, we provision for the entire credit cost. And we are gradually it is also moving in the hands of the bank. It would take time. I think so by end of this year, banks could start taking all form of product, unsecured business loan, secured business loan machinery, supply chain financing. So of our co-lending book, co-originated book, 50% is in the hands of the NBFC. And that we cover the credit cost, and that's why the provision also covers for that.

Okay. But so going ahead, would it be more appropriate to calculate this as a percentage of the on-book AUM? Is that understanding correct?

No, not exactly. So the correct way of probably looking at it is a balance sheet AUM plus co-origination income, plus 20% of the assigned book, which we have done in co-lending and the 10% of the DA. So if you put together, then the real credit cost should be good measure to have a complete picture of the percent -- as a percentage of the book.

We have a next question from Nirvana Laha, an individual investor.

First of all, one request, if you could please start sharing ALM data from the next quarterly presentation because that is something that we like to track. So if possible, please.

So that since you asked question, we are positive on all ALM market. And that is also because while we do long tenure product as well, so secured loans up to 10 years, 12 years. But most of our long tenure product actually get to downsell in our co-lending book, actually. Suppose I have given somebody INR 1 crore piece of loan, and it is for 10 years, [ 3 plus ] 10 days, 80% of that will go to the bank. And only 20% of that will be held in our books for the long tenure and we match that to our equity capital that now -- total tenure or average tenure of our book should not cross our equity capital, but thank you for the -- we'll see how best we can present that because the regulatory reporting structure and this whole co-lending and how it impacts the entire ALM, this has to be looked -- is to be something to be deliberated. We will surely come back and try to find a way to best represent it to you.

Okay, sure. So in the annual report, I saw that there was about INR 51 crore worth of contingent liabilities, which was sort of marked against FLDG guarantees for co-origination. This is from the annual report. But now I just heard you say that it's provisioned and therefore, part of the credit cost. So if it's in contingent liability, then it's not part of credit cost, right?

We do it both, sir. So it is a contingent liability. And because of this is contingent, we are also in our expected credit loss provision, we are provisioning it. Am I right?

Yes.

Okay. So the ratio that I saw was around 10%, so around INR 51 crore on a co-origination book of INR 488 crores, that was the contingent liability. And including credit cost. So is it fair to say that this number is somewhere between like around 10% to 15% is the kind of guarantee that we are right now having to give on our co-origination book.

Sir, the recent provision is an internal thing and the FLDG is external. So it is just that we are a little conservative on this. That's about it.

But yes, your math is more or less right, 10 plus about 1.5 Yes. So I think your math is right that far -- last year's annual report which you are seeing because these were mostly new relationships with large lending institution. The total contingent liability against an outstanding portfolio is in the range of 10%. With every passing time, it is coming down. But the credit cost of that, which has come to us against that contingent liability, get provisioned simultaneously.

Got it. But you see it coming down, right, from this 10%?

Yes. As I said that we would endeavor and that is the endeavor, which is happening. So one of the second largest public sector bank in India, we have gone live on what we call option 1 fully digitally integrated system for a business loan wherein 20% would at the point of origination, underwriting and disbursement is happening from us, the 80% is coming from the bank. And once that happens, then this contingency would keep coming down. Obviously, the difference would be adjusted in price. So think of this way, I go to a very large AAA NBFC, I originate a business loan with them. They give me a price of, say, 10.5%. I give them a 5% first-loss class cover wherein the credit cost is expected to be 1.5%. I take the provision of that 1.5% in my ECL. But if I go to a large public sector bank, which I cannot give any first-loss cover, the price would go up from 10.5% to say 12.5%, but it would release our both contingent liability as well as the ECL provision.

Got it. Got it. So on OpEx cost this quarter, I think we have done very well. We have flat Q-o-Q, even though there's been a lot of growth. So do you see this run rate maintaining over the next few quarters? And there's been a INR 3.2 crore employee cost reduction quarter-on-quarter. How is that?

So it is -- as we have given the guidance at the beginning of the year that we are capping on our overall OpEx, so it is likely that it could go up slightly from where we are because the inflationary factors keep on pushing it up a little, so probably on a holistic basis, we may not be significantly higher compared to what we have spent during the quarter. But it is not static. It will not be going in all the 4 quarters during the year. And this reduction in employee cost is the factor that whatever we have done our P&L during the first quarter of the year, and whatever incentive, et cetera, we have factored in probably was a little lesser compared to what we have budgeted for; hence, there is a reduction, but as we progress, it will catch up.

And last, if I may squeeze in. Anuj, what you described about the model was very interesting. We would like to hear more about the model in the next calls and presentations. If I can ask just a couple of questions on that. So every loan application right now in UGRO, does it go through the GRO score 3.0 process?

Every loan, except for micro loans, because in micro enterprises, there is not enough data to analyze. So the platform requires bank statement, GST and credit repayment behavior. But for very small customers, sometimes, we don't get bank statements or if we get, the number of like -- very thin bank statement. But other than micro enterprises loans, everyone else goes through the GRO score.

And for micro enterprises, you would have manual score cards?

So we have an abridged version of the same GRO score, which only takes into account the repayment behavior.

And is there a manual override to a GRO score, like if GRO score 3 says that the score is good, and you can lend it's A, B, C or whatever the bands that you classify in. Is there a manual layer of override after that? Or is it?

So the GRO score gives a probability of default. So A, B, C, D, E, each -- against each, there is a probabilty of default, which is getting estimated. So depending on what kind of products we are doing, we have internally made a cutoff of what should be a straight reject. So typically, a GRO score of B and E under most circumstances would be a straight reject unless we find that there has been an error in reporting in Bureau. This can happen, but although very rarely, but this can happen. Sometimes there is error in reporting, and that's why the machine has read it wrong. But other than that, there are very clear guidelines on which are to be straight rejects depending on which products we are applying it to. But credit officers have authority, there for A score customer if he has found something which is not comfortable with or our sector and templated underwriting scorecard is not stacking up or suppose our FCO and Fraud Control Unit has red flag something although collateral quality is not as it is expected, credit officers can say no.

Do we have data on like what percentage of A or B, there is a manual override where we don't lend, like what percentage?

The approval rates in GRO score A and B are in the vicinity of 50%. So 50% of GRO score A and B are still getting declined by underwriters for various reasons. It could be reference related. It could be collateral related or it could be something else.

And idea is to bridge this gap.

And Anuj, we would like to hear more about the model from you each time. Thank you.

We have our next question from Pruthul Shah from Anubhuti Advisors.

Anuj jee, good to see you again. Can you hear us?

We can take him back again. Let's go to the next participant.

We have a question from Rucheeta Kadge from iWealth LLP.

Sir my question was on the ROE that you've guided for, which is 18%, so is this without a capital infusion that you'll have to do by the end of the year or with that, that you're guiding 18% ROE with the capital infusion.

And this ROE is not the guidance for this year. This guidance is for next.

I know. I know. I know.

It is this, Rucheeta, what we want to achieve on a sustainable basis.

Okay. Okay. So '25...

But target is to get there by '25 and maintain that thereafter.

Understood, sir. Understood. And this year, ROE would be 3.5% is what you're expecting?

ROE would be closer to 10%. ROA would be 3.1%.

3.1% and the tax rate would be?

29%.

We have a text question from Mr. Tushar Malhotra from Advaita Advisors. What is the difference between return ratios, that is ROE and ROA of co-lending side and co-origination? And the second question is, what is the percentage of customers we fund without GST data, both amount of AUM and number of customers.

I think the difference to the last -- he is asking about that last slide. Yes.

So co-lending. So co-lending returns look superior if you have gone through our investor presentation. It is likely because we earn amount of the income, almost same amount of income by deploying much lesser capital, so in co-lending 80% of the -- our exposure is being taken by the banks and the 20% exposure remains with us. And the margins are almost similar. So our capital attachment to the servicing the same kind of exposure is much less. Hence, the returns are far superior compared to on balance sheet lending. There was another question on?

On the how many -- what is the percentage of AUM and number of customers which are without GST?

So roughly about 20% of the AUM, 10% is close to our micro enterprises division and 10% of partnership and alliances. These are typically customers which are very small in size and GST is not applicable to them yet. But I will point out that these are all secured either by a property collateral or by FLDG.

We have a question from Pruthul Shah from Anubhuti Advisors. Mr. Pruthul Shah?

Pruthul, We can't hear you. So you can write your question in the text box if you are not being able to -- the voice is not coming, we will answer that as well.

Meanwhile, we'll take the next question from Anil Tulsiram from Contrarian Value Edge.

Sir, can you describe how has been the journey of your micro loan branches? And what has worked and what has not worked well and how sooner can we scale this particular segment?

Yes. Just I want to make a clarification so that people would not get confused our micro loan is micro enterprises loan. We are not in micro finance, as lot of people get confused. Yes. And our average ticket size is around INR 7 lakh, INR 8 lakh, it's largely secured business. Amit, you want to take that?

Yes. So I really need -- and for everybody's reference, really set up our 75 branches by Q4 of last year. So we have one, this one full year due to the proof of concept. All our branches have now -- even effective quarter 1 of this year, which means our hypothesis that a branch will take about anywhere between 15 to 18 months to breakeven has been true and right. So that's number 1. Number 2, these branches have now started delivering above market or above peer set disbursement month-on-month. So we're about between INR 85 lakh to INR 90 lakh of disbursement on these branches month-on-month and you people should compare this with the peer sets where the micro enterprises business happens. So it's at least 20% up above the market average. Having said this -- having seen this very encouraging trend, I think by end of this year, we will take for the quarter -- end of quarter 3, we will take our decisions between quarter -- end of quarter 2023, we will take decision to enhance this distribution so that when we enter the '24, '25, we have people have large set of these distributions ready to deliver throughout the year and therefore, delivering to the bottom line.

Anil jee, as entrepreneurs, we would like to continue building and expand. We get very motivated when we travel to Tier 2, Tier 3 towns. We see the untapped market opportunity. We think we have so much to do and that's why, why we are not doing so quickly. But the fact is that we are compared to 15-, 20-year old established NBFC organization. Capital being precious to us and we need to attract capital all the time, you have to sometimes take a halt in terms of what -- how much more you can build out. So we are in that place. But as we do the first talk on delivery performance on our bottom line. I think we have said that we have identified 280-plus location within the 5 states itself. And once we have nearer to our current year of financial target, we will trigger the expansion on that because that is not only very profitable business, which can enhance our ROEs and we'll actually achieve those ROEs because of that, but also it serves the purpose of solving the real problem of credit into Bharat, not in India.

Yes. Sir, the second question is regarding your prime secured loan. Can you help me understand the profile of these customers? And you have said the average ticket size of INR 70 lakhs, can you give a range to get exactly the maximum lies in. So that's it.

So the average profile of our prime secured customer is typically the sweet spot is between INR 5 crores to INR 10 crores of turnover. He is typically a manufacturer or from a service industry. More importantly, he has a very strong financial discipline, which means there are strong banking habits, there is a regular discipline on the GST because of which we are able to evaluate him based on our GRO score model. So that's first. So that's the profile of between the turnover range and what kind of businesses we do. Secondly, when we talk about INR 70 lakh to INR 80 lakh of average ticket size, these when we go across Tier 1 and across the metros and Tier 1s. What we are talking is about a 17% average loan to LTV ratio and therefore, a property of anywhere between INR 1.2 crores to INR 1.5 crores is an average collateral value. So that's -- that is the customer whom we are talking about INR 5 crores to INR 15 crores of turnover and a property of INR 1.5 crores that he can mortgage to us.

Yes. So sir, is my understanding right, the maximum of your customers turnover is around, say, max INR 10 crores to INR 20 crores are not beyond that.

Yes. Yes. In fact, let's say, around INR 10 crores is where the sweet spot is max.

Sir, my last question. Any update on what is the development on the OCEN and by when it is expected to -- do you have any insights on that by when it will get implemented, Open Credit Enablement Network.

So OCEN is already live. The financing options in OCEN is currently what the government is working upon. But OCEN as a concept is already live.

In fact we were the first implementation of OCEN, so the government e-marketplace GeM and its financing platform called GeM Sahay is all the OCEN concept. And we were not only the integrator for that, we were creator of that. We hosted in UGRO Cloud. So all of that was done.

So what I meant is -- it was expected that this protocol will be adopted by mass like say Swiggy, Zomato, Uber and everyone will join this segment and there will be distribution of their own.

That's what I'm saying, the concept is there. So there are multiple elements of that, right? What is OCEN is that your account aggregation is part of OCEN, which means that you can fetch the banking data. Now GST has been made part of this, which means on the account aggregation itself. So with a single OTP, you can now fetch the GST, you can fetch the banking and then on such platforms, lenders can come. Now the loan service providers, which is like Swiggy, Zomato, large corporate has to also come. So OCEN is a concept. There is no physical platform per se. Now the infrastructure is ready. So on a platform where on account aggregation, your bank and GST has come and then if someone develops a protocol, the GeM decided to do GeM Sahay. For example, GST Sahay is doing that. So you will see over a period of time, the uses of OCEN as a concept would increase, and that is happening over a period of time.

We have a text question from Mr. Prasad Deshpande, an Individual Investor. While FY '25 off-book AUM target is 50%, theoretically, one can do 80% off-book. What range do you see the off-book AUM mix settling down in steady state in a few years from now?

Ideally, for now, what we can perceive is that 50% we would like to maintain, simply for 2 reasons. One, we are a principal partners to lending institutions. And I think the rule of principalness or principality comes when we are equal partners. We keep increasing that and which is economically on return perspective is very attractive. Then we lose the confidence of the banking institutions, which are partnering with us. Number two, on the ground, we are innovators of multiple types of loan products or multiple types of customer profiles. Banking systems adopt them with lag effect of seeing the performance of that in our on-book. So for example, if we created GRO X where we say credit for a small merchant, it has very any high tenacity, we can give it over in 10 minutes' time. It comes back every day. If I take on the day 1, this to a large public sector or private sector bank, it would be very hard for them to adapt. But if you do that for a period of time of, say, 6 months to 1 year in -- on my balance sheet, show its performance, then the bank comes to us. Same is the micro enterprise.

Excellent example. So micro enterprises loan now is when we've started tasted success with the co-lending partners. However, go back 15 months ago, I think they are still trying to understand the segment bit skeptical. So for that reason, we will have to build our own books and because of their very profitable businesses it is good to have them on your books as well.

We have a question from Mr. Pruthul Shah from Anubhuti Advisors. The first question is AUM for FY '24, INR 10,000 crores, FY '25 INR 20,000 crore and beyond that 30% CAGR in AUM, is this understanding correct given the guidance on Slide 7 in recent presentation? And the second question is in Slide 14, what is the difference between gross yield and net yield? Is it the commission paid to partners?

On the first one, yes, Pruthul jee, you're right. But I would say with disclaimer, these are aspirational numbers, which we would like to achieve. But whenever it comes to the arbitrage between delivering the bottom line performance by sacrificing a INR 1,000 crores a year, we will prefer and choose the bottom line performance. We've got business to [indiscernible] punish us if we are not at INR 20,000 crores or INR 19,000 or 18,000 crores but we are at 18.5% of ROE because we choose a [ 18.5% ] ROA versus there, INR 10,000 crores of AUM. This is a culture which we are building. Yes and gross then that is the same.

Yes, you are right that it is gross the difference between the gross yield and little is the difference if we pay to the partners.

It's not commission. It is the partner. In our PMA channel, the partner may be doing at x percentage and because he covers our losses and his services originate and go on the right with us, that difference goes to him for that.

As there are no further questions, I would now like to hand the conference over to management for closing comments.

Thank you very much for spending the time and also, we have seen -- for the first time, we are seeing UGRO really as a public company. We are seeing increased number of retail shareholders. We are seeing increased number of high net worth investor. We are seeing institutions, [ PMSI ] participating in that. Successes of companies like ours, whether it's in HDFC or ICICIs of the world is dependent upon the support from shareholders across the board. We were successful in getting large market being invested to support us and we expect in the next 5 to 7 years, broad-based shareholders to support us in terms of making UGRO as India's largest financial institution around small businesses because we think India belongs to Bharat and Bharat belongs to SMEs. And beside delivering profit and returns, we are doing good to the society by creating this business. Thank you very much and see you again.

On behalf of UGRO Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.