UGRO Capital Limited (511742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. On behalf of Emkay Global, I welcome you all to UGRO Capital Quarter 4 FY '24 Earnings Call. We have with us today Mr. Shachindra Nath, Founder and Managing Director; Mr. Anuj Pandey, Chief Risk Officer; Mr. Amit Mande, Chief Revenue Officer; Mr. Kishore Lodha, Chief Financial Officer; and Mr. Sharad Agarwal, Chief Operating Officer. Before we proceed, as a standard disclaimer, no unpublished price-sensitive information will be shared during the conference call. Only publicly available documents will be referred to for discussion during this interaction. In case of any inadvertent disclosure, the same would in any case form part of the call of the recording of the call. Without much ado, I would like to invite Mr. Shachindra Nath to share his thoughts on the company's performance and discuss the capital raise and latest acquisition. Over to you, sir.

Thank you, Avinash. Good evening, everyone. This is actually not just a year-end quarterly result presentation. Obviously, we have done as per our plan for quarter, but we believe this is a momentous occasion in our life cycle. As you all remember, UGRO is a 5-year-old organization. It started as the India's first listed start-up, 5th of July 2018 when this company was born. This company was born with a combination of 5 private equity investors coming together along with me, and we capitalized this company to the tune of almost INR 958-odd crores. We suffered immediately post our capital raise, the crisis of ILFS, the DHFL and Yes Bank. We started our business in April '19. April '19 to March '20 was our first year. We deployed our equity capital of INR 850-odd crores into the markets and then suffered COVID. COVID period was a time of reckoning, and we used that time to build the scale and size aspiration of ours. Pre-COVID, this company was 120 people company. Post-COVID, it became almost 1,500-plus people. We put massive digital and data analytics infrastructure. We put physical infrastructure out with almost 100-plus locations, and we brought a large number of lenders on balance sheet and we created a very massive capacity of co-lending. The resultant of that, that we, in 2022, were INR 3,000 crores; in '23, we were INR 6,000 crores; and in '24, we have ended at INR 9,050-odd crores. Our operating leverage played off from INR 7 crores of PAT. We grew to INR 40-odd crores last year, almost to INR 120 crores this year. But what changed for us that we took a call to raise disproportionate capital to augment our growth. We've raised -- what have we been trying? We have been trying to bring stability to our cap structure, and we have been trying to bring unique capital provider to us. When we started, we brought 4 private equity investors who have defined time line when it comes to their ownership of us and how long they will remain as our partners. Last year, we brought a global development financial institution in form of IFU, which has a very long time horizon. And now in order to attract domestic capital and family offices, we did this unique structure of CCD and warrants and marketed it to some of the large family offices, and they came into our capital structure. Not only that -- if we go to the first slide, please. Not only that, we, one of our existing investor, which is Samena, actually invested INR 500 crores through warrants, one large fund invested INR 210-odd crores and roughly around 10 large family offices got attracted. This capital raise of INR 1,332 crores, of which is INR 275 crores, it's in form of CCD, INR 1,057 crores in form of warrant. Actually, fulfill our capital needs for the year and also fulfill the capital need for the next 2 years. And that allows us to continue growing without the worry about of the capital. And that allows us to get to our growth rate very easily. So that is largely on our capital raise. It gives the management the ability to grow without being hindered for capital. It allows the management to focus on getting rating upgrade and reducing its cost of borrowing, and it allows public market shareholder to participate in the growth journey of UGRO. So that largely is on the capital raise. We will answer the questions through FAQ. Second, Avinash, you said that to talk about our acquisition. As some of you know, UGRO's proposition is following. UGRO would like to service the customer segment between INR 15 lakhs to INR 15 crores turnover. This customer segment constitute roughly 90% of the INR 90 lakh crore of the credit gap. And this is the customer segment we service through 4 distinct channel. We service the customer through our prime channel, where we focus on large ticket secured loans up to INR 3 crores, business loan for our customers through intermediation, which is like DSA. We have a large number of micro enterprises branches, where we focus on small-ticket secured loans. We have an ecosystem where we focus on machinery and rooftop solar. We have a supply chain where we focus on retailer. We have a partnership and alliances. We have focused multiple types of fintechs and NBFCs, who provide the service through underlying customer segment at a highly granular and high-yield segment. And last is our digital vertical. There is one segment of the market, which is wide, large and whose need we would like to service was not getting serviced by UGRO, which is called embedded finance. Embedded financing niche, think of a merchant, which is a small retailer near your neighborhood, who uses Airtel Payment Bank or a Fino or any of these payment platforms QR code, who buys the material for X amount of money, sell the material to end customer and this payment data is getting captured in some of these payment banks or wallet platforms. Now if this customer, this merchant needs financing, then how do you provide this financing -- excuse me, how do you provide this financing through an integrated platform? Financing his requirement is that he should be able to borrow through this integration, which is called embedded financing, INR 1 lakh for a 30-day period and then from his daily sale, the EMI, he can get it. Our proposition is simple, but the technology solution and the data integration or data analytics around this is quite complex. MyShubhLife in the last 7 years have achieved a very high degree of perfection in the embedded financing market through this integration, through this payment platform. Its quality of shareholder, the quality of the management and the governance have been extremely good. But given where the market is, now market is moving there in the balance sheet provider as well as the technology lender, both have to be integrated. So both has to be integrated and has to be kept -- have to be provided. MyShubhLife as a tech platform has achieved this level of perfection. They came to us for co-lending, and we told them that why don't we partner. We spoke to their VC investors. We propositioned to them that they can be shareholder of UGRO and their long-term benefit is far more profitable because UGRO would continue to grow. For the management team, they get the benefit of our balance sheet and that's why we structured this acquisition. We are acquiring MyShubhLife at 1.9x price to book value of their net worth. We are paying a consideration of INR 45 crores in the form of 36% in form of cash, 64% in form of UGRO shares to become a subsidiary and we have aligned and integrated the management team through our ESOP and profit share market. This acquisition potentially in the next 3 years gives us additional 2 lakh retailers as a customer and probably INR 1,500 crores of AUM at the end of the 3-year, incremental a year and roughly around INR 100 incremental PAT of what we do with organically. We are very excited about this acquisition. This is in line with our DNA of being a data tech company. It's an extension of what we do, and we are being able to inherit a management team who's DNA is entrepreneurial, and they will become part of our family. So I think this acquisition fulfills the need -- one segment of the customer need, which otherwise was eluded from us. Kishore?

Yes. Coming back to financials. For the whole year, we have achieved AUM of around INR 9,047 crores, which is broadly in the line of the guidance which we have given at the beginning of the year. During the year, we have achieved a gross disbursement of INR 5,867 crores. So now monthly, we are clocking in excess of INR 500 crores, which is broadly in the line what we have planned for the year. The year-on-year, that disbursement has grown up by 26%. Last year, we have done a disbursement of INR 4,600 crores. Our book AUM, we have targeted for about 45%, and our ultimate goal is to reach 50%. We are in line on that. Last year, we are at about 40% of our book AUM. Now we have achieved 45% of our book AUM. Pretax profit has jumped from INR 84 crores to INR 179 crores, which is 113% jump year-on-year. Quarter-on-quarter also, we have -- the profit has gone up from INR 34 crores of PBT to INR 56 crores of PBT. PAT has gone up during the year from INR 40 crores to almost INR 120 crores during the quarter. Quarter-on-quarter, profit has gone up -- PAT has gone up from INR 14 crores to INR 33 crores. So again, there is a significant jump on profit as well. Our net income has moved from 12.2% to 13.5%, which is in the direction where we want to take this forward, as Sachin has explained earlier into the multiple interactions that we are increasing our micro verticals, where we are increasing -- we are focusing on the yield. Cost-to-income ratio is gradually getting down, which was 62% last year. Now it has come to 54%. As the economics of the scale is catching up, it will go down further. ROA has moved from 1.1% to 2.3% and ROE has moved from 4.1% last year to 9.9% this year. Our total EPS for the year is about INR 13.39 per share. Book value is about INR 157 as on 31st March. This is not considering the current equity raise, which we have announced yesterday. The money will flow in part of it in the coming months and part of it will come in gradually in the next 18 months' time. Price to earnings is about 16.4% on the book value -- on the market cap of 31st March 2024. This is our aim as we have indicated earlier that we would be growing on a sustainable basis for about 30%, for which for next year, 2 years, whatever capital we would require, we have already locked in that capital. Our book, as we explained earlier also, that our aim is to reach 50% of the book we will keep on-book and 50% we will take it to off-book in the form of co-lending, co-origination and direct assignment. Cost-to-income ratio as of now is closer to 54%. We'd like to take it to 45%, which may take over 6 to 8 quarters from now. And ultimately, we'll reach the desired ROA of 4% which we, as a management team, will believe that we may take around the 8 quarters' time.

So one of the questions we have always been asked, what is the bridge from this 2.3% to 4% ROA? Given that this question has been asked to us for many time, we are trying to explain how this would happen over 8 to 10 quarters. And there are 4 components to that. The first component is the yield expansion. Our yield expansion is a function of our sheer focus on our second vertical, which is micro enterprises vertical. Micro enterprises vertical, which is a business where in 75 locations till third quarter of this year was focused on doing between INR 8 lakh of average ticket size secured loan. Now that vertical is expanding in 2 ways. We are going to 150 now. And by end of the year, it should be 250 locations. And most of this portfolio of INR 8 lakh secured loans happens at around 20% yield. Adding to that, UGRO has a very unique proposition vis-à-vis this lender set. It is probably the only company which does secured loan of up to INR 3 crores, business loan through intermediate channel up to INR 25 lakhs. It do micro enterprises secured loan up to INR 8 lakh to INR 10 lakh. It does machine refinancing ,5 types of machines, CNC, printing, packaging, plastic molding machine and now rooftop solar. It also does retailer financing and so on and so forth. Now both our intermediary channel, our micro enterprises and our machinery channel, now would focus on all products together. So not only the expansion in micro enterprises would enhance the yield, but it also would enhance the productivity because now a small branch of UGRO is being trained, designed and monitored for being able to do the INR 10 lakh secured loan, but also at least 1 or 2 large loans, 1 or 2 machinery loans and 1 or 2 rooftop solar. So that's the first component of ROA bridge. Second component is what we say is cost of borrowing decrease. Cost of borrowing decrease have 2 components. One, the market phenomenon; and second, who we are. Given that we have been a young company, we have been growing extremely fast and our need of liquidity has been large. Our cost of borrowing for our side of capital and rating is roughly around 100 to 50 basis points higher than our peer set. We are expecting that because of the increase in the vintage, because of the scale getting increased, because of very sizable capital, almost equal to our existing net worth, there is a 50 basis point rate reduction would happen over 8 quarters. And hopefully, some bit of fair cycle change would give us additional 25 to 30 basis points. So we are presuming that in 8 to 10 quarters, cost of borrowing would come down 75 basis points and 50 basis points of operating leverage. Operating leverage has again 2 functions. Our OpEx to our income now has -- is growing disproportionately. Our existing physical infrastructure and digital infrastructure is sweating more by multiproduct. Our AUMs are growing and our costs are not growing in proportion to our AUM growth, and that's the operating leverage of 50 basis points we are presuming. And obviously, as our portfolio seasons, as you have been seeing, we have been guiding towards overall credit cost of 2%. We have been largely at 1.5%. This quarter, we have increased that a little bit, but reaching around 50 basis points of credit cost would increase and that broadly is the bridge from 2.3% to 4% ROA in 8 to 10 quarters is what we presume. Avinash, this is it from our side. We have kept the presentation very sharp. Most of the other things in the presentation is already circulated and is available to everyone. But management team would be very happy to answer questions.

Yes, sure. So we'll go to Q&A. So we have first question from [ Rahul Verma ].

Congratulations on a very good set of numbers in line with what we have guided. Question is obviously related to the huge fundraise that you have done. Now with this quantum of fundraise, how do things change, sir, on 2, 3 fronts? One is growth, are you looking at much faster growth than what you had previously guided for? And are we looking at -- the second question was on the ROA front. We used to initially talk about 4% exit ROA for FY '25. Now we seem to be more on the exit run rate FY '26. Is there a change there? Or what are we looking at? These two broad questions first.

Yes. Very good questions. On the capital front, I think this capital for the growth, which we have been presuming or have been guiding, was required in any case. The difference is that we have taken all of that capital upfront. But we have designed and taken in a manner that for our existing shareholders, it is not dilutive immediately. So that dilution should happen over a period of time, except the increase in the price benefit would not go to existing shareholder. So we have kept something on the table for the incoming shareholders. So we would have needed roughly around same amount of capital to manage our next 2 years of growth. But the capital, we have taken in the form CCD plus warrant. So the money off the CCD and 25% money of the warrant would add roughly around the same amount of equity capital, which was required for this year of growth. So our capital efficacy would go up from 21% to around 29% for the year. And next year, as warrant keep converting, we will get back to the same level of capital adequacy. With respect to the ROA bridge, you are right. We have said that we would exit near about '25 at 4% of ROA. Now that is a function of the maturity of the market and how the overall scenario is. We presume -- one of our assumption was to grow at a much, much faster rate, at earlier pace, but what we are saying is that we will get to that level of ROA. This is why, if you look at our structure, we have given a CCD at 18 months with some coupon because we are saying that this is the bare minimum we have to achieve. It is a lot of hard work. If you look at last 4, 5 quarters or 6 quarters, the cost of borrowing has remained elevated. The liquidity for the market has remained slow, but we have not shown you neither our cost of borrowing has grown nor our liability has got constrained vis-à-vis not many larger peers that have been the challenge. So in a macroeconomic scenario wherein -- what is being told to NBFC to grow at a certain pace, what is being told to have some healthy profitability, we think this is what people should expect from us. We may surprise you, we don't know. But as of today, where we stand, what we see in the regulatory landscape, what we see in the liability landscape, what we see in the capital providers, all of that putting together, this is the number for the year-end to year we are putting out. But one thing which we have done is that we still have taken capital upfront so that some of -- if there are headwinds, then we can take that headwind head on in coming quarters. But I think so for a company with 3.5 years of -- if we take a 5-year total of it, 1.5 year has gone into COVID, 1 year has gone into credit crisis, for a 3.5 years of real operating size company, this level of scale, product, diversity, sheer focus on data and analytics and distribution capacity, in my 30-year professional career, I have not seen. But obviously, I understand investors, I would expect all companies to perform at the same level. We would also get there very soon.

Sure sir. UGRO has done an outstanding job of reaching where it has. Now if you could just give us a perspective of what are the growth rates we are looking for '25 or '26 and if you could just put that in context with what happened in Q4, where the disbursements were slightly in a slowdown mode. So that plus the growth that we expect for the next 2 years.

Yes. First and foremost, we were at INR 3,000 crores in '22. We were at INR 6,000 crores in '23 and we are at INR 9,000 crores in '24, which means this company minimum of INR 3,000 crores of AUM, it grows. And the AUM growth in the last quarter, what we have been seeing, UGRO has established a very good name within the lending universe, especially in intermediated market. Some of the tenders which have larger balance sheet capacity, actually are taking assets from us at much faster pace. So the foreclosure for us was a negative surprise and our foreclosure were higher than what we have expected. Obviously, we will correct that, and we will match that at a higher growth rate. So I think the quarterly growth coming at 8% rather than 15% was a function of that. What we will do next year is what we are telling you, INR 3,000 crores is a minimum base, we will definitely do. There is no doubt about it. We think that we would be additional 10% to 15% of that. But when it comes to management focus, that additional growth, we want to only do in the segment of the market, which gives us the higher yield, which pushes our ROA. And that's where we are. So now that whether that is 10% higher or 5% higher or 15% higher, for us now, what matters is that incremental growth is all in the higher ending segment with the lower credit cost. So that's where we are -- that's the way we are operating as a management team, and I think that's the right thing for us to do. Anuj or Amit, anything you want to add?

No, absolutely, at the end of the day, growth without -- growth with profitability will be the focus for this year. And therefore, we are not putting up into whether it is 12%, 12.5%, 13%, 14%, but the fact is that we have to inch our ROA towards the focus as Shachin has spoken earlier and that will be the focus of the entire team.

Okay. So if you can allow just one final question, I'll come back to the queue. In the bridge from 2.3% to 4% that you just very nicely elaborated, I just have one question on the credit cost. In Q4 itself, you are at about INR 41 crores of credit cost in the quarter, which if I generally annualize, we'll be about 2% on the overall AUM. So do you really have that lever on the [ credit ] there?

Anuj?

So you're right. In the last quarter, there's a small blip, but that was all planned in previous quarters itself. For the year, we are around at 1.5%. And we have been telling that as we season, we will stabilize at around 2%. So if you only look at that last quarter, in our last quarter, we took a call on very, very old unsecured loan and took a write-off of about INR 10 crores, which is over and above what should have been the normal credit cost. But it was a one-off event. As per our plan and as per the way we have calibrated, we would be between -- for the next year, we should be between 1.8% to 2% overall.

Next question, we have from [ Anidhya Agarwal ].

Can you listen me?

Yes, we can hear you.

First of all, congratulations on a great set of numbers. We are -- as investors, we are really happy with the kind of AUM growth the company is doing. So my first question is on the credit cost side, right? We are saying that at 2%, we should settle down in terms of credit costs, right? So how are we seeing a, let's say, bad credit cycle, business cycle or, let's say, any recessionary event if it happens? And what are the concerns related to that because we are dealing with really the lower-most [indiscernible], right? So how are you seeing -- in such a scenario, what could be the impact to our business?

So I mean, there are 2 ways to look at this. The way we have designed our portfolio construct, the portfolio construct will remain same as a principle. And that is that 70% of the portfolio will remain secured, 30% of the portfolio would be unsecured. And within this construct, what we have done from last 3 quarters is that we have started covering our unsecured business through the central trade guarantee schemes. So if you find our percentage of unsecure, which was 30% up to 2 quarters back, the unsecured portion, which is not covered by CGTMSE or doesn't have any kind of collateral, has actually come down to 27%. So from a design perspective, this is how we want to grow, to continue to be at 70:30. Now within that for each of the product, we have a lifetime estimate of GNPA and credit cost. And those lifetime GNPAs are actually the stressed scenarios GNPAs. In normal course of things, actually it would be lesser. But the way we have designed, we want to cover the -- even the stress scenarios. So of course, a very large unforeseen event happening like COVID and no one can be really prepared. But within the MSME ecosystem, if in a particular state or if in a particular sector or if some -- or if in a partial profile, there is a higher stress, our plan takes that into account.

Okay. That answers my question. Second, I would want to ask you, so are we trying to tie up with any payment platforms like for say Paytm payments or -- not Paytm right now, but other payments like on PhonePe or any, where the business transactions are taking place on a day-to-day basis. And according to how many transactions the business is growing, even the small businesses, which are not GST-registered. So GST-registered business, we are already dealing with, right? So are we also trying to deal with non-GST-registered businesses?

So I want to answer this in two parts. One, of course, we already have a partnership alliances where we already have partnerships with whether it is e-comm players or certain payment systems or supply chain systems, where we leverage this ultimate data to provide credit. The second piece is that this is where there will be eventual migration of a lot of businesses because it makes credit easier with alternate data available. And so the acquisition of MyShubhLife is in the same direction, which gives us the power of technology and the platform there to be able to embed ourselves in multiple such ecosystems, test these products and really scale up on this front as well. Also, one has to be cognizant of the fact that whenever we embed ourselves in these systems, these are products which are new age. We need to test them for a while before we scale up, need to have a clear eye on what kind of credit cost do they deliver because these, of course, are high-yielding products. But yes, the approach is to moving and adding these kind of businesses onto our fold, and that is why the acquisition of MyShubhLife.

Okay. Just sir, last question. So we have -- we are issuing around INR 1,300 crores of debentures and share warrants, right? So these are all preference to be issued to certain people. So is there anything which you are looking for retail shareholders as well?

No. So look, there are a multiple ways in where the company can raise capital. One, obviously, when you are a registered company, retail shareholders can always buy from the market, we don't restrict them. But in order to augment the capital, there are sources available to us. Obviously, sources -- one stated objective of UGRO is to make it completely institutionalized ownership platform. We started before private equity from putting in the entire capital, owning almost 80%, 90% of our capital structure. One of the pre-investor, PAG Asia exited from the market in 2022, that gave opportunity to some large family offices, public market, retail investors to buy. That actually happened at the price range of INR 150 or so when we are trading on the 1.1x price book value. At the same time last year, because the company was not well known in public market, we felt our good source of capital is private. And we went to a very long-only investors sovereign and brought Denmark, government arm IFU into our capital structure. And for this capital raise, we said that if we bring one of our existing investors and 3 of the large family offices of India, it would strengthen our capital structure. For a company which is already listed, to bring broad-based retail public, the only option is the right issue. And right issue is the time-taking cumbersome process as that right issue would require all existing shareholders, the way the rights issue work in the market, who people expect the right issue to be done at a senior discounts to the trading price, which is not in the interest of the existing shareholders. And that's why we have chosen this route to bring long-term capital in our capital structure.

Okay. Sir, I just wanted to say on a lighter note that as an investor, I would -- like me personally, we would have been happy to join in for 10,000-odd debentures or warrants if company would have allowed us. So we just wanted that kind of clarity from the company in future that even small investors like us should be able to participate in such.

I truly appreciate that. As you would understand our constraint, our business is business of lending. We come and talk to people like you only once in a quarter. When we raise capital, we raise to advisers and advisers take us to where the -- we are hungry for food. Where the food belongs, it's depending upon the servers, which are our advisers. So people who advise on these capital raise, we don't know who all they have reached out, but where they took us, we saw a very great big success rate on that, but they are quite fully taken.

Yes, definitely. In future, we would be looking forward to such right issues or maybe preferential to parties interested.

I would just that keep watch. That is the why -- that is why there's a 2-day prior notice period required on a Stock Exchange. So UGRO gave advance intimation that its Board meeting to be held on 2nd of May would consider a preferential allotment of capital issue. Obviously, you would have missed that, otherwise, you could have sent an intimation showing your interest and if we would have definitely included you. But no problem, we'll keep -- we'll find a way to make sure that interested people, if they want to come, they should be allowed to come so that capital is not prerogative of only a few. Anyone who want to participate in UGRO's capital structure, we really value that irrespective of the size and who the person is.

[Operator Instructions] The next question is from [ Pruthul Shah ].

Am I audible, sir?

Yes, you are very well audible, sir.

Yes. Sir, congrats for the great capital raise that the company has done. My question is with respect -- Hello?

Yes, please go ahead.

Yes. My question is with respect to the AUM guidance that we gave earlier for FY '25, which was around INR 20,000 crores. And now we are not even talking about it. We are talking about INR 12,000 crores, INR 13,000 crore AUM. That is one thing. And secondly, we have raised capital way more than what we were planning. So from both the sides, if you see that we are raising higher capital and also guiding for a lower AUM. So as an investor, we are not able to understand that what actually is -- what is the reason that this things are getting changed? If you could clarify on that aspect.

Yes. And the third thing which we have not guided is what we are guiding to you. See, for any investor like you, if some -- there are 3 things which are critical -- 4 things which are critical, especially for lending business. Successful lending businesses in India, first and foremost, the cardinal principle is that they should show some level of stability -- predictability. And that's why these businesses should have 5 core parameters. They should grow between 30% to 35%. Beyond that, you take too much of risk. Below that, you're not successful -- you are not attractive. Second is that they should deliver a good ROA performance, return on asset performance, if you're not a bank. Banks can survive on 1.5% to 2% of ROA with the leverage of 7%, 8%, they get to 18% average ROE. NBFC should deliver at least 3% to 4% of our ROA. Fourth, the credit cost should be below -- has to raise very sustained line up 2% to 2.5%, not beyond that. Income to OpEx ratio should be between 40% to 45%. And depending upon who the parentage is, leverage can be between 4% to 7%. We said leverage would be up to 4% and co-lending actually supplement for the leverage. That is what we think. If we achieve for the next 5 years, that is what would reward the investor. So in lending universe, you have companies which traded 6x price-to-book multiple to less than 1x price-to-book multiple. Just look at the NBFC curve. But what correlation will always found is ROA, ROE and growth rate performance. What we -- the question is that you said that if by FY '25, we said by exit of FY '25, if we were to achieve a certain level of AUM, but that AUM was not helping the cost for other 4 parameters than we have to recalibrate and adjust. We have proven our capability to growth. If you think the growth -- or what we have learned, if growth is the only parameter for value creation, we can grow at 100% for next 7, 10 years. That's not a problem, because there's a INR 90 lakh crores of credit gap of which 80% is in the target customer segment of UGRO INR 15 lakh to INR 15 crore, you can grow as much as you want. But that growth -- level upgrowth requires to give a different level of capital, different level of liability pricing, so on and so forth. Market situation changing, liability cost getting this, we would grow. But what we are saying is what is that we want to achieve? What we want to achieve is a sustainable level of value creation for all of our existing large shareholders, for every public market shareholder, for the new investors which are coming now. And that we believe is a function of growth, combination of ROA and ROE performance, we will do that. That is the most priority than everything else. So I hope that answered the question. Second, why we are taking that much of capital? We have taken -- said that we will take INR 400 crores, INR 500 crores of capital. But on the headline number basis, we have taken INR 1,330 crores of capital. We have done that. So who is -- existing large investors are taking massive dilution at a price-to-book multiple of 1.6, 1.7x. They should be one which would be very, very unhappy. What we told them? We said that we can do tranche capital raise. We raised INR 300 crores, INR 400 crores, INR 500 crores capital now and we go next year. Probably our price to book multiple would change, and we raised 1 more round of capital at that point of time. Given that we got so much of reception, acceptability from some of the most prestigious name in the country, we said, because this is structured, it is a gradual dilution. It is not an immediate dilution. I'm getting a CCD, which will get diluted when it gets converted. Our company would -- dilution would happen when warrants would convert. And that's why if we can lock all the 2 years of capital needs for our growth rate, exactly same growth at what we have planned, we should take it because it may so happen that at this level of capitalization, not just today. So today, our capital adequacy would go up by INR 550-odd crores and the balance of warrant would convert, the next level of capital would come in. But it might need to give more confidence to rating agency, which might lead to a rating upgrade. It will give more confidence to all of our 30, 40 large lenders that this company has no problem of capital. So it also increased our leverage and reduced the cost of borrowing. It gives more confidence to us as the management team that come what may, if there is a hostile environment, if there is a little bit of any change in the ecosystem happens, we have the capital. So I think -- so that's our rationale. We generally believe that what we say and what we deliver, investors are very smart. They understand the real intent of what we are saying. We wanted to tell all of you that we have the capacity to grow, while we are a young company. There is no company in India in the lending space, especially the NBFC, which has delivered INR 9,000 crores of assets in 36 months flat with the credit cost. And I'm saying it with a large sense of responsibility. And now we are saying that in the next 24 to 36 months, our next full stop is to deliver relative profitability, which matches to the best of the peers because we are in need to build it for life and create an institution. And some of you are participant of that journey, would judge us on an every-quarter basis and we are happy to answer to all of your questions for that.

Great answer to that. Just one question. What is the peak leverage that we are thinking on the business model that we are? So you mentioned about 4x leverage. So is it so?

Yes, for next 2 to 3 years, so we have not built ever more than 4.5x multiple on leverage.

Okay. Okay. Got it. And just last question from my side. So this year, we have like 3x our profits on INR 40 crores to around INR 120 crores. So can you guide us on the possibility that how much and what range the growth would be for FY '25?

Sir, I would say there are too many moving parts when it comes to the real bottom line performance because there's a cost of borrowing element, there is an off-book percentage of element, there is a yield element, there is a credit cost element. I would be unfair sitting right now to exactly give you the number. We can only talk directionally. Directionally, in the 8 to 10 quarters, we want to achieve 2% to 4%. And every quarter, we want to demonstrate our journey towards that. I think so you can do the math on your own at every-quarter basis.

Can you just say whether the PAT growth will be more than the AUM growth or it won't be the case?

We are just trying to calculate.

Yes, of course, it is likely that our PAT growth will be higher than the AUM growth. Otherwise, this target of reaching 4% ROA would -- cannot happen.

One question from the chat. The question by Amit is, what went wrong in supply chain lending, 14% yield channel is seeing 4% plus GNPA? Any learning from this, what corrective actions we are taking?

I'll take it. So overall, the way for an NBFC like us, the supply chain finance ecosystem has evolved and the way we see the opportunity, we think that for our kind of institution, which is focused on a digital data science-based solution, the last leg of supply chain, which is from distributor to retailer fits in the best. The exposures are granular. More and more retailers are getting digitally enabled. Our technology solutions are available to onboard and underwrite them seamlessly. And the rate of interest or the yields, which are desired can be had from this segment because there is relatively less penetration. In our experience, when -- and the main anchor to supplier side and anchor to dealer side is more large NBFCs and banks domain, and we don't want to compete there. It is pretty much a touch-and-feel underwriting. We tried and tested it for our systems, but we found that our moat would lie in the last leg. Now coming to a relatively larger NPA within our product portfolio, it is a function of the AUM growth which we had. So there are a few bad apples and some of them, 1 or 2 anchors have been with us in a stressed kind of a scenario for around 3, 4 years, and just after COVID. And because we didn't want to grow the AUM in that space too much, as a percentage, the GNPAs are looking higher. What we have decided now is that we will have an accelerated rundown of that portfolio, and we will progressively build the granular last-mile retailer finance portfolio.

I would just add on top of what Anuj said for the benefit of everyone who's listening, supply chain as an ecosystem component has multiple legs. The first leg is the vendor supply to an anchor and banks lending to the vendor, believing that the money would come from the anchor. It is nothing but an off-balance sheet exposure to a large AAA anchor. Now that financing happens in the rate of, I can go on tracks at 7% and without tracks it 7% to 8%. Now we can't complete that. Our cost of borrowing is 10.75%. Second portion is the anchor selling to a very large distributor, which also have a CC/OD facility from a bank. So on the both side of that spectrum, we were getting customers which were lower rated and were willing to pay our price. So theoretically, we are getting negative selection at BBB- company, BBB+ company. And we realized that, that is not where we should be. And some of that reflection is in the NPA while what Anuj said that because the portfolio is running down, the NPAs will be higher. Had we grown the portfolio, it would have been the same. But that's where we felt that for a AAA anchor is the -- that AAA anchor's last mile retailer, nobody provides the financing because that requires physical infrastructure, digital infrastructure, large data size driven underwriting, very small ticket, and we are -- that's where we should focus. Learning is we should play in the segment where our strength is. UGRO's strength is to understand data, underwrite that basis. UGRO's strength is then take the case to an underwriter who does in a templated basis underwriting. Third is UGRO's strength is in its physical distribution and collection infrastructure, which is today at 105 locations, going to almost 400 locations in the next 2 years. And we will play all of our products segments to our strength rather than competing to the people who have balance sheet level strength, not other strength.

Okay. We'll move to the next question. Our next question is from [ Omkar ].

Congrats on the fundraise as well as the results. So my first question is on the co-lending income. It has been very strong during the quarter. So is this a one-off because it's a Q4 or is this going to continue?

So co-lending income, as we have said that co-lending is gradually increasing. The proportion of co-lending in the overall AUM is increasing. Hence, the income is increasing. This quarter, a little bit of blip is there on the higher side because we have done rate reset for our end customers, which has resulted into the upfronting. So portion of it, you can treat as a one-off.

Understood. And in terms of cost of borrowing, which we have said that it is going to come down. So are we looking at any credit rating upgrades in, let's say, next 1 year?

So there are multiple parts to it. First part is that on the broader interest rate cycle, we think that considering the global scenario and considering the domestic scenario, interest rates are likely to move down in the first half of the year at least. It may take even third quarter or fourth quarter of the year before interest rate starts going down. But considering our vintage, our performance and our strong relationship in multiple sets of and in multiple kinds of lender sets and also coupled with this equity range, which is fairly large, which is almost equivalent to the current equity, which we have, we should get rating upgrade. And also, it will give additional comfort to our existing vendors, because equity always gives significant comfort to the lenders, which should help us in terms of bringing down the cost of borrowing. We had a rating upgrade in March. On 15th of March, CRISIL upgraded us from A- to A/Stable. So quick trading upgrade has not come by, but we are quite positive that once they get to know about this fundraise, we should get another round of rating upgrades shortly.

Moving next, we have a question from [ Anil Tulsiram ].

A couple of questions on ROA bridge. My problem is giving the lot of increase in the expected ROA. So can you explain what giving you confidence to increase the branches from 75 to 250? And what has been the experience in recovery from the past defaults? That's the first question.

Okay. So let -- if you've been following us, we launched these 75 branches in the year '22-'23. At that point of time, we launched these -- we opened these 75 branches. And we waited to see how these branches perform, what is the learning, and we've seen that all these branches do break-even anywhere between 12 to 15 months. Given the accelerated learning after that on our micro enterprises model, we are opening under the next level of 75 branches and also we've already opened. These should go live during this quarter and the next 100 branches will come in during the year. And so the confidence is coming from the fact that there is a proof of concept. There is accelerated learning curve. There is a product suite that can be distributed out from these branches, which is -- which our peer sets may not have. And therefore, the productivity is higher. And from here is where -- with a strong base, there is an ability to scale up and grow.

Okay. And sir, is my understanding is right, the entire loan of micro loans is secured by the central agency?

No. The micro enterprises loans are secured loans, secured by property, either residential or commercial. These are loans up to INR 25 lakh in tier 2, tier 3 towns, and they're secured by property.

Okay. Okay. And sir, the next question is on the cost. So the entire decrease in the cost will be only because of increase in the scale or we are taking any steps to reduce the customer acquisition cost?

So both the reasons combined, it cannot be one. Both the reasons combined. One, of course, that there is an overall scale impact which is leading to the whole reduction in cost-to-income ratio -- cost-to-income ratios. You would have seen our cost-to-income ratios drop quarter-on-quarter or year-on-year over last 2, 3 -- 2 years. and we keep going from the current band towards the range between 40% to 45% over next 8 quarters. That's number one. Number two, cost of acquisition, there are multiple channels where we acquire. The intermediate channel is a very, very commercialized channel. We all know a lot of other players also play in the channels. So cost of in these channels are more of less standard. However, as our productivity increases in our micro enterprises, the equipment finance loans and our direct channels, our cost of acquisition will keep coming down, which will also add to the drop in our cost-to-income ratios.

Sir, and the last question is on the DSA. DSAs are known to -- they might take the file to anyone who's giving the higher commission. So do we have any plans to increase our own channels, our own men on the street to source the loans? Or we will rely more on the DSAs going forward?

Our intermediated volumes, if you've been following, again, us, have been at about 50 plus -- upwards of 58%, 59% last quarter. If you look at this quarter, they are at around 55%. At the end of this year, they will be in the range of 45%, which means that given our expansion in micro enterprises branches, given our expansion in the ecosystem business, there is a conscious effort to move away from the dependence on these. Number two, this also is imperative because Shachin also touched upon the foreclosure rates and these foreclosure also are a function of how it was originated and we felt the pinch of it last year. So there will be a continuous conscious effort to move away from the intermediated channels. We see this going towards 40% or sub 40% in the next 8 quarters.

Anil, I just want to add. I just think it will be little unfair to say the DSA takes file where there's the highest rate. See, intermediaries in India play a very important role to get timely credit to medium-sized MSME, right? So -- and the actually rate of intermediation within DSA industry is more or less uniform. While there are competitive pressure, if suppose a new player enters who might give 10 basis points higher, but actually, what DSE ratio for secured loan, between 1.25% to 1.5% is the standardized commission rate, for -- when for a business loan, 2.5% to 3.5% is a standardized rate. For machinery and rooftop solar and other product, DSE don't do it. We are actually making them learn how to do it. What DSE actually want is a good price for the customer and a very superior turnaround time. Our turnaround time -- so these are the players -- big players, right? All of the big names in the industry. We've been in business on the basis of our power of turnaround time. Machine is saying -- we're saying no, a platform in 60 minutes, say give you in-principle approval and that is why at a little higher blended portfolio yield of 12.75%, 13% vis-à-vis is competition does at 10.5%, we still win our business. The only trouble -- or only challenge is this is your customer because of its primeness is always hunting for a lower rate. So once a customer comes to us because of our turnaround time, the competition offers at a lower price that it moves away from us. And the way we think is that we have to engage our DSA partners with multiproduct, we will gradually become more competitive on the pricing side. And that's why this would remain an important component of our business, but we are doing disproportionate focus on building our direct universe. Today, our gross AUM, say it is a 50%, 50% split. 50% comes from our intermediated channel. All of our micro enterprises is direct. All of our machinery is direct. All of our retailer financing is direct. All of our partnership and alliance is there is another NBFC or fintech. All of our digital is direct. So this proportion would tilt gradual. So from a 50%, the intermediated would go down to 40%, go down maybe 30%, 35%. But -- and the reason why it would go down because they are both products being added to intermediary channels. We are telling the intermediates, you can also do rooftop solar. Because it's our interest that our intermediary partner also learned to do more things than just selling a LAP or a business loan. So our absolute volume may not go down. But our focus is to increase our funnel to direct customer. It is not a -- we are -- ours to DSA. No, some of what we have said, partner might be listening to this call. This is live on YouTube, Facebook, all of that because I want to tell them you are an important partner to us, but we would like to own the customer and service the customer needs, and that is why we're going more direct.

Got it, sir. And my last question is on MyShubhLife. So just like micro loans, these are the unsecured loans. So will this be under insurance of central government agency?

So we can -- if you want to, we can take it. Depending upon the -- so these loans are prized largely at 30%, they have a short tenure of 30 to 90 days, they might come back from daily basis, the price that we have presumed and very high credit cost and the pricing being low, we will see whether we need a credit guarantee on top of that or not. So you can -- see the credit guarantee is nothing but an insurance. You can actually take the same insurance on your own by over-provisioning for that. So we'll see over a period of time, but the customer segment would be eligible for credit guarantee scheme, in fact, this would be -- most of these customers would be eligible for Mudra, eligible for CGFMU and also some of them will be eligible for CGTMSME as well. And as you know, under the -- most probably, if you read the BJP manifesto and if they happen to be the next -- forming next government, they have promised that the Mudra limits to be increased from INR 10 lakh to INR 20 lakhs.

The next question is from [ Sonal Gandhi ].

Congratulations on the fundraise, sir. I had 2, 3 questions. So one on the co-lending income. So you've touched upon it. So the question was, basically, we have done some reset, right? Our gains are up almost 30 basis points on a blended basis Q-o-Q. So that is the yields are higher in this quarter because of that rate hiked, right? If I look at co-lending plus direct assignment AUM, and if I look at the income, which is upfronted, that is almost 19% versus about 14%, 14.5% in previous 2 quarters. So maybe if you could help me or guide us, how should we kind of build that number in next few years.

So it depends upon the product mix as well. Every product comes with a different yield band and that upfronting will depend upon the quantum of DA or co CLM2, which we'll do in that product segment. So the business loan segment or the micro business loan segment, where if we do higher, even if we do in lower number, then the upfronting would be significantly high because those products are at 19% to 20% yield band, and bankers would normally take around 9.5% to 10% compared to a Sanjeevani secured product, where the yields are 14%, bank could still take about 9%, 9.5%. So the margins would be significantly low. So we have to do significant higher volume to find the same quantum of the upfront income. So it will depend upon the mix of all the products that how much income would come in. And of course, this quarter, as I explained earlier, that we have done rate reset for all our secured products, where we were on floating rates, which has given an additional blip on this upfronted income.

[ Sonali ], your question for how do you build the model? I can only help you with you a few facts. Please look at our co-lending sheet. Our co-lending sheet has a percentage of byproduct, how much of that has gone into the co-lending. And then there is a bifurcation of co-origination and as well as co-lending. Co-origination is largely spread income. Co-lending is largely relief the commission income, which comes out of the upfront at the NPV value. If you apply that metrics, and we are also telling you that if we have a run rate exited INR 550 crores, incremental AUM growth will come in higher yielding micro enterprises secured loan. And there is a percentage component of that, which is already in the co-lendings. You cross-reference these two, you'll be able to get to their model.

Right, sir. So I've done that, that's what I mean, 19% is the rate this quarter and previous 2 quarters it has been 14%, 14.5%. But maybe I think it will soften. I get your point.

So [ Sonali, ] We can have a separate conversation. Obviously, you are able to come with analysts. So you will have a much deeper level of questions. We can help you with some of that if you don't mind. But please go ahead with the rest of your questions.

Sir, second question was, so we are talking about increase in yields by about 150 basis points. Now I understand micro enterprise loans is going up and that's a high-end product and probably the secured product might go down definitely and what I understand is...

Of course, not. No, that we have not said. We said...

As a percentage of AUM.

No.

No, actually, it won't. What would happen -- so it's not that our -- so all of our 25 branches, which you high ticket 13.5% secured loan, we continue to do that. Incremental volumes, say if suppose theoretically if you are doing INR 550 crores a month and if we were to do a INR 600 crores a month, incremental INR 50 crores would come at 20% yield, this is also secured. But it won't change too much a percentage. What it would change is yield band, but not too much of percentage.

So maybe I framed my question in a wrong way. Let me just reframe or rephrase it. So secured prime, probably, as the focus moves more on micro enterprise, we'll continue to insecure also, secured prime but the percentage of micro enterprise loans will increase as a percentage of our AUM. Now, probably it stands about 8% to 9%.

From 12%, it will go to 20%.

Close to 20%.

20%, yes.

So -- and the differential would be about 700 to 800 basis points.