UGRO Capital Limited (511742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UGRO Capital Limited Q3 and 9-Month FY '25 Earnings Conference Call, hosted by PhillipCapital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aman Vishwakarma from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. On behalf of PhillipCapital Private Client Group, I welcome you all to the Q3 and 9 months FY '25 Earnings Conference Call of UGRO Capital Limited. From the management, we have Mr. Shachindra Nath, the Founder and Managing Director; Mr. Kishore Lodha, Chief Financial Officer; Mr. Anuj Pandey, Chief Risk Officer; Mr. Amit Mande, Chief Business Officer; Mr. Sharad Agarwal, Chief Operating and Technology Officer. I now hand over the conference to Mr. Nath for his opening remarks, and we will then open the floor for the question-and-answer session. Over to you, Mr. Nath. Thank you.

Thank you, Aman, and PhillipCapital for hosting this call. Good afternoon, everyone. Thank you for joining us for UGRO Capital's Q3 FY '25 Earnings Call. The financial sector continues to experience significant regulatory changes and market challenges, particularly for NBFC and Micro Finance. Despite these headwinds, UGRO Capital has demonstrated resilience and continued to deliver the strong performance, reinforcing our commitment to empower India's MSME. We are proud to share that UGRO Capital's assets under management reached a record INR 11,067 crores, reflecting a robust 32% year-over-year growth. Our net disbursement hit an all-time high of INR 2,098 crores showcasing our operational strength and strategic focus. Our emerging market channel, previously referred to as micro branch network, has been a standout performance for this quarter. The renaming of this channel reflects our focus on differentiating ourselves from the micro finance business, which UGRO Capital does not engage in. Instead the emerging market channel focuses on addressing the credit need of MSMEs in the smaller towns and semi-urban semi-market, delivering a tailored solution to help these businesses thrive. This channel disbursement grew to INR 543 crores compared to INR 180 crores in the same quarter last year. This exceptional growth has been supported by addition of 74 new branches, taking our total to 224 branches across 11 states. However, while our performance remains strong, it is important to acknowledge that the realization of our 4% ROA target has been delayed due to lower volumes primarily driven by slower liquidity environment. Despite this, we are actively expanding at a faster pace than before, enabling us to transition to higher-yielding portfolio more quickly. This strategic calibration will strengthen our profitability trajectory over the long term. At the same time, the regulatory tightening around unsecured loans have created a perception challenge for NBFC. While co-lending volumes have temporarily declined as banks has become cautious on business loan segment, hence the volume in the quarter dropped to INR 372 crores from INR 615 crores in the previous quarter. UGRO Capital's unsecured loan portfolio remains well incurred as these loans are guaranteed under CGTMSE, Credit Guarantee Fund Trust for Micro and Small Enterprises scheme, ensuring portfolio quality and reducing risk. We expect that most of the banks would restart the business loan segment in the current or ensuing quarter, which would bring back the volume of co-lending for UGRO. In the interim, given expansion of our emerging market channels, expansion of our secured volumes are also growing, which would also compensate for a shortfall of unsecured in co-lending. Despite this, the broader market inability to differentiate MSME lending from personal and consumption loans has posted a temporary challenge. Despite these headwinds, UGRO Capital has maintained a stable GNPA ratio of 2.1% and net NPA of 1.5%, reflecting our disciplined underwriting practices and proactive risk management. On the funding side, we mobilized INR 1,400 crores this quarter, underscoring the trust we have built with a diverse lender base. While we're navigating a slow liability environment, our cost of borrowing remained flat at 10.68%. We continue to believe that our rate of borrowing is higher than our peer set of market. However, given the volume of borrowing and RBI tightening on bank's lending to NBFC, these have not come down as an envisaged. We are taking active measures to optimize it further to improve net interest margin. We believe that with continued scale of operation and good performance, our rate of borrowing would gradually start coming down as envisaged, albeit at a slower pace. Looking forward, our roadmap of achieving 4% ROA and 16% to 18% of sustainable ROE includes focusing on high-yield emerging market loans, expanding this segment allows us to cater underserved MSME, semi-urban and rural market, delivering both impact and returns, optimizing funding costs as our credit rating improve and our financial position strengthens, we see significant scope to reduce borrowing costs, leveraging economies of scale, our scalable infrastructure ensures that fixed costs remain efficient as AUM growth and accelerating portfolio recalibration by expanding faster and increasing the share of high-yield segment, we aim to drive profitability with profitable growth in the near term. Additionally, our acquisition MyShubhLife and embedded financing platform continues to progress well. MyShubhLife AUM stand at INR 302 crore as of December 2024, and it has served over 28,000 customers since we announced the acquisition, through partnership with platforms like PhonePe, Fino, Meesho, Airtel, Mobikwik, and we expect more partners to be onboarded in this quarter. With access to potential market of over 3 crores merchants, MSL is helping us address critical credit gap in the small retailer ecosystem. While NBFC and micro finance sectors face its scrutiny, UGRO Capital remains uniquely positioned. Our focus on MSME financing, supported by strong risk management practices, a diversified portfolio and a strategic approach to growth ensures that we remain on a solid path of achieving our long-term goal. As we close quarter 3 FY '25, UGRO Capital is well positioned to deliver 30% AUM growth year-on-year, enabling MSMEs across India to thrive. I extend my heartfelt gratitude to our team for their relentless dedication and to our investors for their trust to UGRO's vision. Together, we are building a financial institution that not only delivers value, but also transforms the backbone of Indian economy and it's small business. Thank you, and I look forward along with my team addressing all your questions. Aman, over to you.

[Operator Instructions] The first question comes from the line of Narendra from Robo Capital.

My first question is regarding the cost to income, right? We can see that this quarter, it has -- so was there any one-off in this? Or should we take this as the trend going ahead?

Kishore, Do you want to take that? Obviously, as I said in my opening remarks, UGRO is continuously accelerating its branch infrastructure to grow because we believe that our wish to high ROA is a function of how quickly we can expand to our emerging market channels. We have added 75 plus branches. As you know, good thing is that our first set of 25 and 75 branches took almost 18 months to break even. The newest set of our last 90 branches took only 8 months. That gives us the confidence that we should continue to expand our branch infrastructure and some of the OpEx increase, which you are seeing is just a sheer function of that. Kishore, if you want to add something?

Yes, that's right, Sachin. So as we have now 214 micro branches in emerging markets, so this trend is not one-off. This is in a part of the plan and probably next few quarters, we may -- as we expand our footprint in the emerging markets, this trend may continue for a few quarters.

So what could be the cost to income in that case for this year as well as next year, if you could throw some light?

So for this year, we should end closer to 55% or 1% here and there. And next year, it should go down depending upon how next 3 months pan out as far as distribution is concerned. So we'll reevaluate it in the month of March based on the distribution that how it will pan out in the next year.

Okay. So this INR 125 crores of operating expenses should continue every quarter for the next 2, 3 quarters, at least, right?

Yes.

Yes. Okay, okay. And my second question was regarding your secured, unsecured mix. So what is our mix between secured and unsecured? And in the secured segment, what would be our LTV?

So I'll take that. This is Anuj. So our broad intent is to keep secure, unsecured mix as around 30-70. And within the unsecured loans also now 41% of our portfolio is covered under the central guarantee scheme. So -- and we started this exercise about 1.5 years back. So every new sourcing, which we are doing for each quarter, we are covering it under the central guarantee scheme. So this is likely [Technical Difficulty]. And on an average, on LTVs, for secured loans, we are at around 55%.

Okay. So your secured would be 70% and unsecured 30%, right?

Right.

Yes. Yes.

Yes. And only caveat is that generally market is unsecured. The unsecured portfolio, because it carries credit guarantee cover, which is called CGTMSE, wherein 75% of outstanding loans, the credit loss on that is guaranteed by the coverage. Most of the market would not treat that as an unsecured, but we differentiate between collateralized loan and non-collateralized loans. So loans which does not have any type of collateral constitute around 30-odd percent. But if you take the CGTMSE guarantees as a form of a security, then unsecured portion of our book is roughly around 18%.

Okay. Understood. And going ahead, all the unsecured loans are going to get covered under the scheme, right?

Yes. We try to take as much as coverage as possible. We have calibrated between the cost of the guarantee versus expected credit cost. And between the two, depending upon what the situation in the market is, we take the coverage.

Understood. Understood. Got it. And in your opening remarks, you mentioned that the 4% ROA guidance has been delayed. So by when can we expect to reach that kind of a number, if you could throw some light?

Yes. So I think the way we're expanding, I think our capacity is now complete, is getting built out as you will see that in our disbursement numbers. Last quarter was also our highest quarter in the form of both AUM and gross disbursement. This quarter is both. We continue to believe that our capacity built out is much larger than what we are seeing in the form of the liquidity. I think with that is -- will get released now, given that the lower growth, which NBFCs are showing, bank financing to NBFC would start reviving by -- within a quarter or a little later than that. And also, we don't want to expand liability at expensive cost. This guidance is keeping that in mind was to give confidence to people and our shareholders and investor fraternity that UGRO continues to be on the path of its build out. It is demonstrating both its capacity of origination, its infrastructure and credit cost and credit delivery. But if the liquidity remains a little tighter or it is coming at an expensive pace, we just don't want to chase assets at any cost. And that's why this guidance. I do think it's very difficult to calibrate to give you a clear guidance of when it would be. I think we are seeing around 2 to 3 quarters of delay versus what AUM we should have been versus what we are, it is showcasing at least a 2 to 3 quarter delay.

Okay. So the main pain point is the cost of funds. Is that right?

And absolute liquidity, which is available in the market for our size of NBFC.

Okay. Okay. Understood. So the sourcing of funds is a pain point, right?

No. So we -- our last quarter was highest quarter in terms of overall borrowing. That was the largest quarter. But the capacity of the disbursement, which we have built, if we have to match our cost of borrowing would shoot up, which we don't want. So we have to balance between the kind of growth, which we can undertake given our infrastructure versus what we would like because ultimate final P&L is not only a function of just clinical disbursement. It is also the cost of borrowing. So that's why it is -- till the time overall market liquidity and risk perception around NBFC in general doesn't change, I would say, I think it will remain a little slower. It's nothing to do with that. We are not in micro finance. We are not in some of the consumption, net loan, neither we are in PL, nor we do all of that. But overall, then generally, when RBI takes action on NBFC, general perception on NBFC is lower, it impacts every player in the market.

[Operator Instructions] The next question comes from the line of Avinash Singh from Emkay Global Financial Services Limited.

Two questions. The first one is on co-origination of CLM 1, that CLM 1 or co-origination has been kind of very, very weak for last 4, 5 quarters. So what is sort of an underlying reason? Is there some kind of a discomfort that a bank have or something else playing out? So that's one. And the second, if I come to this emerging market LAP or a small ticket LAP, what is the typical I mean duration of these loans? This question I'm asking because if I see the quarterly disbursement and if I see the AUM accrual, the difference is too kind of a wide and suggest that, okay, nearly every quarter, 20%, 25% of the loan is being repaid. So because in this size -- ticket size, we would not expect much of a balance transfer also. So what is happening here? I mean like, in particular, if I see this quarter in the emerging market LAP, we have INR 543 crores kind of a disbursement. But the AUM accrual is just like INR 260 crores. That suggests that, okay, out of INR 1,105 crores that was at September, nearly 25% has been paid off in this quarter. So what's happening here?

I'll take the first question. I will request Anuj to take the second one. I'm just trying to see the data which you are seeing. On the first one with respect to co-origination. So as you know, just for the broader audience's perspective, there are two. One co-origination as a term in our balance sheet of INR 1,412-odd crores, which is largely our business loan being done with the larger NBFC. And other form of co-lending and co-originations what you can do with banks. Banks are typically continue to do co-lending, which is option 2 of co-lending. This is akin to BA, which means we onboard the customer on our balance sheet and [indiscernible] 3 or 5 days that goes into the co-lending and get 80% of that loan gets transferred to the bank, and we get the refinancing with that. With respect to co-origination, earlier as the business loan was -- as a segment was not being accepted within the bank because there was no credit guarantee. Once the credit guarantee came, all banks started doing co-lending on business loan, and that's why our volume in relationship with most of the large NBFC stopped and that volume moved to the bank. And that's why there is a drop and that increased the co-lending volume for the bank per se. In the last 2 quarters, what we have seen, general risk perception allowance, so-called unsecured, co-lending volume in the banks have also now slowed down [indiscernible] gone to all the banks and explained that unsecured consumption in PL is not an unsecured MSME loans because banks generally do unsecured. I think most of the banks have understood, [ BFS ] has also taken a note of that, and there has been a lot of industry-wide consultation is happening. And we expect that some of these banks would restart the business loan segment, and one of the largest banks or large banks in the country is starting the business loan segment. So it will restart. So that's broadly the color why you see drop in co-origination happening because that volume got consumed in bank, bank's volume has come down because they want to hold only secured, but our growth would pick up. If we see a systematic change of banks not wanting to do unsecured or business loan segment, then we will reinitiate the co-lending -- co-origination with other NBFC. Second part is, as Anuj said, we want to keep only 30% of our balance sheet at the AUM level, non-collateralized loans. Once we acquired MyShubhLife, the volume delivery there on embedded financing all of a sudden accelerated. So last quarter itself, we did INR 300-odd crores. And we were doing roughly INR 225 crores of business loan. Put together, that would have become 50% of our disbursement volume. So we naturally brought down our business loan segment to now INR 100-odd crores, so that unbalanced -- on AUM basis, we continue to remain within 30%. The entire embedded financing fees, which is coming from our fintech MyShubhLife, cannot be co-originated or co-lend because that are short tenure, 1-year loan to be repaid on a daily EMI basis through payment platform aggregation. So that's why you will see over a period of time, business loans to remain mostly through embedded financing on balance sheet and not go in co-lending format. We would replace that with more secure volume, which is now happening because of the branch expansion. I hope it explains the detailed picture. Anuj, do you want to take the second one?

Yes, I will take it. So our average tenures in our emerging market product is about 7, 8 years. But what we have tried is also to introduce our Sanjeevani bigger ticket loans in these markets. So what is -- and that is why a little bit of confusion has happened in terms of AUM increase. So while in the investor deck, the emerging market LAP product is the product up to INR 25 lakhs ticket size. So while we have done INR 543 crores from the emerging market channel, some of it is larger tickets also, which is what we wanted to plan and that is the strategy because in Tier 3, Tier 4, Tier 5 towns, there's an opportunity to do slightly bigger tickets, there is lesser competition, and we have the underwriting wherewithal to do that. So out of that INR 543 million, whatever is relevant for emerging market, less than INR 25 lakhs that is being reflected in the emerging market AUM, rest is in Sanjeevani product AUM. So there is no gap. And in the sense that whatever we disburse has not translated into AUM is just that it is shown into 2 different products.

Yes. I think that we should change the...

Yes. We'll change that going forward.

The next question comes from the line of Ganesh from Bharat Bet Research.

Sir, my question is regarding our machinery loan segment. So we seem to be growing quite well in this segment and the broader asset quality for this is also quite positive. So broadly, going forward, how are we looking at it in terms of the opportunity here? And is there a possibility of kind of expanding our presence in this segment further?

I'll take that -- if Amit is on the call, he can also do that. Look, we continue to believe that productive asset financing, we call machinery as a productive asset, mainline lenders have not yet captured this opportunity fairly well. Our core of our underwriting is to do cash flow analysis through data analytics platform by analyzing the BSE Banking and Bureau, create eligibility, underlying collateral defines the tenure and the price. Machinery, CNC printing, packaging, plastic molding machine, is a productive asset and have its own cash flow. So when you add in the cash assessment method, the cash flow of the machinery, it becomes very viable for us. It is a shorter tenure and a reasonable yield, more or less at securities, and that's why the portfolio has performed very well. We would like it to be expanded further. We're doing an average of around INR 75 crores a month. Our target was to take it to INR 150-odd crores. What we are seeing is that we have worked with roughly around 75-plus OEMs in India. What we have seen is that expansion of the volume over here, either would require expanding the ticket size or reducing the average cost of lending, both we don't want to -- and that's why we are taking a very deep calibrated effort to gradually increase the size and deepen our penetration. We have taken 2 steps, one of which is successful and one of which is not so successful. In our intermediated prime channel for the first time in India, we introduced machinery to all our intermediary partners, which you call DSAs, and we have seen around INR 25 crores, INR 30 crores of volume started happening there. It's a new product. Most of the DSAs in India either do unsecured loan or do LAP. For them to do machinery was a new concept, but we marketed and they have now understood, and they are becoming reasonably successful there. We also have expanded our machinery product to all of our emerging market branches, where we did not see so much of reasonable success because for our credit officer and credit fraternity to also learn because they have just learned from doing small ticket LAPs to now big-ticket LAPs and now also graduate immediately to machinery was not very successful. We are making constant efforts to monetize the entire branch channel and multichannel network to adapt machinery as a product. We are hoping that by end of this last quarter, the INR 75 crores to INR 80 crores of average volume hits this first milestone of INR 100 crores. And next year, we take it and stabilize it at around INR 150 crores to INR 175 crores per month. So short answer is this is an extremely good product. We have seen its acceptability across all of our co-lending partners with the bank. It has very good credit quality. It is reasonable in shorter tenure. We would like to expand it, but not only expand -- not by increasing the ticket size or lowering the yield. So within the same band of 3.5 years of tenure and INR 35 lakhs of average ticket size with an average yield of 14-odd percent, we will gradually increase it by expanding to our entire network.

And just the second question on -- so on our Slide 27, which is the GRO Score risk band. Over there, if you look at the risk band B, the divergence between the disbursed and the non-disbursed default is quite high. So just wanted to check, in addition to this score, what is kind of driving the decision-making between disbursals and non-disbursals because that is quite a material gap that we've identified. So if you could just provide some color on that?

Anuj?

So there are a variety of other drivers. We don't disburse a case unless we meet the customer. So we use GRO Score as our primary filter. And then other policy parameters, which would mean doing reference checks of the customer, calculating his eligibility, kind of property because property is not covered in the GRO Score, et cetera, are part of the other reject reasons. That is why -- but the way the gap is, it actually tells us that the GRO Score is tracking quite well.

The next question comes from the line of Anil Tulsiram from ContrarianValue Edge.

My first question is on your emerging market loans, which is a small LAP of INR 10 to 15 INR lakhs. I think the most important thing here is collections and legal infrastructure. So can you elaborate how you are ensuring that now that our branches are expanding at a rapid pace for the last 18 months, we are ahead in forming collection infrastructure and the legal team?

I will take that. So we have a very, very exhaustive collection and litigation infrastructure dedicated to emerging markets. So today, we have about 210 active branches and about 250 people in collection dedicated to these branches. The way this happens is a set of 5 branches are combined into a cluster and set of 3 to 4 clusters combined into a state and states combined into a region. For each of these, we have a collection fraternity and a collection supervising channel. Also for each set of 5 to 10 branches, we have a dedicated litigation domain expert whose only job is to execute the litigation orders, which we get. So we are quite aware of this and have invested a lot on this.

Yes. Got it. And sir, the second question is on co-lending. So just give me 1 or 2 minutes to explain the concerns. I've spoken to a few industry experts. And according to them, what's happening in the industry, I'm talking about industry, not UGRO. Proper risk sharing is not happening in the co-lending industry, wherein the small players are being forced to replace the bad assets with good assets by the big banks. Secondly, banks are hesitant to enter into co-lending because of micro supervision by the RBI, wherein for any default of even NBFC this year that they will be held responsible and they may face sanctions or other things. So -- and you are part of this co-lending committee, which has been formed. So what are the steps being these concerns, which is slowing down the industry growth?

Yes. Sir, this would require -- this would be a very long answer. I'll try for -- the benefit of everyone, I'll try to summarize it. Number one. Banks and regulators, both, and especially the government of India, all of them are aligned to the fact that for priority sector lending, NBFC are well poised to demonstrate the credit or disseminate the credit, and that's why banks are eager to participate further. And there is no doubt it. Second, the process of co-lending has become more robust as passing of the day. In fact, in the last quarter, we took certain -- a large number of public market investors to multiple banks to showcase how co-lending happens. Third, within the different bank, they also understand that the co-lending is more return accretive than their own direct channel because average banking advanced yield is around 9.5%, return on average is 1.5%. Even existed for credit cost, co-lending actually delivered superior return on assets. Last but not least, temporarily, when RBI said that unsecured business should be brought down. A lot of banks became downwards and gone slow on the unsecured piece of the co-lending, but they are coming back. We are understanding that unsecured business, which is 75% is credit guarantee, is not an unsecured. They in their business are lending to MSME without any collateral. Last but not least, in terms of -- there are 3 types of NBFCs, which play the market. One large AAA NBFCs and AA NBFC. Most of them are on balance sheet leverage there because they continue to get liquidity at a cheaper cost and co-lending being very hard to execute, they don't get interested. Some of them I won't name on the conference call, but some of them started and then stopped because they found it very cumbersome. Second is the peer set, which is A rated NBFC. We got 5, 6, 7 of ours, which are in A rating universe continue to do fairly well when it comes to do co-lending, and that's why we have a very disproportionate market share on co-lending -- MSME co-lending side. Last but not least, there are a large number of players, which are in the range of, say, BBB-minus to BBB-plus, bank continue to find it very discomforting to do co-lending with a very small NBFC, which doesn't have power of the capital, they don't have their own balance sheet. Rightfully or wrongfully, ideally the bottom of the pyramid credit, which is done by these NBFC, should be adopted by the bank, but it would happen only over a period of time. In summary, I think the co-lending, and that is -- I'm not at liberty to tell you what has been recommendation of the committee, which was set up by the DFS. But in summary, all of the recommendation and the consensus was co-lending is here to stay. It needs to be strengthened. The operational hassle need to be removed. More technology integration should be done. And there should be more support and more widespread adoption of co-lending should happen within the bank.

The next question comes from the line of Amit from RoboCapital.

My first question is on the emerging markets brand channel. Just wanted to know like how is the typical branch? What is the size of the branch? How many employees are in the branch? And what type of AUM do we need to breakeven? What type of products are being done from the branch? Just some high-level overview of the branch network?

Amit, are you on the call? If you are, you can pick it up.

Yes. This is Amit, here. So to your question, every branch today has a branch manager, about 6 sales officers, a credit manager, an operations manager and a collections manager. So it's a typically 11-member branch and the collections guy comes in, in a month or 2. So overall operating cost of a branch is anywhere between, depending upon the city, which actually includes rentals and salaries and incentives, is about INR 4 lakh, INR 4.5 lakh. This is the monthly operating cost. So at the moment, our AUMs touch about INR 5 crores, operationally, the branch breakeven, and they will be accretive going forward. So that's the back-of-the-thumb dynamic for the branch. On the product -- okay. go ahead. Go ahead. I will cover...

Sorry. I think most importantly there might be market channel. It requires a level of hierarchy. Every branch, 5 branches have a cluster credit and cluster sales. Every set of few clusters have then regional geography and then it rolls into state and then it is divided into South and West. We are the only small ticket LAP business or emerging market business, which is pan India. Most of our peer set either are south-focused or north-focused. We are very prominently present in Tamil Nadu, Telangana, Karnataka, Andhra in South. And now we are very strongly present in -- originally in Rajashtan, Gujarat, and now we have expanded into UP, MP and Maharashtra. So we have invested both in the branch infrastructure and -- but also hierarchy infrastructure, and we are using our learning of our data technology and how data can be used to do credit. These branches, as of today do small ticket LAP, which is up to INR 25 lakh and connect branches. Roughly around 50% of our branches now we have trained them to do also larger ticket LAP, up to INR 1 crore. Average ticket size is coming around INR 40 lakhs, INR 50 lakhs. Over a period of time, while we have rolled out both machinery and rooftop solar, we have not seen an uptick because we have to train people to understand how to underwrite credit on rooftop solar and machinery. But our eventual goal is also to do that. Last but not least, our channel infrastructure growth also helps us indirectly in two of our additional businesses. So for example, in our embedded financing business, wherein India's largest payment platform are now aggregated -- integrated with us through our fintech platform, MyShubhLife. We have capacity to do merchant financing in almost 3,000 plus fincos because of our 300-plus physical location. Same way, our partnerships wherein we partner with smaller NBFC and fintech, there also, we can underwrite loans into all the physical geography we are expanding. So there is a direct benefit to UGRO of expanding our branch network, but there is also an indirect benefit that some of our channels, we can underwrite businesses where others can't go because they don't have that much a physical presence.

Right. That's great. So we are not doing any unsecured from the branches. Is that -- is my understanding correct?

We are not, but we believe that out of our total location, we have around 50 to 60 or 75 locations, wherein there is a potential to do high-quality business loans. So as you know, we have been doing business loan, which is under credit guarantee, we have done our volumes of around average of INR 200-odd crores, which we have brought it down to INR 100 crores. We are seeing the trend that between the 2 markets, prime market of 40, 50 cities in India and emerging market, the credit quality in the emerging market is far superior. So we are doing a little bit of experiment of also doing business loan in some select branches, where we see maturity of our credit cluster, credit fraternity and sales fraternity, but this should would not be a mainstay of our business. Our mainstay of our emerging market business will continue to be secured LAP business.

Right. And just a follow-up on that. So the business loans that we are doing -- so those are from DSA in that case, right? Those are the DSA channels, unsecured business loans?

Yes.

So those would be what type -- I mean, those would be working capital type of loan? And what would be the end use of those loans?

You're right, [indiscernible] working capital or other business needs. These are short tenure loans between 24 to 36 months and up to INR 50 lakh. So you're right, they are large need for working capital or inventory stocking up, et cetera.

We'll move to the next question, but I would only ask you, sir, and also to the broader market, you have to differentiate between unsecured loan for a consumption, buying fridge, TV, scooter or personal loan to invest, for example, in crypto currency versus a business loan for a small business, which is done on the basis of a cash flow and guaranteed by CGTMSE. The entire focus of MSME financing in India, the government focus, the regulatory focus is to move MSMEs to cash flow-based underwriting. And most of these business loan, which is done for short tenure, are done through the lens of GST, banking, cash flow in the banking and completely automated. And we have seen very steady credit cost of around 2.5% across our portfolio. But also given that there are no collateral, we keep it under control in terms of the total volume of our balance sheet.

Yes, that's what I was trying to get to. It was very useful.

The next question comes from the line of Kamal, an Individual Investor.

I'd like to share a bit more about your long-term moat. I'm assuming that this is mainly data-driven lending. How central is technology to your data-driven lending? In other words, what would be the tangible impact to your AUM growth or to your NPAs, if you completely removed technology-driven lending?

In the cost-to-income ratio, ratio would go up significantly and our credit cost would go up significantly. Our core belief that like it has happened in consumer financing space, if you look at pre-2008 of consumer financing and post-2008 of consumer financing, consumer financing in India expanded on the power of consumption-driven data demand, self-employed population growing and your ability to do cash flow underwriting basis bureau score has what exploded the consumer financing market. We continue to believe the advent of GST, digitization of banking, maturity of bureau would continue to explode credit. It is not for the purpose of origination of the loan, but it is making our credit and sales fraternity more productive and our credit costs more predictable. We cannot create scale and size without continuously investing in our data analytics and our IT and technology infrastructure.

And just a quick follow-up. Is that the only long-term moat that UGRO has? Or do you also seem to have different moats, which would be -- which will differentiate you from other NBFCs of the kind?

Yes. So I think that within MSME space -- number one, we continue to believe that MSME market gives a significant opportunity to create a very scaled business in India. India's credit market gap on MSME financing is longer. There has to be multiple players, which has to step up, and there's an opportunity to build very scalable business. That is scalable business, our moat continues to be to underwrite customer and understand the cash flow through the lens of data. Second, we are the only player in the country, which has a diversified asset channel, and a focus on one customer segment, which is INR 15 lakh to INR 15 crore turnover, where we have the ability to do a loan of INR 5 lakh to up to INR 5 crores. We have the ability to understand multiple type of collateral. We do against self-occupied residential property, industrial, commercial property, we do machinery, we do rooftop solar, we do embedded financing. So our distribution and its veracity is the second moat. And third is our liability income, which is very diverse and deep. We are not just an on-balance sheet borrower, but we have ability to partner with very large banks and adjust our both distribution and credit to fit into that, that allows us to scale. So combination of these 3 is we think so it continues to be fairly unique. Time will tell whether what scale, size, profitability and how we become the top-run NBFCs across multiple product lines.

The next question comes from the line of Rishi, an individual investor.

Sir, I just have a couple of questions. One on the CGTMSE scheme. So I'm not fully aware of what it covers and what it doesn't cover. So earlier in the call, you mentioned that it covers 75% guarantee. So I just wanted to understand what is the -- I mean, GNPA that you currently have allocated to that means? Does that take into account the 75%? Or do you consider it as completely unsecured and you have provisioned 3.8%, which is about INR 120 crores? I think that's about half of all the provisions that you currently have on the GNPA. So if you could just explain around that, it would be helpful.

Yes. Anuj, do you want to take that?

Yes. I'll take it. So we have -- so there are actually a couple of schemes from the central government, where SEBI is the facilitator, which are targeted to encourage sourcing to for micro and small customers. The most popular and the largest one is called CGTMSE, where we are also part of that. Now what it does is, it arrives -- it studies the portfolio of the company and it arrives at a premium amount. And you pay that as an yearly premium for the portfolio, which you cover, which is approximately 1% of the total portfolio size. And for the duration of the loan, you keep paying this premium. And whenever an NPA happens, you can raise the claim. Typically, the claim, which you can do in a particular year, is 2x of the premium paid. So we have been a member of this and have been covering our unsecured loans for last 1.5 years every quarter through the scheme. What you see as NPA, as a good accounting practice, we keep showing the account as a NPA till the time we receive the claim from CGTMSE. What CGTMSE policy does is it gives -- it guarantees 75% of the principal outstanding. So for example, if INR 100 of loan is covered, and it is covered under the guarantee scheme, then at the end of the -- after it becomes NPA and the documentation and their normal operational paper work is completed, then INR 75 of that government reimburses as part of the plan. So till the time we get that, we continue to show that as an NPA.

Understood. So a lot of -- I mean, a part of it is expected to roll back into...

Yes, by next year.

Understood. And one other thing that I wanted to ask. I mean this is more from a global perspective of how you see the business evolving. So I understand that the intention is to grow AUM at about 30%. And I mean, in general, if the return on equity is -- our target return on equity, I think, it is about 18%. So any lending that you do above the 18% is going to come from additional equity raised, unless you want to change the leverage, which I believe that at the 2-year mark, which we've been talking about, where our current committed equity is about INR 2,800 crores plus/minus net profit. It's probably going to be about INR 3,000 crores and on-book AUM would be about roughly with the leverage, probably about INR 12,000 and off-book at the current ratio should be about INR 9,000 crores. So beyond the INR 21,000 AUM mark, if the company is still interested in sort of like building an AUM at 30% run rate. If the market's feedback on the share price is not commensurate with the ROE and the ROA, will the company consider only growing at the return on equity rate? I hope the question is clear because -- my question is basically...

Sir, your question is very clear. All lending institutions, except a few deep south of the 3 south players, except one, most of the lending and banks -- one of the reasons why RBI guide banks to not grow beyond 15% because RBI wants banks to grow lower than their ROE performance so that they are not stuck in the incremental capital requirement and they grow out of their retained earnings. Most of the NBFCs, including the biggest one in India, grow at a rate higher than ROE performance. The only caveat being there is equity market give them a pricing power, which allows them to dilute further and which is accretive to the shareholder. If we continue to perform the way we are performing, which means on all metrics, we deliver, but it does not get reflected into the share price, then which is something which is beyond our control, we would have no choice but to grow at a lower pace because we cannot grow at 30% because we would need more capital. And more capital cannot come when your share price performance is not there and your existing shareholders would not allow you to dilute further. So I hope the answer is right. We are hopeful that would not remain the case because there is no logical answer why a company -- we continue to believe that this is just an adverse market cycle, wherein all of the investors are coloring all NBFC in one brush, and that's why not rewarding NBFC, which are different than microfinance and some other players in the market. But as the things get normalized curve, it should get -- pricing should get normalized and allow us to raise more capital at a much better pricing than what it is today.

Absolutely, Mr. Nath. I think I understand that point because -- I mean, I just wanted to understand that whether the management was on the same page because other companies that have invested in the management worries more about the business. Here, I understand that you hold a substantial part of your net worth in the company. So I'm expecting that will be shareholder-friendly as well. Another question is just on the portfolio makeup. So the diversification based on the different secured and the different products that we have has obviously given us a much better profile in terms of risk when we see the microfinance institutions showing better ROE, but huge provisions these past few quarters. So -- but on a global front, it looks like the company is more like an index of individually concentrated NBFCs. Would that be right to say?

So I think the way we should look at -- your analysis is quite correct. I think between MSME space, there are 4 different type of diverse offering with different NBFCs provide for, and we are in aggregation of all 4 for reasons explained by me earlier. So there is a prime business channel, which actually play -- big players, which are typically NBFC undertake. There is an emerging market business with 3 or 4, which NBFC undertake. We are little upper ticket size. There is a machinery productive asset business. There are 2, 3 players in that. And there is a high fintech orientation on our embedded financing platform. We have aggregated these 4 businesses as one company because we think that over a longer period of time to serve our customer, this is the best way to do it. And over -- at its scale, all of these have a point of confluence and you can benefit from each other channel very well. And also it reduces the risk to some extent while giving you the operating leverage. So you've got it very right. We continue to believe that we have...

My only concern is that this is a very long -- my only concern is that it takes a very long time to understand this, and I hope the market understands and appreciates the company. I mean it's very similar to HDFC Bank as opposed to commercial banks or only retail banks. I mean -- so it's a great model, but I hope in the long run, the market appreciates that.

Sir, I can only say that we are constantly trying to explain. We have failed in that to some extent. We will double up on our effort to convince people of what we are doing is best for creation of an institution and hope that I think once the abrasion in market goes away and people look at a normalized curve, they should bounce back very quickly.

The next question comes from the line of Hari Prasad from Capital.

I just wanted to check what would be the branch level profitability that we are talking about, given that we've incurred significant OpEx on the back of new branch addition? And could you give us some guidance on the profitability going forward as well?

Yes. We do very quickly, actually -- so obviously, those OpEx are all in the numbers which you are seeing. For our emerging market branch, branch at a gross disbursement of monthly volume of INR 1 crore and an AUM of INR 5 crores not only breaks even, but becomes fairly positively ROA accretive. Out of our total block, we have 90 branches, which are new branches and come in last few quarters are yet to reach that mark. Rest of our branches are in the positive territory, while we are adding 100 more branches. So over a period, we will stabilize at 400-odd locations. So I think in 3 quarters from now, all of our locations would be positive accretive. And then we'll take the halt and we'll make sure that the end result of all 400 locations comes into the positive territory. Now we can take that and give you some more color on this on a separate call if required.

And can you help us sort of understand a little bit about -- can you share some commentary on the other expenses as well, which have gone from INR 38 crores in Q3 '24 to approximately INR 59 crores in Q3 '25.

Sorry, I didn't get the question. Anuj, if you got the question, if you can take that?

No, I also missed that. Can you please repeat?

I think just wanted to understand other expenses as well in the P&L, which have gone from INR 38 crores same quarter last year to INR 59 crores this year. Is it all related to branch? Or are there other expenses as well, which are...

I will take it. This is Kishore Lodha. So there are 3 components to it. One is purely a function of higher disbursement. So there are certain costs, which come along with the disbursement. With the increase in disbursement, the costs come. So that is one part of it. Second part of this expense would be the GST expenses because as an NBFC, as the business grows, we are supposed to get only 9% of the input -- 50% of the input credit and 50% is charged off to the P&L. So second -- some portion of it is belongs to that as well. Third component is that as we are talking about a lot in CGTMSE, it costs us 1% of the portfolio secured, and we write it off over a period of 12 months because the coverage is for 12 months. So the third component, which is related to CGTMSE cost. And fourth one is inflation, where normally all costs are getting inflated to the extent of normal market, 6%, 7% inflation. And fifth one is the branch expansion. So all put together, INR 38 crores has become INR 58 crores. It is not a function of one of these.

The next question comes from the line of Meghna from InCred Equities.

[indiscernible].

Sorry. We can't hear you. Can you be more closer to the mic, please?

Yes. Is this better?

Yes.

Yes. I just had a question on the yield. The net yield and the gross yield. The difference between the 2 and the movement till the quarter?

Sorry, what is your question? Kishore, did you get that?

Yes. So Meghna, if you look at the yield, it is -- still remains flattish to 16.7%. And this quarter, there has been some uptick on the gross yield, which is 18.2%. It is largely because some part Sachin and Anuj has explained earlier that we have partnered on some embedded finance side this time, where the gross rates are higher, but our margins would be to the extent we have agreed with the partner. So that the divergence is on account of that. While we have been talking about that our emerging market portfolio is expanding, it is higher yielding. However, there has been some competitive pressures on the other channels, especially on the larger ticket LAP and machinery financing, where some pressure has been on the pricing. That is why despite emerging market going, this overall yield remain flattish for 1 or 2 quarters. However, as the mix would go up significantly from the emerging market, this trend will change, and the yield is likely to go up.

Okay. Great. That's very helpful. Just one more question is on the yield. The net yield would be net of -- what is the difference between the...

Rate of the partner share. So wherever we have partners who are originating for us, some portion of the yield they would take away. So some NBFCs, smaller NBFCs are originating for us. Similarly, in embedded finance, there are partners like PhonePe, BharatPe and others, Meesho, et cetera, would be originating for us, and they would be taking a share of the yield as part of the arrangement. Hence the -- so whatever is going to the partner is the difference between the gross yield and the net yield.

Got it. That's very helpful. And I had 2 more questions. One is on a broader segment. Are you seeing any asset quality stress coming up in any segment? Or is it stable? And the second question I had is, on the other OpEx, as you mentioned, do you see the current run rate to be carried forward for the next few quarters at INR 48 crores? Or should it move?

So on the asset side, from early portfolio indicators, there's nothing specific which we have seen. But from our acquisition engine, we do see a little more on decline by machine, primarily owing to customers' bureaus getting stressed, getting a little bit of overleverage and the turnovers dipping. But those have not yet reflected on the portfolio, and I don't think they will get reflected. But from our acquisition perspective, approval rates will go down a little.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Aman Vishwakarma for his closing comments.

Thank you. On behalf of PhillipCapital Private Client Group, we thank all the participants for your valuable time and especially the entire team of UGRO Capital for letting us host this call. And for the closing comments, I'll now hand the call over to the management. Over to you, sir. Thank you.

Sorry, I was on mute. I was saying thank you so much for everyone attending this call. Our team of Head of Investor Relations, [ Ritu ] and her team would be very happy to answer any further questions. Thanks, PhillipCapital for hosting this call. Have a very good day. Thank you.

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