UGRO Capital Limited (511742) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UGRO Capital Q1 FY '26 Earnings Conference Call hosted by Elara Securities (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Daptardar from Elara Securities (India) Private Limited. Thank you, and over to you, ma'am.

Thank you, Anushka. Good evening, everyone. On behalf of Elara Securities, we welcome you all to Q1 FY '26 Earnings Conference Call of UGRO Capital Limited. From the esteemed management, we have with us today, Mr. Shachindra Nath, Founder and Managing Director; Mr. Anuj Pandey, Chief Executive Officer; Ms. Shilpa Bhatter, Chief Financial Officer; Mr. Sameer Nanda, Chief Revenue Officer; Ms. Ritu Singh, Senior Economist and Head Investor Relations. We express our gratitude towards the management of UGRO Capital to provide us the opportunity to host this conference call. Without further ado, I now hand over the call to Mr. Shachindra Nath, Founder and Managing Director, for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.

Good evening, everyone. It is my pleasure to welcome you all to UGRO Capital's Q1 FY '26 Earnings Call. We have been maintaining that MSME financing in this decade is the largest credit opportunity in India. And for us, every quarter solidify its base. Q1 of every quarter for lending institutions start with a slower base, however, that defines how the year would pan out for us. This quarter for us had multiple milestones. We did capital raise of around INR 300 crore through rights issue. We did a preferential allotment of around INR 900 crores where we saw our existing investor commit capital to us and we will be utilizing the funds raised through -- for acquisition of Profectus Capital, which would increase our base to approximately INR 15,000 crore with a potential of improving our return on assets in FY '27 with added profitability. Our share price has not been what we would like it to be. Raising capital at low valuation is neither desirable nor acceptable to us. However, in lending, between dilution versus maintaining the momentum of growth, we have preferred growth. We understand the importance of clearly outlining the levers that drive our growth, ROA and ROE, and our endeavor would be to explain that more over period. UGRO has been pivoting its asset engine to emerging market small ticket LAP and embedded finance in the last 2 years. In this journey, we have expanded our footprint from 150 locations in FY '24 to 309 locations as of June '25. This quarter, we are presenting to you how the build-out is happening. We believe, on the current performance, when all our branches mature, we would reach monthly exit run rate of around INR 400 crore per month just from our emerging market channel. UGRO would be a very different financial profile company once we reach that scale. Our other lever of ROA is our embedded merchant lending business, which came to us through acquisition of MSL tech platform, and we are presenting the performance of the same as well. This quarter, we also elevated Anuj as our CEO. He has been with me since its very -- UGRO's very inception. When we started the UGRO, the organizational design was to have a CEO for the business so that I can focus on strategic things, which are investor interface, lender interface, organic and inorganic business growth opportunity and CEO can focus on core operating performance. I am very pleased that our Board have recognized Anuj's talent, perseverance and knowledge about lending industry and I have entrusted him with this responsibility. I now turn to Anuj to take you through the quarter's performance. Anuj?

Thanks, Shachin. Good evening, everyone. The first quarter of FY '26 was all about discipline and laying the groundwork for our next leap forward. Traditionally, Q1 is a softer quarter in terms of disbursements and this year has not been very different. Especially in this year -- this quarter, we have tightened our underwriting filters, especially where borrowers leverage was elevated and have moderated origination volumes in those pockets. This focus on quality has meant that even with slower disbursements, our growth trajectory stayed strong and our risk profile is stable. Let me walk you through this quarter highlights. Firstly, on strategy action, we have announced a INR 1,400 crore all cash acquisition of Profectus Capital, which is progressing well. Shareholder approval is secured, and change of control and allied regulatory approvals are underway. Profectus has demonstrated stable portfolio expansion, building its access under management to INR 3,468 crores as of March 2025, with presence across 7 states through 28 branch network and over 800 member team, all while maintaining a gross NPA of 1.6% and a net NPA of 1.1%. Integrating Profectus, school finance expertise, unlocks INR 2,000 crores growth potential and strengthens our secured asset mix, accelerating our journey to become India's largest MSME lender. This acquisition will accelerate our AUM towards our medium-term goal of reaching INR 20,000 crores. On capital raise, as Shachin mentioned, we successfully completed INR 381 crores of rights issue and are in process of INR 911 crores of preferential issue this quarter. This capital combined has improved our capital adequacy ratios to 22.4%, which also ensures we can continue expanding without compromising quality. Now on business update. Our AUM closed at INR 12,081 crores, up 31% year-on-year. Disbursements for the quarter were INR 1,599 crores compared to INR 1,146 crores in Q1 FY '25. The sequential decline from INR 2,436 crores in Q4 FY '25 was by design and in line with our budgets. Our emerging market business expanded to 286 operational branches by June, with a clear path for more expansion by September 2025. These branches are now showing improving vintage profitability validating our expansion strategy. In embedded finance, we crossed the milestone of INR 1,000 crore AUM this quarter. We disbursed INR 582 crores through MyShubhLife platform with a monthly disbursal run rate of between INR 100 crores to INR 150 crores, reinforcing our ability to embedded credit at scale with digital ecosystems. Portfolio quality state impact with GNPA at 2.5% and net NPA at 1.7%, well within our internal estimates. Our unsecured portfolio, though has witnessed some stress on account of overleveraging, as mentioned earlier, we have tightened our underwriting and have curtained disbursements in last 2 quarters, INR 186 crores in quarter 1 FY '26 versus peak INR 623 crores in quarter 2 FY '25. Our total off-book assets stood at 42% of total AUM, supported by 17 co-lending partners. Total debt at INR 7,586 crores as of June 30 and with over 50 lenders, we have a very diversified liability profile. Our long-term rating is A+ rating watch with positive implications as assigned by India Ratings. On financial performance, our total income grew 40% year-on-year to INR 421.8 crores. Our net total income stood at INR 216.5 crores, a 31% year-on-year growth. Our PAT came at INR 34.1 crores for the quarter, up by 12% year-on-year. Our credit cost was INR 47.7 crores, representing a 44% year-on-year increase but lower than our quarter 4 FY '25, which was INR 54.3 crores. ROA for our quarter 1 FY '26, if we exclude the branch expansion impact, would be at 2.3%, which is in line with our internal estimates. Looking ahead, we expect disbursement momentum to pick up from quarter 2 as seasonal effects subside. The emerging market network is near full rollout and our embedded finance funnels continue to expand. The industry is currently facing higher stress in certain unsecured segments, but our exposure there is limited and ring-fenced. Approximately 70% of our book is secured and our underwriting filters are sharper than ever. We remain committed to building UGRO into India's largest small financing institution. Before we end, I would like to take your attention to Slide 7 and Slide 8 of our investor deck, which we have uploaded. This is especially inserted this time to highlight the traction which we have achieved in our focus emerging market channels. Out of the total 286 branches, which we have currently, 150 of them are greater than 18 months old and 136 are less than 18 months old. And their traction overall from vintage perspective, we have explained that in the slide. So our AUM per branch for branches, which have attained greater than 18 months, is already touching INR 15.4 crores. For less than 18 months, it is currently at INR 3.4 crores. From business perspective, the average ticket size is close to INR 20 lakhs for a loan with an average yield of about 17.8% to 18%. Our GNPA for vintage branches is, at this point in time, 2.4%, well within the estimates and for newer branches at this -- it is 0.2%. Similarly, for credit cost, for greater than 18 months, the average credit cost is about 1%; for newer branches, at this point in time, it is 0.3%. So out of total 286 branches, 121 branches have already broken even, and others in next 12 to 15 months are on the path of breaking even. We had also given a steady state estimate of once a branch becomes vintage, what is the kind of productivity we can expect. And broadly, our internal estimates is that a branch should be able to deliver INR 1 crore to INR 1.1 crores of disbursal per month once it becomes stabilized with a ticket size of INR 20 lakhs with a yield of 18%. This -- in emerging markets, we only focus on secured business. We don't do any unsecured business at all. The distribution of AUM and branches is also very well diversified with 48% of branches in North, 25% in West and 27% in South. This is what I thought I should highlight and now we are open to questions.

[Operator Instructions] We take the first question from the line of Anil Tulsiram from Bestpals Research Advisory.

My first few questions are on embedded finance. I want to understand about the customer profile of this embedded finance product whether it is existing to credit or new to credit? Secondly, is it a monthly EMI product or what? Third, in case of default, do we had any infra to collect the sum? So those are the few questions.

So on embedded finance, the way we have built it is to get embedded in an existing payment ecosystem like a PhonePe or a BharatPe and through that, get access of the transaction history of the -- so typical target segment here is our small retailers or medium-sized retailers who use a payment ecosystems' QR code for their daily transactions. And the way we have built our business rule engine is to read the transaction history and compile it along with the bureau and other rules, statistical rules which we have made around. Typically, this is a daily repayment product and not a monthly EMI product with an average ticket size of less than INR 2 lakhs.

Got it. Sir, I mean, in case of default, do we do physical collections or it's entirely digital collection?

So the players in the ecosystem now are also realizing that it is a very important component of their business and they have started investing in very large field forces, both for distribution and collections. So in case of a default, there is a call center and a field force, which is there to collect. In any case, the way we have designed this portfolio, we keep about 10% of the loans disbursed as a reserve pool for provision. So far, the portfolio -- this is our 11th month, the portfolio performance has been very good and the credit costs, which we are seeing are about 3%.

Anujji, if I may add, the way you should think about it, among the top 5 payment platforms in India, our top 4, Google Pay, we don't pay a partner. But between PhonePe, BharatPe, Paytm and Google Pay, there is roughly around INR 30 crore merchant footprint we have. Now that INR 30 crore merchant footprint is not exclusive to each one of them. And obviously, each one of them uses each other's payment platform as well. But the way the product is designed. So one, they are -- our technology embeds into the payment platform. They are the first point of origination and they are also our collection agents. The way this works is that think of this that there is a shopkeeper, which has a daily transaction flow of roughly around INR 10,000. So what we call daily [Foreign Language] collection [Foreign Language]. When our machine runs the program, it looks at the daily transaction flow, then it pings the bureau, look at their historical payment profile. And then basis that it qualifies the customer for a certain amount of loan, but it ensures that the loan EMI should not be more than 20% of his daily collections. So if his daily collection is INR 10,000, the EMI should not be more than INR 2,000. And then you collect automatically from the system from his daily transaction flow. So that INR 2,000 on a daily basis come back to us. So if the loan is -- INR 2 lakh loan is for a 1-year period, the average loan book pay off in 6 months' time, and that's why the risk associated that is much lesser. Second is that, so as Anuj said that these products, while there is -- of the total gross yield, there is a distribution fee, which goes to a PhonePe. There is a collection process fee go to them. But of the total yield, we reserve around 8% to 10% of the yield as a provision coverage. We are seeing around 2.5% of credit cost. But net, we get around 16.5% of all the fully provided credit cost OpEx technology. That's why this has potential to deliver a 5% of ROA. Only thing is that you cannot make this as the only business, and that's why it's a percentage of the total portfolio. And as in my opening remarks, I said that our EM platform and this has a massive ROE kicker possibility.

Got it, sir. And what is the target mix of embedded finance in the next 2, 3 years?

We would like to be around 10% to 12% of the total AUM.

[Operator Instructions] We take the next question from the line of Amit Agarwal from WaterEquity.

If I've understood your opening remarks, you mentioned that around 70% of our book is secured. So what is the average loan to value for such properties or at origination or what is the general cushion you keep on such secured transactions? And what are the type of properties you generally consider for lending?

So at a portfolio level, our loan-to-value would be around 55%, while for prime secured loans, we go up to 80%. But at a portfolio level, this would be about 55%. And we do self-occupied residential property, commercial property, industrial property.

Amit, good to see you on the call. Some of our lenders joining the call is very encouraging. So of this collateral, which Anuj explained, if you look at our Slide 6, it will give you a clear picture of our asset mix and the type of the collateral. So on prime, we take pure physical collateral, residential, commercial, industrial. In micro, predominantly it's commercial plus residential. In machinery, it is machine. In our digital alliance and partnership, it is the first loss cover and high provision coverage ratio.

Okay, okay, sir. On Slide 6, you are saying that FLDG from partner is also a part of a sector for you?

It's kind of a collateral, yes.

Okay. And if I can just ask one more question because this pertains to -- it may affect you and you have given a separate slide on the new co-lending guidelines. So do you think -- so one can be, do you think, as a positive or a negative at a general level? And how much do you see effect on your company going forward from January? So one can be industry level your comments and one the company specifically, if possible.

So there are 2 parts of it. It's half glass full, half empty. I think so -- well, let me talk about the positive first. So one biggest positive is that now co-lending, all form of co-lending in India have now come under regulatory umbrella. So as you know, NBFC to NBFC co-lending was not within any regulatory framework. So now the co-lending has been -- coverage has been given to -- 2 regulatory entities can do co-lending and that -- so everything has come under that umbrella. Second big positive is that RBI for the first time has allowed first loss cover to be given to the bank. Now some people think that, how can that be good? I'll tell you why it is good. So today, if a State Bank of India or a large NBFC is a co-lending partner. They have to carry the risk of the total origination co-lending which they do. Now because of that, they charge a certain amount, they presume certain amount of risk and they charge a risk premium, and that becomes our net rate. Now we report everything on an AUM basis. We are comfortable with our credit cost. If you go to a bank and say that now if suppose in our secured business, our expected credit cost is around 1%, and if we give them a 2% or 3% of a first loss cover, they would -- volume would increase multiple fold. So that is a big positive. And because of that of FLDG, our net cost in co-lending would come down. And also, obviously, it is a business without capital. So the advantage with larger players, the triple AAAs and parent-owned entities have is of leverage. So second largest NBFC or third largest NBFC in India is levered 8x. Now we get leverage of only 4x, but now this will give us the capability to actually lever us very similar without actually putting capital behind it. So I think it's a very ROE positive move. And last but not least, not relevant to us, that the co-lending was only applicable to priority sector lending. Now it is open for all. So actually, any class of assets can be done, while our assets are only priority sector. Now the challenges. So I think so we have -- industry has very strongly represented to the regulators. They've heard our voices, and they have made adjustment from draft to the new guideline. My view is that from January to 2 quarters, there would be destruction to reset the new process. The biggest challenges would be that now we have to select our co-lending partner at the point of origination itself. I don't think so the technology is a challenge because in most -- at least in our case, with most of the banks, we have fully integrated both in simultaneous lending and post-disbursement transfer of loan lending. So that is not a challenge. I think so that would be fine. But at the point of -- today, when we do co-lending, we don't look at which bank the loan would qualify. We disburse from our balance sheet and then bank -- we test which loan case would fit to which bank and it goes there and then they test it on their policy and process and then it gets transferred to that. Now our distribution architecture has to change that at the point of origination, we have to choose that where this loan would get qualified, and we would need the corresponding bank to also say, yes, and the loan documentation will be accordingly get triggered, and banks then would still have the time to take 15 days to the loan to get transferred to them. So it is a little bit of tweak from our original process but it is not insurmountable. So on the balance of capacity of volume increase with the FLDG and the process, market expanding in a big way, I think so with a little bit of 2 quarter of adjustment to the new, the overall industry volume and our volume should multiply from where we are today.

We take the next question from the line of Rishi from [indiscernible] Ventures.

Can you hear me?

We can.

Congratulations to Mr. Anuj for his elevation as the CEO. Mr. Nath, thank you again for coming on national television to explain the acquisition of Profectus. I just have a quick question on the -- trying to understand the management's thinking about inorganic growth. So I understand that it's going to be a secured mix that's going to improve the portfolio mix and probably bring down the cost of borrowing. But the point that I would like to understand is, it seems like a tactical solution to hit the ROA that we initially wanted to hit. So how does the management see further or future inorganic growth? Do you think you will always be open to such growth opportunities? Or is this a onetime thing and you're now just going to focus on the business as usual?

Yes, very good question. Thanks for this. So look, we have never focused on any inorganic ever. We have always focused on organic business and that continues to be our philosophy. I don't think so that going forward till the time we are fairly valued, we would have the availability of capital to look at something. While everything which is there available, we obviously evaluate it, but there's hardly any fit which we find. So my reasonable estimate is that we would not be doing more acquisition unless something very attractive comes that -- which can improve our financials dramatically. On your question to why we did this and whether it is tactical or is a long-term strategy, to be fair, it is more tactical than a long-term strategy. There was a little piece of long-term embedded into that, but it was more tactical for us. We -- in our steady-state basis, our journey from our current ROA to 4% ROA has a time period. And that is largely a function of our emerging market business and their branches getting to a certain level of volume. Our portfolio yield increasing because of that volume and then that's hitting an ROA. When -- we were supposed to raise the capital because we have to suppose to maintain a certain amount of capital adequacy. Having raised that capital, whether to deploy that capital over a period of sometime and build portfolio or whether if there is asset available which can actually improve our ROA in shorter period, we choose that. It doesn't impact our capital adequacy. Our capital remains the same because we have acquired it more or less near book value. And we felt that it improves our asset mix. It gives us a line of business, which is school financing. And obviously, it has multiple other things, like portfolio quality, asset mix, so on and so forth. One way to look at it is that we were rated India Rating A+. When any acquisition happened, ratings goes into a watch. India Rating when they looked at the numbers, the watch from a stable outlook, we became positive outlook. What does it mean is that what the acquisition probably from a rating perspective is a positive because they saw that our financials number, portfolio quality would solidify. One of the biggest input to our ROA journey, which is less in our control is our cost of borrowing. Our cost of borrowing vis-à-vis our peer set has remained elevated. It's roughly around 150 to 200 basis points more than most of our peer set. Larger peer set obviously is much higher. But even if you look at A+ and AA- rated entity, our cost of borrowing is definitely high. It has remained high because we have been a very high growth company, which means on a month-on-month, our borrowing profile, we borrow a lot and when you borrow a lot, obviously, you have to pay a price for that. So this acquisition also helps us in that because we have achieved our numbers purely from an AUM perspective, profitability perspective. Now, we have an advantage of to play how much more organic disbursement we can do. So we will play of growth versus bottom line and reducing our cost of borrowing. So on these 3 spectrum, I think so this qualifies well, and that's why we did this.

Okay. I mean because, I mean, to me, personally, I was thinking that such kind of an acquisition will be done by companies who are desperately trying to meet the Street estimates. And given that you are not valued anywhere close to our actual worth is, I thought why do it to satisfy, actually nobody who is watching us so closely to either bring the price down or up based on the acquisition. And to be frank, I mean I would share the same comment that you mentioned as well.

Sorry to intervene with you. Obviously, it's very close to my heart. So look, beyond a point of time, it's -- how the Street looks at it and whatever price is under our limited control, right? What our job is, what we have entrusted is that what we think, how do we build, we explain it well to people. Sometimes people accept it, sometimes don't accept it. We are confident that what we are building would get value. But in what period of time, we don't control. Whatever action we take, we take it purely fundamentally of whether it is good for business or not. One of the way the Street would value us over a long period of time is when we improve our operating metrics, right? So the constraining factors are constraining factor. We don't have a parent and that's why we don't have the same cost of borrowing which large parent NBFCs have. We have a cap on leverage because that's the way the lending market works. Within that constraining -- 2 constraining factors, we have to improve our portfolio yield. We have to control our credit cost and we have to demonstrate consistent growth. And we felt that Profectus acquisition fit on those criteria, and that's why we did that.

One final question, if I may. I mean could you just talk very briefly about the exits of Mr. Amit and Kishore, if you would?

Yes, of course, why not. Look, UGRO is a growing organization. And over a period of time, I always go back in the history, if you look at the evolution, even banks like HDFC Bank and ICICI Bank, in a growing organization, people definitely come, commit themselves to build certain things which they are interested with. And when there is -- they see that their role is over and they are getting a better opportunity of what fits to their profile, obviously, they will choose that. Now we, as management as a company, actually feel that it is important that people come here, stay for a reasonable period of time, if possible, stay for life over here, but if they get the opportunity, then they should choose those opportunities and go for that. What is important for the company that we should have talent embedded which can step up and fill those vacancies without disruption to that business. Amit from here, if you look at -- we're thankful to him. When he joined UGRO, we were roughly around at INR 1,500 crore of asset organization, and we delivered almost INR 12,000-odd crore, but he felt that his skill set, and because he came from a background where in large-scale intermediated distribution business was his core skill set. And he felt that an opportunity of similar place with a much larger scale for his residual professional career is in interest, and we said that. But what he has put up here and what kind of talent he has built, organization will continue to do well. So it is in both interest. On CFO, again, it's a personal choice. Obviously, a CFO role in UGRO is a difficult role. If you look at the banking financial services industry, majority of the easy lending from main line banks is to entities which either have a parent or have a vintage. And sometimes the -- UGRO has a very deep diversified lending base. So you have to not only interact with the global DFI, you have to interact with private sector banks, public sector banks, public market. So it's a hard job. And sometimes people make personal choices that for the same time and in fact, where they can deliver more, but there also we had very capable sufficient preplan. Shilpa was already appointed as Deputy CFO, when Kishore shown his desire to go to other organization, she was already immediately elevated as the CFO position.

If I may, can I just ask one final question, and I'll jump back into the queue. So is the warrant that are possibly going to expire out of the money, can I confirm that the actual -- given that they are the same for the CCD buyers as well. Can I confirm that the price for them is the INR 185 plus the INR 62 that they had prepaid 18 months back. So overall, they are doing it at INR 247 minus the 12% that has been related?

Sorry, so I couldn't understand the question, but I tell you what the -- so the warrants were issued at a price of INR 264, right? And all the investors had paid 25% of that as their initial contribution. Now the warrants are deep out of money. When the company needed capital, we had a choice to go and raise the capital either from new investors or raise the capital from the same set of people who had put money through the warrants. Now we felt, because obviously, when you need the capital, the -- given the public market is not very widely open, if you go to private investors, the time it would take for private investors to put capital can sometimes be very elongated. And that's why we felt that this -- the good choice would be to go to existing investors who have put money on the warrants and request them that whether they can put capital on the current traded price. The way we've structured it, we said that you come at INR 185, which was that time the SEBI preferential pricing formula. We paid a coupon, which was 12.5% upfront coupon, and we linked the second coupon to the exercise of the warrant. So if for some reason, share price in the intervening period moves and the same investors want to exercise the warrants, then they don't get it. They get only 12.5%. So that's why the effective price for them becomes INR 162. So from a company perspective, what we said that given that if we were to forfeit the 25% and if we have to pay 25% at a balance sheet level, it is a 0 impact on us and the share -- these investors are getting new shares at INR 185, which otherwise any other investor would have got. In order to be fair to the balance public shareholder and because there was a dilution happening at a lower base, we calculated the total dilution. That was an extra 4% dilution between INR 265 and INR 185, and that's why we did a right issue of the matching 4%, which came out to be INR 400 crore. We took the effective price of INR 162, which was INR 185 minus 12.5% and made a right offering at INR 162. And that's why of that -- some of the existing investors, IFU, which is Denmark government, committed INR 150-odd crore. Some of the other investors put money in the rights. And also, contrary to our expectation, we saw quite a bit of public participation and that's why rights went to up to INR 380-odd crores. We could have done a smaller rights issue, but we did matching right issue to the dilution. So there was a 4% extra dilution happening between INR 265 to INR 185 and we made the size of the rights issue exactly this. So it was very well debated both at our Board level and as well as external advice, and that's why to be fair to every public shareholder, this is what we did.

So my question was basically the INR 162 plus the INR 62 that they've already paid. So the effective cost is INR 224. If they don't exercise the warrant, they lose the 25%.