Ugro Capital – Opportunity To Invest in a Fintech-like Company Below Book Value

Firstly, I want to thank the Vpers for building a formidable thread full of varied opinions. I have read it from top to bottom and also gone over the recent annual reports. I think I am clear on the Cole ding model and the hunger in the SME sector for loans.

I have some exposure to SQ, SOFI and UPST. I use AI/ML in my job and also teach it regularly. here are some of my comments/questions to the learned folks and would love to hear back.

1. Basically this is sub prime lending. so is UPST, sub prime lending is prone to fat tail black Swan risks. In the case of UGRO, one can envision scenarios, recessionary scenarios which may precipitate a large set of simultaneous defaults across multiple seemingly unrelated sectors. AI ML models and pretty much any academic data analysis will be blind to fat tail events. UGRO says their model has passed two covid waves, which is some reassurance, but that is not yet the spectrum of all market cycles. UPST ticker is down considerably. Basically, in the current high interest env, banks are choosing not to Co-lend with UPST.
   THIS TAIL RISK WILL NEVER GO AWAY WITH UGRO.

2. Scalability – at low AUM base, company can be very choosy and maintain asset quality. However as AUM grows, company will be very tempted to relax lending criteria which may lead to higher NPA. Only time will tell if they can build up AUM while preserving asset quality. The underlying requirement is that there are enough good quality SMEs out there that have to be tapped. Again, only time will tell.

3. COMPETITION. The kind of data driven models UGRO AR talks about doesn’t seem too hard to replicate by other NBFCs or banks or similar startups. Is the TAM large enuf for multiple players to has ly play in? Cross selling or cannibalism by Cole ding partners was also brought up, but only be an issue down the line when the huge pool is divvied up.

On the positive side, if this happens to be the decade of the blossoming of the Indian SMEs and if UGRO scoring system is truly working, a multibagger s enario will result. As the tail wind is decadal, a staggered investment with possible downsizing may be the way to go.

DISCLOSURE – Studying, not taken a stand/position yet.
I am a bit of a dunce,rants are not recommendations! Do your own DD