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

It is clearly a promotional segment, so I would take it as such. Mr. Nath has never shied away from talking about Ugro being undervalued. I am not a fan of managements talking about price but for a fast growing company like Ugro which is guzzling capital, price is a very important determinant of performance. Higher the price, lower the dilution and better the terms of growth for shareholders. So I can sympathize with his yearning for higher multiples. Equally, I would understand people being skeptical about a management that focuses on stock price, I have been the same with other company managements, often. Even so, there was no “overt selling” of Ugro the stock as far as I could see.

Keeping aside the promotional nature of the segment, a few key snippets from the business POV that I took away:

• His constant re-iteration that the the themes of – 1. MSME sector (with around 20-25Cr voters) 2. Cash flow based underwriting and 3. Co-lending as a model are all going to find favour with Government and RBI regulations because they are collectively in the interests of higher credit penetration and growth for the country

• He gave some indications about expected disbursal rates in FY24, FY25 and FY26 (I don’t think these can be treated as guidance at all, but might help us in understanding Ugro’s internal directional thoughts). Basis that it would seem to be that FY exit AUMs for Ugro could look something like this:
  FY24: 10k Cr
  FY25: 17k Cr
  FY26: 26k Cr

I have a suspicion that they may be able to grow faster in FY24 and FY25, maybe 11k Cr and 18k Cr of AUM respectively. If co-lending continues to work well, then there is a chance that co-lending as a % of AUM may even exceed 50% (Already at 40%). That would further strengthen ROEs.

This is clearly a business which has figured out the growth side of the equation via

1. large capital at its disposal (large equity base, access to PSB funds via co-lending and fast software based underwriting ) and
2. A large runway (huge under-penetration in MSME lending)

What it needs to establish is the quality and robustness of its underwriting across a cycle. If it is able to establish that, then this business has the potential to become one of the most exciting lending businesses in India. We should all be watching their NPA nos. and collection data very closely.

A couple of data points I’d like the company to start disclosing from next Q:

• ALM details
• GroX traction: Quarterly disbursement and customer counts (GroX is another very exciting and high potential product which moves the needle on the ground for MSMEs)

Disc: Invested and biased. Lending businesses are leveraged and thus quite risky. Please do your due diligence and maybe even err on the side of caution while evaluating lending businesses.