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

During the Q4 FY24 earnings call, UGRO Capital discussed its experience and strategy regarding supply chain financing:

1. Focus on Last-Mile Financing: UGRO emphasized its strength in financing the last leg of the supply chain, particularly from distributors to retailers. This segment is well-suited to UGRO’s data-driven and digital underwriting capabilities.
2. Challenges with Anchor Financing: The company found challenges in providing financing for larger, anchor-led supply chains, which are dominated by larger NBFCs and banks. UGRO’s higher cost of funds and the competitive nature of these segments led to some negative selection and higher NPAs.
3. Strategic Shift: Due to the complexities and risks associated with financing larger entities, UGRO decided to focus on the more granular last-mile retailer financing. This segment offers better yields and aligns with UGRO’s digital and physical infrastructure strengths. The company plans to gradually reduce exposure to the higher-risk segments of the supply chain while building out its retailer finance portfolio.
4. Risk Management: UGRO acknowledged that the higher NPAs in its supply chain financing were due to the inclusion of lower-rated customers. They plan to manage this by focusing on segments that align better with their core competencies and by increasing the granularity of their portfolio.

Anchor-Led Supply Chain Financing:

What It Means:

• Anchor: In supply chain financing, an anchor refers to a large, reputable company (usually a big manufacturer or retailer) that serves as the central point in the supply chain. Smaller suppliers or distributors work with or supply goods to this anchor company.
• Anchor-Led Financing: This type of financing involves financial institutions extending credit to the suppliers or distributors based on their relationship with the anchor company. The credit is often secured against the invoices or purchase orders issued by the anchor.

Why It’s Competitive:

1. Lower Risk Profile: Anchors are typically large, creditworthy entities. Financial institutions perceive lending against their receivables as lower risk, making it highly attractive.
2. Lower Margins: Due to the lower perceived risk, the interest rates (or yields) on these loans are generally lower. Large banks and established NBFCs (Non-Banking Financial Companies) dominate this space as they can afford the lower margins due to their lower cost of funds.
3. Volume and Scale: Large institutions are often better equipped to handle the high volumes and operational requirements of anchor-led supply chain financing, giving them a competitive edge.

UGRO’s Approach: UGRO found that competing in this space was challenging due to its relatively higher cost of funds and the pressure to compete on price (interest rates). Consequently, they faced negative selection, where they ended up financing lower-rated companies willing to accept higher rates, leading to higher NPAs.

In response, UGRO shifted its focus towards last-mile financing, where it could leverage its data-driven approach and physical distribution capabilities, thus avoiding direct competition with larger, more established financial institutions in the anchor-led space.