| Ugro Capital Limited | ||||||||
| Rating outlook revised to 'Positive’; Ratings Reaffirmed; 'CRISIL A-/Positive' assigned to Tier II Bond | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities and debt instruments of Ugro Capital Limited (UGRO) to ‘Positive’ from ‘Stable’ while reaffirming the ratings at ‘CRISIL A-/CRISIL PPMLD A-‘. CRISIL Ratings has also assigned its ‘CRISIL A-/Positive’ rating to Rs.200 crore tier II bond. The rating on the commercial paper has been reaffirmed at ‘CRISIL A1’.
The revision in outlook is driven by the expectation of continued improvement in the earnings profile and steady scale-up of the portfolio. The expected capital infusion of Rs 350-400 crore will support the planned growth. The ratings also continue to reflect the company’s diversified and customised product offerings across the micro, small and medium enterprises (MSME) segment. These strengths are partially offset by the company’s limited track-record of operations and high operating costs.
UGRO’s pre provisioning operating profit has improved to 2.7% on average managed assets for the first nine months of fiscal 2023 from 2.0% and 2.1% in fiscals 2022 and 2021, respectively, supported by high net interest margin and assets under management (AUM) growth. UGRO’s return on managed assets (ROMA) improved to 0.8% for the first nine months of fiscal 2023 from 0.6% for fiscal 2022 (1.9% for fiscal 2021). Excluding the impact of deferred tax write offs of Rs 11.4 crore, ROMA would be 1.1% for the first nine months of fiscal 2023. Profitability is expected to improve further with scale based operating efficiency kicking in.
The company’s AUM has grown 1.7 times to Rs 5095 crore as on December 31, 2022, from Rs 2696 crore as on March 31, 2022 (Rs 1317 crore a year earlier). Out of the total AUM, ~28% was co-lending book (~8% as on March 31, 2022). The growth has been driven by deepening its presence in existing geographies and increasing co-lending partnerships with large banks.
UGRO’s tangible networth stood at Rs 922 crore with adjusted gearing of 3.5 times as on December 31, 2022 (Rs 935 crore and 2.2 times, respectively, as on March 31, 2022). The company is in the final stages of raising additional capital of Rs 350 - 400 crore, with the infusion expected in Q1FY24. |
CRISIL Ratings has analysed the standalone business and financial risk profiles of UGRO. |
Key Rating Drivers & Detailed Description Strengths: Comfortable capitalisation Capitalisation metrics remain comfortable, supported by the large initial capital infusion. The company has, since 2018, raised a total equity capital of ~Rs 900 crore, from investors such as Newquest Asia Investments, Clearsky Investment holdings (ADV Partners), Samena Capital and DBZ Cyprus (PAG), most of which was raised upfront, before the commencement of operations in 2019.
As on December 31, 2022, tangible net worth of the company stood at Rs 922 crore with an adjusted gearing of 3.5 times as against Rs 935 crore and 2.2 times, respectively, as on March 31, 2022. The company is expected to follow an asset light model over time with a significant proportion of the AUM being off-balance sheet in the form of co-lending or direct assignment transactions, which should reduce the capital requirement for the business. Co-lending as a proportion of AUM has increased to 28% as on December 31, 2022 from 8% as on March 31, 2022. Further, the company is expected to raise ~Rs 350-400 crore of capital in the near term, which should support the capitalisation for the planned growth.
While gearing is expected to increase from current levels, on-balance sheet gearing is expected to remain below 4.5 times on a steady-state basis.
Diversified product offerings across the MSME segment with presence across multiple geographies The company started its operations in January 2019 with secured and unsecured business loans for the MSME segment and has over time, diversified into other product offerings catering to the overall MSME ecosystem such as supply chain financing and machinery loans.
The company operates through three sourcing channels i.e. branch led for secured and unsecured loans (66% of AUM as on December 31, 2022), ecosystem led for supply chain financing and machinery financing (20%) and partnership and alliance which is for business loans backed by third party guarantee (14%). The company offers financing solutions to MSME borrowers to cater to their various needs. Additionally, it has independent verticals and product teams to manage the different product lines. The company had, as on December 31, 2022, presence across ~32 states with 98 branches.
The company has also partnered with new age technology companies for the sourcing of loans via a co-lending model, wherein it does not have a physical presence. For machinery loans, the company has built partnerships with 40+ original equipment manufacturers (OEMs) and for supply chain finance, it has built relationships with 75+ anchors as on December 31, 2022. UGRO has also customised its product offerings to meet the demands of its borrower segments and has built in a high degree of digitisation into its business processes.
Weakness: Modest, albeit improving earnings profile with operating costs remaining high The earnings profile of UGRO, while improving, is constrained by high operating costs. This is due to upfronted operating expenditure for branch infrastructure, human capital and technology infrastructure build-up. Consequently, operating expenses as a percentage of average managed assets remained high at 5.2% for the first nine months of fiscal 2023 as against 4.9% and 5.2% for fiscals 2022 and 2021, respectively.
Nevertheless, pre provisioning operating profit improved year-on-year, to Rs 91 crore (2.7% of average managed assets) for the first nine months of fiscal 2023 from Rs 50 crore (2.0%) and Rs 32 crore (2.1%) in fiscals 2022 and 2021, respectively, supported by high net interest margin and AUM growth.
Net profit although increasing, has been volatile since inception due to deferred tax adjustments. The profitability of the company till fiscal 2021 included benefit derived from deferred tax created on the brought forward business losses of Asia Pragati. From fiscal 2022, the company did not benefit from such tax write-backs and therefore there was a dip in profitability from the levels of fiscal 2021.
The company has written off deferred tax assets of Rs 11.4 crore in the first nine months of fiscal 2023, as these have lapsed. Nevertheless, UGRO’s ROMA improved to 0.8% for the first nine months of fiscal 2023 from 0.6% for fiscal 2022 (1.9% for fiscal 2022). Excluding the impact of these deferred tax write offs, ROMA would be 1.1% for the first nine months of fiscal 2023.
Credit costs have been remained range bound at 1.2-1.3% between fiscal 2021 and the first nine months of fiscal 2023.
Going forward, with the scale-up in operations, operating efficiencies are expected to kick in and further improve pre-provisioning operating profits.
Limited track-record of operations UGRO commenced its lending operations in January 2019. The company’s AUM grew substantially to Rs 5095 crore as on December 31, 2022, from Rs 2969 crore and Rs 1317 crore as on March 31, 2022, and March 31, 2021, respectively. Given the rapid scale-up in loan book in recent years and the limited track record, portfolio seasoning remains critical, with ~40% of AUM being disbursed in the past nine months.
UGRO’s gross stage III assets stood at Rs ~85.8 crore (2.5% of gross advances) as on December 31, 2022, as against Rs 56.4 crore (2.3%) as on March 31, 2022, and Rs 36.5 crore (2.8%) as on March 31, 2021. One year lagged gross stage III was 3.7% as on December 31, 2022. Although marginally increased, the asset quality metrics remain moderate.
The company has restructured assets of Rs 102 crore (2.9% of gross advances), of which Rs 31.6 crore (1%) are classified as gross stage III assets; the performance of this portfolio will be a key monitorable.
The company has made significant investments in systems and processes for underwriting and risk management practices with a strong focus on technology enabled solutions. Additionally, the company has a well-diversified portfolio (with no state contributing more than 16% of the portfolio) and presence across multiple MSME segments.
The ability of the company to manage collections and overall asset quality metrics as the portfolio scales up will remain a key monitorable. |
Liquidity: Adequate Asset liability maturity profile as on February 28, 2023, had positive cumulative mismatches in all the buckets upto one year. As on February 28, 2023, the company had liquidity of Rs 302.45 crore with Rs 224.4 crore in the form of cash and equivalents, Rs 61.8 crore of liquid investments and Rs 16.25 crore of unutilised bank lines, as against total debt repayment Rs 300 crore till April 30, 2023. |
Outlook: Positive UGRO is expected to see an improvement in profitability metrics, supported by steady scale up in operations and comfortable capitalisation levels. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Company UGRO is a systemically important non-banking finance company (NBFC) engaged in financing secured and unsecured loans to MSMEs. It was incorporated in 1993 as Chokhani Securities Ltd and was acquired and renamed as UGRO Capital Ltd in 2018 by Mr Shachindra Nath (Executive Chairman and Managing Director) who has over two decades of experience in the financial services industry. The company is publicly listed on the Bombay Stock Exchange since 1995 and got listed on the National Stock Exchange in August 2021. Mr. Nath is supported by seasoned key management personnel each having expertise of over a decade in their respective functional domains.
The company has raised capital from marquee private equity investors namely Newquest Asia Investments (TPG), Clearsky Investment holdings (ADV), Samena and DBZ Cyprus (PAG) who invested in the initial phase of UGRO’s evolution along with Mr Shachindra Nath. The four investors together hold 65% as on December 31, 2022.
The company commenced operations in January 2019 and had an AUM of Rs 5095 crore as on December 31, 2022, of which Rs 3320 crore was on-book. The company has diversified presence across 16 states (99%) with ~98 branches as on December 31,2022, and has further entered another 16 states through limited presence (total exposure of ~1%). None of the states are contributing more than 16% of the AUM as on December 31, 2022.
The company reported a profit after tax of Rs 26 crore on a total income (net of interest expense) of Rs 264 crore for the nine months ended December 31, 2022 as against Rs 15 crore and Rs 175 crore, respectively, for fiscal 2022. |
Key Financial Indicators
*Gearing is adjusted for the intangible assets on the balance sheet and Direct Assignments. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Yet to be issued |
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This Annexure has been updated on 17-Mar-2023 in line with the lender-wise facility details as on 26-May-2022 received from the rated entity
Criteria Details
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