Detailed Rationale

Crisil Ratings has placed its ratings on the bank facilities and long-term debt instruments of Ugro Capital Limited (‘UGRO’) on ‘Rating Watch with Developing Implications’. Crisil Ratings has withdrawn its rating on Rs.800 crore of proposed bank loan facilities at the company’s request. This is in line with Crisil Ratings’ policy on withdrawal of bank loan ratings.

 

The rating action follows UGRO’s exchange announcement dated June 17,2025, on the proposed acquisition of Profectus Capital Private Limited (‘Profectus’) by way of purchasing 100% of the shares of the said company for an aggregate purchase consideration of Rs 1398.6 crores payable in cash in a single tranche. In this regard, UGRO has executed the Share Purchase Agreement with Actis, who is currently the 100% shareholder of Profectus.

 

The scheme of arrangement has been approved by the board of directors of both the entities. The merger is subject to approvals from shareholders and the Reserve Bank of India. UGRO is raising Rs 911 crore via compulsory convertible debentures (CCD) in Q2FY26 for acquiring 100% shares of Profectus. Further, the company has also closed a rights issue of Rs 381 crore in Q1FY26 to fund this transaction.

 

The merger is expected to expand UGRO’s existing presence in its key product segments which is prime loan against property (Prime LAP) and machinery finance. Further, this acquisition will also improve product diversification for UGRO with the addition of Profectus’s school funding portfolio. The supply chain finance and non-bank financing portfolios will be on a run down. The merged entity will have an increased share of secured business alongside technological, revenue and cost synergies with combined assets under management (AUM) of over Rs 15,000 crore.

 

The merged entity will also benefit from Profectus’s healthy asset quality across its products and a strong distribution network in Tier I and Tier II cities.  The earnings trajectory of the combined entity will need to be seen in the context of the timeline of operational synergies derived from the merger. For fiscal 2025, return on managed assets (ROMA) stood at 1.2% for UGRO and at 0.7% for Profectus. Hence ability of the management to manage cost, post-acquisition of a lower yielding secured product will be a key monitorable.

 

The merger is expected to be completed within 6 months post receipt of RBI approval, and will be effective April 01, 2025.

 

The rating factors in the company’s demonstrated ability to scale up its franchise business on the back of its wide operating network, as well as comfortable capitalisation levels and diversification in resource profile. These strengths are offset by its improving, yet modest, earnings profile and monitorable asset quality trajectory.

 

UGRO has scaled up its AUM to Rs 12,003 crore as on March 31, 2025 from Rs 9,047 crore as on March 31, 2024, supported by healthy traction in the micro, small and medium enterprise (MSME) financing segment with growing working capital and ecosystem financing needs and UGRO’s widespread operating network to tap this. The growth has been driven by deepening presence in its existing network while also expanding selectively. Furthermore, UGRO also receives interest from banks for priority sector loans, for which it has entered co-lending/co-origination arrangements with large banks. These form part of UGRO’s off-book portfolio, which comprise 43% of AUM as on March 31, 2025, against 40% as on March 31, 2023.

 

UGRO has comfortable capitalisation levels with reported networth of Rs 2,046 crore as on March 31, 2025 (Rs 1,438 crore as on March 31, 2024), supported by capital infusion of Rs 1,750 crore since inception which includes Rs 510 crore infused in the first quarter of fiscal 2025. Furthermore, the entity is raising ~Rs 1,296 crore in form of equity and CCD in H1FY26. UGRO has been able to improve its funding diversification with increased funding from public sector banks, development financial institutions and financial institutions. However, cost of funds remains relatively higher than its peers. Crisil Ratings believes comfortable capitalisation levels and diversified resource raising ability will support UGRO in meeting its growth objectives going forward.

 

UGRO’s asset quality remains monitorable given the rapid scale-up in the loan book in recent years. The company’s gross stage III (GS III) on own book decreased to 2.4% (Rs 189 crore) as on March 31, 2025, from 3.4% (Rs 170 crore) as on March 31, 2024. The 90+ days past due (dpd) as a % of AUM has remained nearly range bound between ~2.0%-2.3% during the same periods. Some of the improvement in the GS III ratio is a function of write offs of ~1.2% (Rs 74 crore) in fiscal 2025. Additionally, there is a restructured book of Rs 24 crore (~0.4% of own book) of which 0.1% is in gross stage III. Going forward, asset quality will remain monitorable.

 

UGRO’s earnings profile has been modest as it is yet to reach steady-state levels due to high operating costs. Operating cost to average managed assets ratio stand at 3.6% for fiscal 2025, compared to 4.0% for fiscal 2024, but are expected to remain elevated over the medium term due to the company’s expansion plans. The company’s return on managed assets (ROMA) stood at 1.2% for fiscal 2025 against 1.4% in fiscal 2024 and 0.8% in fiscal 2023. Going forward, scale-led operating efficiencies and moderation in cost of funds will be key to UGRO’s profitability.

Analytical Approach

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 large initial capital infusion. Since inception, the company has raised total equity capital of ~Rs 1,750 crore from investors such as Newquest Asia Investments, Clearly Investment holdings (ADV Partners), Samena Capital, IFU and DBZ Cyprus (PAG), most of which was raised upfront, before the commencement of operations in 2019. This includes capital infusion of Rs 510 crore, in fiscal 2025.

 

As on March 31, 2025, the reported networth stood at Rs 2,046 crore on reported gearing of 3.4 times. Co-lending/co-origination (with UGRO as a sourcing partner) as a proportion of AUM has increased to 43% as on March 31, 2025, from 40% as on March 31, 2023. However the share of off book lending is expected to reduced post merger. While gearing is expected to increase from current levels, it is expected to remain below 5 times on steady-state basis.

 

UGRO has been able to improve its funding diversification with increased funding, particularly from public sector banks (28% as on March 31, 2025) and by way of External Commercial Borrowings (ECBs). Crisil Ratings believes comfortable capitalisation levels and improved resource raising ability will support UGRO in meeting its growth objectives going forward.

 

Diversified product offerings across the MSME segment with presence across multiple geographies: The company started its operations in January 2019 with secured loans against property 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 machinery loans. UGRO’s AUM grew 33% in fiscal 2025 to Rs 12,003 crore as on March 31, 2025, from Rs 9,047 crore as on March 31, 2024 (Rs 6,081 crore as on March 31, 2023). This is supported by healthy growth in MSME financing with growing working capital and ecosystem financing needs and UGRO’s widespread operating network to tap this. The growth has been across product segments and by deepening presence in existing geographies and operating networks. Going forward, on merging with Profectus the company now plans to expand geographically by adding 3-4 new states and to increase the number of branches to 400 by March 2026.

 

The company operates through four sourcing channels including prime branch led for secured loans against property, unsecured business loans and prime machinery loans (53% of AUM as on March 31, 2025). Within this, secured was 29% and unsecured was 19%. These unsecured business loans are backed by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)/ Credit Guarantee Fund for Micro Units (CGFMU). The second sourcing channel is emerging branch led for secured enterprises loans, rooftop solar and machinery (19% of AUM as on March 31, 2025) and remains UGRO’s focus channel. The third sourcing channel is ecosystem led for supply chain financing and machinery financing (12%), out of which, the company is running down its supply chain financing book and the last is partnership and alliances which is for business loans backed by third party guarantee (14%), apart from usual customary security provided by ultimate borrowers.

 

UGRO has established a large operating network with 200+ branches across 12 states as on March 31, 2025. The secured and unsecured loans are primarily through this channel. Furthermore, the company has partnerships with 70+ original equipment manufacturers (OEMs) for its machinery financing product. The company has also partnered with new age technology companies for the sourcing of loans through a co-lending model, wherein it does not have a physical presence, which adds to UGRO’s sourcing pool.

 

Weaknesses:

Modest profitability: UGRO’s profitability has been modest primarily due to upfronted operating expenditure for branch infrastructure, human capital and technology infrastructure build-up. The company reported profit after tax (PAT) of Rs 144 crore for fiscal 2025 against Rs 119 crore in fiscal 2024 and Rs 40 crore in fiscal 2023.

 

The company’s pre-provisioning operating profit to average managed assets (PPOP/AMA) have slightly declined to 3.1% in fiscal 2025, from 3.4% in previous fiscal, due to higher cost of funds and operating expenses. However, steady state operating expense will vary based on branch expansion plans. Credit costs remain range-bound at 1.3% in fiscal 2025 against 1.4% and 1.1% in fiscals 2024 and 2023, respectively.

 

UGRO’s target segment is competitive and there is price sensitivity on the yield side, also its cost of funds is slightly on the higher side. Therefore, UGRO’s ability to raise funds at competitive rates will also drive its profitability going forward.

 

As a result, for improvement from current level, Ugro’s overall profitability trajectory is contingent on steady-state levels of net interest margins (NIMs), operating expenses and credit costs post acquisition of Profectus. 

 

Asset quality monitorable with scale up of business and seasoning: Given the rapid scale-up in loan book in recent years and the limited track record, portfolio seasoning for its secured LAP portfolio remains critical. UGRO’s gross stage III on own book decreased to 2.4% (Rs 189 crore) as on March 31, 2025, from 3.4% (Rs 170 crore) as on March 31, 2024. The 90+ days past due (dpd) as a % of AUM has remained nearly flattish at ~2.0%-2.3% during the same periods. Some of the reduction in GS III was a result of write offs of ~1.2% (Rs 74 crore) in fiscal 2025. Furthermore, ~0.4% (Rs 24 crore) of own book is also restructured of which 0.1% is in gross stage III. There is an inch up in early buckets and the ability to manage these will be 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 15% of the portfolio) and presence across multiple MSME segments.

 

As on date, the company has a strong in-house team of about 600 employees in its collections vertical. The ability of the company to manage collections and overall asset quality metrics as the portfolio scales up will remain a key monitorable.

Liquidity: Strong

Asset liability maturity profile as on March 31, 2025, had positive cumulative mismatches in all the buckets. As on May 31, 2025, the company had a liquidity of Rs 398 crore in the form of cash and bank balances and unutilized working capital limits. Against this they have a repayment of Rs 374 crore till June 2025.

Rating sensitivity factors

Upward factors

• Significant improvement in the market position, while improving asset quality
• Improvement in profitability, with return on assets of around 2% on a sustained basis

 

Downward factors

• Leverage going beyond 6 times on a sustained basis
• Significant and sustained weakening in asset quality leading to adverse impact on profitability

About the Company

UGRO is a 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 has been 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 commenced operations in January 2019 and had an AUM of Rs 12,003 crore as on March 31, 2025, of which 43% was off book.

Any other information: Not Applicable