Key Rating Drivers & Detailed Description
Strengths:
Comfortable capitalisation and improved diversity in resource profile
Capitalisation metrics remain comfortable, supported by large initial capital infusion. Since inception, the company has raised total equity capital of ~Rs 1,240 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. This includes capital infusion of Rs 340.5 crore, in fiscal 2024, from Danish Sustainable Development Goals Investment Fund K/S, which is an arm of the Government of Denmark, along with other large Qualified Institutions.
As on December 31, 2023, reported networth stood at Rs 1,405 crore on reported gearing of 3 times. 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/co-origination (with UGRO as a sourcing partner) as a proportion of AUM has increased to 45% as on December 31, 2023, from 16% as on March 31, 2022. While gearing is expected to increase from current levels, it is expected to remain below 4.5 times on steady-state basis.
UGRO has been able to improve its funding diversification with increased funding from public sector banks (increased to 29% as on December 31, 2023, from 18% as on December 31, 2022), development financial institutions (19% from 12%) and financial institutions (10% from 6%). CRISIL Ratings believes comfortable capitalisation levels and improved resource raising ability will support UGRO in meeting its growth objectives going forward.
Demonstrated ability to scale up with wide operating network
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 supply chain financing and machinery loans. UGRO’s AUM grew 37.5% in the first nine months of fiscal 2024 to Rs 8,364 crore as on December 31, 2023, from Rs 6,081 crore as on March 31, 2023 (Rs 2,969 crore as on March 31, 2022). This is supported by healthy business prospects 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, the company now plans to geographically expand selectively.
The company operates through three sourcing channels including branch led for secured loans against property and unsecured business loans (67% of AUM as on December 31, 2023). Within this, secured was 35% and unsecured was 32%. Of the unsecured business loans, 23% 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 ecosystem led for supply chain financing and machinery financing (21%) and third is partnership and alliances which is for business loans backed by third party guarantee (11%).
UGRO has established a large operating network with 104 branches across 32 states as on December 31, 2023. The secured and unsecured loans are primarily through this channel. Furthermore, the company has partnerships with 70+ anchors and 50+ original equipment manufacturers (OEMs) for its machinery financing product and supply chain financing. 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:
Improving profitability but yet to reach steady-state levels
UGRO’s profitability has been improving, but remains 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 86.7 crore for the first nine months of fiscal 2024 against Rs 39.8 crore in fiscal 2023 and Rs 15 crore in fiscal 2022 (Rs 29 crore in fiscal 2021). The company’s return on managed assets (ROMA) was 1.4% for the first nine months of fiscal 2024 (on annualised basis) against 0.8% in fiscal 2023 and 0.6% in fiscal 2022 (1.9% in fiscal 2021).
The profitability of the company till fiscal 2021 included benefits 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 18.3 crore in fiscal 2023 and Rs 12 crore in the first nine months of fiscal 2024, as these have lapsed. Excluding the impact of these deferred tax write offs, ROMA would be 1.6% for the first nine months of fiscal 2024, against 1.2% in fiscal 2023 and 0.6% in fiscal 2022 (0.5% in fiscal 2021). The improvement in ROMA was supported by lower operating expenses and stable credit costs.
The company’s pre-provisioning operating profit to average managed assets (PPOP/AMA) improved to 3.2% in the first nine months of fiscal 2024, from 2.8% and 2% in fiscals 2023 and 2022, respectively, driven by improvement in operating expenses to 3.9% (of AMA) in the first nine months of fiscal 2024 from 5% in fiscal 2023. However steady state operating expense will vary based on branch expansion plans. Credit costs remain range-bound at 1.2% in the first nine months of fiscal 2024 against 1.1% and 1.2% in fiscals 2023 and 2022, respectively. With seasoning in portfolio, credit cost could go up.
UGRO’s target segment is competitive and there is price sensitivity on the yield side, also its cost of funds is 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.
Asset quality monitorable with scale up of business and seasoning
UGRO commenced its lending operations in January 2019. The company’s AUM grew substantially to Rs 8,364 crore as on December 31, 2023, from Rs 6,081 crore and Rs 2,696 crore as on March 31, 2023, and March 31, 2022, respectively. Given the rapid scale-up in loan book in recent years and the limited track record, portfolio seasoning remains critical with majority of AUM being disbursed in the past nine months.
UGRO’s gross stage III on own book increased to 3.2% (Rs 158.9 crore) as on December 31, 2023, from 2.5% (Rs 95.7 crore) as on March 31, 2023, and 2.3% (Rs 56 crore) as on March 31, 2022. The company’s book has seen write offs of ~1% (Rs 38.5 crore) in the first nine months of fiscal 2024. Furthermore, ~1% (Rs 48.3 crore) of own book is also restructured of which 0.3% 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.
The ability of the company to manage collections and overall asset quality metrics as the portfolio scales up will remain a key monitorable