Rating Rationale
May 26, 2022 | Mumbai
Ugro Capital Limited
'CRISIL A- / Stable' assigned to Bank Debt; 'CRISIL PPMLD A- r / CRISIL A- / Stable' assigned to Debt instruments
 
Rating Action
Total Bank Loan Facilities RatedRs.1500 Crore
Long Term RatingCRISIL A-/Stable (Assigned)
 
Rs.250 Crore Long Term Principal Protected Market Linked DebenturesCRISIL PPMLD A- r /Stable (Assigned)
Rs.250 Crore Non Convertible DebenturesCRISIL A-/Stable (Assigned)
Rs.200 Crore Commercial PaperCRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable’ rating to the bank loans facilities and non-convertible debentures; ‘CRISIL PPMLD A-r/Stable’ rating to the long term principal protected market linked debentures and reaffirmed its 'CRISIL A1' rating to the Rs 200 crore commercial paper programme of UGRO Capital Ltd (UGRO).

 

The rating reflects the company’s comfortable capitalisation metrics and its diversified and customised product offerings across the MSME segment. These strengths are partially offset by modest earnings due to high operating expenses, and limited track-record of operations.

 

UGRO is a non-banking finance company (NBFC) focusing on meeting the credit needs of the micro, small and medium enterprises (MSME) segment. It had assets under management (AUM) of Rs 2,969 crore as on March 31, 2022, of which Rs 2,491 crore was on-balance sheet lending as per INDAS. The company aims to provide a complete financing suite to its MSME borrowers for their various needs including financing for machinery and raw materials, loan against property for business expansion, working capital requirements, etc. The company has identified four channels for the sourcing of loans: Branch led model (both own and direct-sales-agent sourced; 58% of AUM as on March 2022), ecosystem channel (21% of AUM), partnerships and alliances channel (21% of AUM), and direct digital (in a nascent stage).

 

Out of the total AUM of Rs 2,969 crore as on March 31, 2022, ~16% was off-book mainly in the form of co-lending partnerships and direct assignment transactions. The company has identified this partnership model as a central growth driver of business over the medium term and is targeting a significantly higher proportion of its AUM by way of such partnerships. Currently, the company has 8 co-lending / co-origination partnerships with banks and NBFCs and is in advanced stages of increasing the same to more than 12-15 over the next few months.  For raising resources, the company has relationships with a number of banks and financial institutions. For the fiscal 2022, the company has been able to raise resources worth ~Rs 2036 crore of which the bank loan facilities were mainly within the interest rate range of 9.3%-11%. The company’s ability to form strong co-lending partnerships with other lenders and raise on-balance sheet funding at competitive interest rates will remain monitorable.  

 

UGRO has made significant investments in putting in place systems and processes for underwriting, collections and risk management of loans. Many of these processes have a high degree of digitization.

 

From an asset quality perspective, UGRO has seen impact of the challenging macro-environment on their core borrower segment MSMEs. While 90+ days-past-due (dpd)[1] decreased to 1.7% as on March 31, 2022 from 2.3% as on March 31, 2021, this has been supported by Rs 44 core (1.8% of  of the book) of sale to asset reconstruction companies (ARCs). Further, as part of the one-time restructuring as allowed by the Reserve Bank of India, the company has restructured 4.6% of the AUM as on March 31, 2022. The company’s ability to maintain asset quality as the portfolio scales up will be a monitorable.


[1] Delinquencies mentioned in the rationale are based on the on-book AUM

Analytical Approach

For arriving at the rating, CRISIL Ratings has analysed the standalone business and financial risk profiles of UGRO.

Key Rating Drivers & Detailed Description

Strengths:

  •    Comfortable capitalization

Capitalisation metrics are comfortable, supported by the initial large capital infusion. The company has, since 2018, raised a total equity capital of ~Rs 900 crore, from investors such 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 March 31, 2022, reported net worth of the company stood at Rs 967 crore with an adjusted gearing of 2.1 times as against Rs 952 crore and 0.9 times, respectively, as on March 31, 2021. 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. Further, the company is also in a process to raise ~Rs 500 crore of capital over the next few quarters, which should support the capitalization for the planned growth. While gearing is expected to increase from current levels, on-balance sheet gearing is expected to remain below 3.8 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 a prime product offering for the MSME segment and has over a period of time, diversified into other product offerings catering to the overall MSME ecosystem. UGRO has a presence across secured and unsecured segments. It has products with average ticket sizes ranging from Rs 3 lakh to Rs 1.5 crore, with interest rates varying from ~9% to ~25%. The company offers financing solutions to MSME borrowers to cater to their various needs. Additionally, the company has independent verticals and product teams to manage their different product lines. The company has, as on March 31, 2022, a presence across 11 states with 91 branches, 345 active direct selling agents (DSAs), 1,111 employees (including 620+ sales staff). Further, 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 the machinery loans, the company has built partnership with 22 original equipment manufacturers (OEMs) and for supply chain finance, the company has built relationships with 45 anchors as on March 31, 2022. UGRO has also attempted to customize its product offerings to meet the demands of its borrower segments and has built in a high degree of digitization into its business processes.

 

Weaknesses

  •   Modest earnings on account of high operating expenses

On account of the company still being in a build-out stage, its operating expenses have remained high due to large investments in setting up branch network, technology infrastructure, and hiring of employees at senior management level. Consequently, operating expenses as a percentage of average managed assets remained high at 5.0% for the fiscal 2022 as against 5.1% for fiscal 2021 and 7.4% for fiscal 2020. Hence, the pre-provisioning operating profits has remained muted at 2.1% of average managed assets for the fiscal 2022 as against 2.1% of average managed assets for fiscal 2021 and 1.3% of average managed assets for fiscal 2020. However, with the scale-up of operations, the operating efficiencies are expected to kick in and improve the pre-provisioning operating profits.

 

While UGRO has been profitable since the commencement of operations, some of this has been contributed by the tax write-back in fiscal 2021 and fiscal 2020. The company reported a PAT of Rs 14.6 crore with a return of managed assets of 0.6% for the fiscal 2022 as against Rs 28.7 crore and 1.9%, respectively, for fiscal 2021 (Rs 20 crore and 1.3%, respectively, for fiscal 2020). Profit before tax (as a percentage of average managed assets) was at 0.8% for the fiscal 2022 as against 0.8% for in fiscal 2021. The company did not benefit from tax write-backs in fiscal 2022.


While the company’s credit costs have remained range-bound at 1.1% of average managed assets for fiscal 2022 as against 1.3% for fiscal 2021 and 1.0% for fiscal 2020, the loan book is not yet fully seasoned. Therefore, ability of the company to scale up the book profitably while maintaining adequate performance will remain a key monitorable.

 

  •    Limited track-record of operations

UGRO commenced its lending operations in January 2019. It witnessed a year-on-year growth of ~125% and reached an AUM of Rs 2,969 crore as on March 31, 2022 from Rs 1,317 crore as on March 31, 2021 (and Rs 861 crore as on March 31, 2020). While, the company has invested significantly to build up infrastructure in place to ramp up disbursements from a current run rate of ~Rs 300 crore per month to over Rs 700+ crore per month, ability to do so successfully will need to be seen.

 

Also, given the rapid scale-up in loan book in recent years, portfolio seasoning remains limited. Given the challenging macro environment, UGRO witnessed an increase in the 90+ dpd to Rs ~42 crore (1.7% of loans) as on March 31, 2022 from ~Rs 29 crore (2.3%) as on March 31, 2021 (and Rs 8 crore (0.9%) as on March 31, 2020). Further, the company has also sold to ARCs loans worth ~Rs 44 crore during fiscal 2022. Additionally, the company has restructured accounts worth Rs 135 crore (4.6%) as on March 31, 2022; performance of this portfolio will be a key monitorable going forward.

 

Nevertheless, 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 well diversified portfolio across the states (with no state contributing more than 18% of the portfolio) and presence across the MSME segments with ticket sizes ranging from Rs 3 lakh to Rs 1.5 crore.

 

Ability of the company to manage its collections as well as asset quality metrics as the portfolio scales up will remain key monitorable.

Liquidity : Adequate

Asset liability maturity profile as on December 31, 2021 had positive cumulative mismatches for all the buckets upto one year. As on May 25, 2022, the company had a liquidity of Rs 226.7 crore (Rs 102.7 crore of cash and cash equivalents, Rs 114 crore of liquid investments and Rs 10 crore of unutilized bank lines) as against total debt repayment Rs 243 crore till July 30, 2022. In addition, the company has committed funding lines of Rs 245 crore from various financial institutions.

Outlook Stable

CRISIL Ratings believes the UGRO will maintain its comfortable capitalization metrics over the medium term.

Rating Sensitivity factors

Upward factors

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

Downward factors

  • Leverage going beyond 4 times on sustained basis
  • Significant and sustained weakening in asset quality leading to adverse impact on profitability

About the Company

UGRO is a systemically important NBFC engaged in financing secured and unsecured loans to MSMEs. It was incorporated in 1993 as Chokhani Securities Limited and was acquired and renamed as UGRO Capital Limited in 2018 by Mr. Shachindra Nath (Executive Chairman and Managing Director). The company is publicly listed on the Bombay Stock Exchange since 1995 and got listed on the National Stock Exchange in August 2021. Mr. Shachindra 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, 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 68% as on March 31, 2022.

 

The company commenced its operation in January 2019 and had an AUM of Rs 2,969 crore as on March 31, 20212, of which Rs 2,491 crore was on-book. The company has diversified presence across 11 states with 91 branches as on March 31, 2022, with none of the states contributing more than 18% of the AUM as on March 31, 2022.

 

The company reported a PAT of Rs 15 crore on the total income (net of interest expense) of Rs 177 crore for the fiscal 2022 as against Rs 29 crore and Rs 109 crore, respectively, for the previous fiscal.

Key Financial Indicators

As on/for the period ending

Unit

Mar 2022 (FY22)

Mar 2021 (FY21)

Mar 2020 (FY20)

Total assets

Rs crore

2854

1751

1213

Total assets under management (including off balance sheet)

Rs crore

2969

1317

861

Total income

Rs crore

313

153

105

Profit before tax

Rs crore

20.2

12.1

3.32

Profit after tax

Rs crore

15

29

20

90+ dpd of on-balance sheet portfolio

%

1.7

2.3

0.9

Adjusted gearing*

Times

2.1

0.9

0.3

Return on managed assets

%

0.6

1.9

1.9

*Gearing is adjusted for the intangible assets on the balance sheet.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs crore)

Complexity levels

Rating outstanding with outlook

NA

Commercial paper

NA

NA

7 to 365 days

200

Simple

CRISIL A1

NA

Proposed bank loan facilities

NA

NA

NA

1500

Simple

CRISIL A-/Stable

NA

Non-convertible debentures*

NA

NA

NA

250

Simple

CRISIL A-/Stable

NA

Long term principal protected market linked debentures*

NA

NA

NA

250

Highly Complex

CRISIL PPMLD A-r/Stable

*Yet to be issued

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 1500.0 CRISIL A-/Stable   --   --   --   -- --
Commercial Paper ST 200.0 CRISIL A1 04-05-22 CRISIL A1   --   --   -- --
Non Convertible Debentures LT 250.0 CRISIL A-/Stable   --   --   --   -- --
Long Term Principal Protected Market Linked Debentures LT 250.0 CRISIL PPMLD A- r /Stable   --   --   --   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Proposed Long Term Bank Loan Facility 1500 Not Applicable CRISIL A-/Stable

This Annexure has been updated on 26-May-2022 in line with the lender-wise facility details as on 26-May-2022 received from the rated entity.

Criteria Details
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt

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