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.