UGRO Capital, a fintech platform specializing in MSME lending, has received a 'buy' rating from Emkay Research, accompanied by a price target of Rs 425, indicating a potential 47% upside, attributing to three key factors: their strong focus on MSME-oriented lending, a business model optimized for specific sectors, and a data centric, technology-enabled approach helps them to homogenize data that support scale underwriting with low risk.
“On the back of the structural story in MSME lending and the compelling argument for UGRO’s potential success in this space, we initiate coverage on UGRO Capital with a BUY and Sep-24E target price of Rs425/share (FY25E P/B: 2.1x), implying an upside of 47%. The unrelenting successful execution of UGRO’s strategy and its sustained earning momentum, coupled with gradual re-rating, should drive strong returns in UGRO shares” the note said.
“Given MSMEs’ heterogeneous business model, UGRO has, with the help of CRISIL, experienced experts, extensive study and research shortlisted ~9 sectors and >200 sub-sectors for its lending business, while maintaining a diversified portfolio across geographies, sectors and products”, the report states.
According to the Emkay report, MSME credit gap in FY23 was estimated at Rs 92 trillion, and UGRO Capital was incorporated on the bedrock that the MSME credit gap in India could be resolved by use of data and technology. UGRO views data being more powerful than presumed and, within the lending universe, use of data is fairly low.
UGRO is more tech-loaded than most fintechs, according to the Emkay report. Its credit evaluation framework and data-driven solutions enable it to swiftly assess creditworthiness, customize financial products tailored to specific needs, and streamline loan processing for faster approvals.
By providing medium-yield loans under off-book agreements and high-yielding sectors on its own book, UGRO is able to compete in a variety of yield spectrums in its target sector thanks to its approach of growing with a mix of on-book & off-book (Co-lending/Co-origination). According to the Emkay Report "The company will increase its overall AUM by nearly three times over FY23-26E to Rs. 194 billion on the back of its big data, technology, and credit team in place, reaching its desired 50:50 on-book: off-book mix. Due to the significant increase in AUM, the cost-to-income and cost-to-total AUM ratios will decline from 63% and 5.4% in FY23 to 44% and 3.2%, respectively, by FY26E."
Its profitability improvement is largely driven by the operating leverage playing out and credit cost remaining stable. The operating leverage will be driven by slower growth of employee expenses in comparison to the AUM or revenue growth.
The company has introduced its exclusive scoring model, the GRO Score 3.0, an enhanced version of its proprietary scoring model, GRO Score 2.0 which assesses borrower creditworthiness by triangulating repayment history, banking behavior and GST.
In addition to scrutinizing banking and bureau behavior, the company also extracts and analyzes crucial data from GST, which includes details such as sales momentum, purchasing patterns, profit margins, business scale, relationships with counterparts, product variety, and filing consistency.
In the most recent fiscal year, UGRO Capital outperformed its competitors Vertias Finance (62%), Capri Global (56%), SBFC Finance (55%), and Five-Star Business Finance (36%), reporting the highest AUM growth rate of 105%. Similarly, the Company recorded a 105% increase in disbursement during the same period, which was the highest growth rate.
U GRO Capital listed on the National Stock Exchange (NSE) on 11 August, 2021. The company is already listed on Bombay Stock Exchange (BSE) and with the NSE listing, the company became India’s first FinTech Lending platform to be listed on both stock exchanges. The company currently has a market capitalization of Rs 2593 crore and a share price of Rs 280.35.