Bridging the MSME credit gap
UGROCAP's institutional ecosystem, experienced management, attractive valuation, and unique business model catering a largely untapped market gives comfort around LT performance. We are LONG.
UGROCAP was instituted in 2018 with the buyout of Chokhani Securities by the now CEO Shachindra Nath (erstwhile Religare Enterprises CEO) followed by its merger with Asia Pragati’s lending business (i.e., the India NBFC of global investment fund PAG).
UGROCAP is a pureplay small business lending platform with a vision to bridge India’s $470bn MSME lending requirement. Barely one-third of MSME credit is served by formal banking channels, while they contribute c. 30% to the country’s GDP, 33% to our industrial production and 40% to exports.
Sector supported by strong policy push and broader tailwinds
The broader MSME landscape appear favourable with policies such as capital subsidy to promote technology upgradation, CGTMSE guarantee cover, INR15,700cr budget allocation in FY 2022, INR300,000cr automatic loans for business, along with schemes such as ASPIRE, ESDP, SFURTI. Furthermore, emergency credit line has been expanded amid the second wave of COVID-19 and a stimulus package is also expected in due course.
Unique institutional ecosystem at the intersection of NBFCs and FinTechs
In partnership with CRISIL, UGROCAP has identified 8 core sectors contributing 50% to India’s MSME lending requirement and recognized as priority sectors by the RBI. To better service these segments UGROCAP has developed a sector specific in-house rating framework. It also has an edge over traditional banks & NBFCs in terms of reduced turnaround time & better product customization.
UGROCAP’s own wholesale lending base comprises 22 active lenders including ICICI, SBI, Kotak, Oiko Credit, SIDBI, Northern Arc, AU Small finance bank, ESAF among others. It has co-origination partnerships with SBI, ICICI, BOB & Kotak. Co-origination would serve as a base to aggressively grow asset base at an attractive cost, increase share of non-interest income, improve ROEs and offer better pricing to borrowers. The model is expected to be operational in Q1 2021.
Shifting asset base towards microenterprise loan segment
The product portfolio comprises secured loans (38% of AUM), onward lending (8% of AUM), unsecured loans (26% of AUM), supply chain finance (21% of AUM) and microenterprise loan (7% of AUM). For FY 2022, the company has a disbursement target of INR2,500cr, 30% of which is expected to come from the microenterprise loan segment.
Steady growth and strengthening balance sheet de-risks the investment profile
UGROCAP started with INR950cr+ capital raised from global PE investors and is led by a highly experienced and professional team. As at Q3 2021, NIM margins stood at 10.3%, a 1.5% decline on Y-o-Y basis. With the loan book being increasingly wholesale debt funded, management expects it to stabilize at around 8.5% by FY 2025. Cost-to-income has improved from 71% in Q3 2020 to 68% in Q3 2021. Amid growing operations and improving profitability, ROA and ROE are expected to reach 4.2% & 18.8% by FY 2025 from 1.76% and 2.86% respectively as at Q3 2021. As at Q3 2021 the loan book stood at INR1,127cr (+50% Y-o-Y). UGROCAP aims to capture 1% slice of the MSME lending pie by FY 2025, backed by a potential 10-15x growth in the digital lending space. Asset quality remains satisfactory with Proforma GNPA of 2.3% and NNPA at 1.4%.
Valuation on absolute and relative terms looks fairly attractive
UGROCAP trades at 16.2x P/E and 0.9x P/BV on FY22F. Close comps Bajaj Finance (NSE: BAJFINANCE) trades at 50.2 P/E and 8.49 P/BV, AU Small Finance Bank (NSE: AUBANK) trades at 34.5 P/E and 4.8 P/BV and Ujjivan Small Finance Bank (NSE: UJJIVANSFB) trades at 18.3 P/E and 1.78 P/BV on FY22F. 72% of shareholding is institutional, including names such as Newquest, Samena, Clearsky, PNB Metlife, Abakkus among others. Low traded volume is one of the downside risk factors.
An institutional ecosystem, highly experienced management, attractive valuation, and a unique business model to cater a largely untapped market gives comfort around forward-looking performance. We are LONG.
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.