I just wanted to point out that a bet on a lender is primarily a bet on them being able to grow while maintaining quality of the book. Otherwise one can end up in a yes bank style scenario with all equity wealth getting wiped out. For this reason, past performance of lender serves as a good proxy for how they handled stress in the past. Without that past performance, we are investing with “hope”. Absolutely nothing wrong with that, but we must be prepared for our capital to be wiped out, and thus size the position appropriately.
With a 1 year lending track record (gathered that from this thread), it means that a very large part of their lending happened post covid, after they knew which sectors had been hit the hardest and what the status of each lender post covid was. Despite that, their GNPA is 2.3% and 3.9% of the book has been restructured. Restructuring provides a handy tool to hide stress IMHO and is a risk that investors must consider.
Traditionally, MFIs are able to absorb 8-10% credit costs because they have 15-16% NIMs. With a target 8% NIM, what kind of NPAs can Ugro capital absorb comfortably? Given that covid second wave is yet to hit, how much more stress can we expect to build on ugro books? I think these are pertinent questions all potential investors must ask themselves.
For me personally, I am still trying to decide whether to study the co in detail or not (have only read the VP thread until now). Even in a best case scenario where i absolutely love the co, i would not invest more than 1-2% of net worth in an unproved lender since it can blow up dramatically if asset quality cannot be maintained (growing 20x in 5-6 years while maintaining quality of book is not something that everyone can do, digital or not). An unproved NBFC is essentially exactly like a PE investment. Please ask PE firms whether they invest 5-10% of net worth into 1 investment. Just wanted to add a word of caution hope nobody would mind. Also thanks to @Admantium for starting this thread.