You have rightly pointed out the issue yourself.
SBFC is a pure LAP Micro finance institution quite similar to Five Star as oppose to UGRO who wants to build a comprehensive one stop solution for MSMEs. The difference is in the fundamentals, UGRO wants to build the business by following the footsteps of Bajaj finance and SBFC maybe like a generic housing finance company (just a example to show the risk averse nature of the management). If you look closely SBFC has basically just one product and that is low ticket LAP loans on the other hand Ugro has a collection of products to serve nearly all the needs of MSMEs.
It is rather easy to replicate the business model of SBFCs to that of Ugro. The major problem with Ugro is that majority of its current portfolio has very low yield, maybe around 3-4% as most of them are secure business loan or of similar kind. This leads to depressed ROAs and ROEs. This problem would become a very strong moat when they get credit rating upgrades in future as with declining cost of borrowing the same yield will inch upwards.
Out of many ways of getting rating upgrades, one is to grow very fast with good ROA numbers (3+). Ugro was following this approach but got badly hit by declining macro trends. Instead of declining CoB they unfortunately say an slight increment not because of bad work but due to rising interest rates. Fun fact: For getting a rating upgrade beyond, I guess AA- you must reach a certain AUM number the same is when you want even a higher rating.
So, let’s not directly compare SBFC with Ugro as it won’t be a fair comparison. SBFC is a pureplay Housing finance kind of LAP company, very low risk, high margin and slow growth business (even slower after a certain AUM as the market will saturate), UGRO is a pure play MSME finance company that is catering to the whole ecosystem of MSMEs. You can think of Ugro as a company that encapsulates many individual companies.
Some of the unique offering of Ugro are:
- Machinery financing - there are many individual companies that do this.
- RoofTop solar financing - Again there are many NBFCs are doing this
- Micro LAP - That is what SBFC and many MFI are also doing
- CashFlow based financing…to name a few
Disc: Invested, Biased