According to screener notes management expecting GNPA to stabilize around 3-3.5% which is around 50% higher than current NPAs…
Is screener notes showing right details? Did management provided such guidance?
3-3.5% is only for micro enterprise vertical and not for all the verticals. Rather than GNPA, I would focus on credit cost and that would be <2% as per management and that’s very healthy.
Charging 20% interest rate per se is not bad. If you know, how buy now and pay later schemes and buy on EMI works, you will understand that the companies charge 15-18% interest rates. Here, I am talking about consumer segment. So, the actually problem is over leveraging the consumer, means giving multiple loans with this interest rates to a single person and kind of throwing him in a debt trap. This is exactly what happening in MFI segment.
On the other hand, Ugro not giving any loan to a individual consumer, rather to a enterprise with credit history and GST number. Loan is only given after triangulating several data sources to ensure that the enterprise is not over leveraged, and has the capacity and intention to pay. On the top unlike the consumer loan where the money is used to buy TV and Fridge the credit given to a enterprise is used for generating revenue and using it for productive use.
Ugro being Five-star, I am not buying this idea. Ugro has far healthy and scalable business model.
Disc. Invested
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Very telling interview:
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Very nice thread and discussion on Ugro capital. Got to learn a lot!
Couple of points i would like members to clarify on.
- Why is Ugro’s Provision coverage ratio under 50? Is it because most of their assets are not mature enough and provision increases with the maturity? Not being from a finance background i don’t know much about these things so would greatly appreciate if somebody could clarify this as cursory reading seems to suggest it’s very low.
- Management has said they are going to focus on loans to Micro enterprises which will lead to higher yields and I’m assuming there will be less competitive intensity but wouldn’t this be much riskier leading to higher probability of future delinquency/NPA’s?
I understand they are confident on their proprietary scorecard and deep understanding of the sector but micro enterprises by their very nature will be extremely risky.
On an unrelated note wouldn’t something like a Northern Arc capital be a better bet? They also have a good proportion(20%+ if I’m not wrong) of MSME lending along with other segments+ Fee income from placement and asset management. They have much better return ratios albeit they are much older and have already incurred costs upfront(Discl: invested & biased)
Disc: Not invested but in my watchlist.
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Thanks for sharing bro. At around the 8 min mark, he touches upon his exit from Religare. What happened was a matter of speculation; was good to hear him speak about it.
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As per my notes…3.5-4% GNPA is steady state target for unsecured loan book for unsecured book (as per mgmt) would be:
- gnpa: ~4%
- avg tenure of loan: ~3 yrs
- credit cost: ~1.5% (=4%/3), expected to stay between 1.5%-2%
Target blended gnpa (secured + unsecured): 2-2.5% (with portfolio construct: 30% unsecured and 70% secured).
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for point #1, it is because their stage 2 NPAs are proportionately higher compared to stage 3. stage 2 loans need lesser %age of provisioning. hence blended provisioning appears low. As book matures and stage 3 npas ratio (as %age of overall npas) increase, provisioning will also need to increase.
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bac98aa4-4f06-4f98-bcce-a27c32ef9fdf.pdf (2.6 MB)
Ugro acquires Datasigns. Though nothing has been mentioned about the acquisition cost and revenue for the acquired entity.
Ugro has announced the issue of NCDs at the interest rate of 9.66% which is significantly lower than their current cost of borrowing of 10.7%. Looks like in a few quarters their aggregate CoB will go down by at-least 50 bps.
Noteworthy is that any drop in CoB will directly flow to PAT.
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Any thoughts on Q3 business update?
Some significant things: a 32% increase in AUMs YoY
Off-book lending is at 44% the lending – reducng the risk profile and improving the proftability significantly
Overall quite diversified book, not just MSME
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Please correct me if I am wrong but the increase in book value is not directly corelated to the AUM growth. Book value increases in line with the ROE metric which is around10% for UGRO as of now. This can be verified with data from Sept 2020 to March 2024 where AUM growth was upward of 30% but the book value only increased from 133 per share to 142 per share. A point to note is that ROE was very low for UGRO during this period.
Another way to increase the book value is by raising of equity capital, we can observe this that after the recently fund raise its book value has increased to 210 per share.
But the good news is that the management is guiding for the ROE to be in the range of 16-20% in the next 6-8 quarters. With RoA in the range of 3.5 to 4 and they are also planning to increase the leverage ratio to 4-5. And it should lead to re rating of the P/B ratio from current 1.05 to a much higher number which is the hypothesis for this stock.
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You are right… including your points BVPS may come around 232…
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update, fund raising will be done at 10.00% and not at 09.66%.
As per the press release:
GNPA = 2.1 (same as of q2)
NNPA = 1.5 (it was 1.3 in q2)
credit cost = 42cr (it was 44cr in q2)
In the backdrop of apprehensive situation in the financial sector these numbers are very robust. Notable is that all other financial services especially MFIs have posted very bad results.
Disc- invested and biased
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Hello Deepak Ji, Do you believe at this price and keeping the macro view, this will go on and be a mutibagger? I do not hence wanted to check your thoughts. Been an underperformer when markets were running hot and the first signs of market cracking, this cracked more.
Results are good, given the market. At PB of 1 Ugro is attractive. I just don’t like management boosting. I hope they give a honest picture of their ROA-4 plans. I am not sure they are even moving in that direction.
Disc: Invested.
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