Ugro Capital - Opportunity To Invest in a Fintech-like Company Below Book Value

Stock Opportunities Untested - but worth a good look
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Guidance for FY26:

  • AUM Growth: Projected at approximately ~30% year-over-year. This significant expansion is indicative of robust demand for Ugro Capital’s services and a strong market position in MSME financing. The growth underscores the company’s capability to scale operations efficiently.

  • ROE: Expected to soar above 18% from the current ~8%. This leap suggests enhanced profitability and operational efficiency, potentially attracting more investors looking for high return on equity.

  • ROA: Anticipated to reach ~4% from the current ~2%. This improvement in return on assets signals better asset management and profitability per unit of asset, making Ugro Capital an attractive investment in terms of asset utilization.
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  • Leverage: The leverage ratio is expected to increase to 4x-5x from ~3.5x, indicating Ugro’s strategic move to leverage more debt to fuel growth while maintaining a healthy balance sheet. This could lead to higher returns if managed well.

  • Credit Cost: Projected to be between 0.8-1%, demonstrating effective risk management and potentially lower provisions for bad loans, which enhances the bottom line.

Hypothesis on Valuation Rerating:

If Ugro Capital achieves its FY26 guidance, particularly the ROA at 4%, there’s a strong case for a rerating in its stock valuation. Here’s how:

  • Price to Book (P/B) Ratio: Currently, Ugro Capital’s P/B ratio might not reflect its potential due to the lower ROE and ROA. However, with the ROA projected to double, this could lead to a significant rerating. If the market starts pricing Ugro Capital at a P/B ratio of 4, akin to high-growth financial institutions, it would reflect:

    • A recognition of its asset quality and profitability.

    • Confidence in management’s ability to execute their growth and efficiency strategy.

    • An acknowledgment of the company’s niche in the high-demand MSME sector, which is less volatile than consumer lending.

  • Market Sentiment: The substantial growth in AUM and profitability metrics could change market perception from seeing Ugro as a mere MSME lender to a growth-oriented financial institution. This shift could attract both value and growth investors, pushing up demand for the stock.

  • Comparison with Peers: If Ugro’s metrics outperform those of its peers, particularly in ROE and ROA, it might command a premium valuation. A P/B ratio of 4 would not be out of place if its financial health and growth trajectory outstrip industry standards.

  • Risk Management: Low credit costs suggest a robust risk management framework, which could further justify a higher valuation as it implies a lower risk profile.

  • Potential Catalysts:

    • Expansion into new sectors or regions could further bolster growth prospects.

    • Strategic alliances or acquisitions like the one with MyShubhLife could open new revenue channels and improve market penetration.

In conclusion, if Ugro Capital meets or exceeds its FY26 guidance, the market’s perception could shift, leading to a revaluation of the company’s stock. A P/B ratio of 4, while optimistic, would align Ugro Capital with leaders in the NBFC space that demonstrate similar or superior financial performance metrics. This scenario would not only reflect its current state but also its potential for future growth and profitability.

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" if Ugro Capital meets or exceeds its FY26 guidance", this is a big IF.
There is expectation build-up that happens for so long. Cost to Income Ratio has gone up this quarter, and they are targeting 200 branches by FY 26 end, which means CI Ratio won’t come down drastically. Management has drawn how they can achieve their target, but I am also curious as to what excuse they are going to say, if not achieved.
Till they reach the branch expansion to reach desired level and let the branches consolidate, atleast the CI part won’t come down.

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I agree, time for management to prioritize actions and talk less and get focused. I believe they set lofty goals on their guidance, ROE and ROA which are harder and markets would measure them on.

Disc: Invested at higher price point.

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I am considering interest rate cut cycle, once it starts things will start to change

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In 9months, timeline has been relaxed [refer star 1 and 2 comments]. Hence, they are now aspirational goals and no more milestones to achieve by FY26.

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Credit cost is projected to be around 2%. Please check!

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Whatever all the members have been saying does make sense, and there is no doubt about that. Nevertheless, we have to be really mindful of the situation we are in. High-interest cycle for many quarters now, bank lending to NBFCs has literally come down (baring lending to AAA or corporate driven NBFCs), exorbitant level of delinquencies in the system, and believe me, not a single institution is unaffected by this, including the giant Bajaj Finance.

Look at what is happening with all the MFIs including the banks that have high MFI exposure, such as Indusind and IDFC bank, also look at the numbers of industry leader Credit access who posted losses in this quarter. On the contrary, Ugro has posted significantly robust numbers; credit cost in absolute number came down from 44 to 42 cr, GNPA is stable at 2.1 and NNPA increased slightly to 1.5 from 1.3, posted increased PAT, slight decrease in CoB. For me, this is a very direction the company is embarking on.

Regarding management setting higher goals or milestones and aspiring to a better valuation, I mean, why shouldn’t they? Doesn’t every founder do this? The company is scaling aggressively, has co-lending agreements with numerous institutions, and has some of the best PE funds on the cap table, delivering very stable performance in this slim situation.

Regarding the increase in CI, they are scaling aggressively not just in terms of expanding branch network but also AUM. Their microenterprise branches now breakeven in 8–12 months; hence, the 75 branches that they opened in this FY will be profitable by the end of the calendar year 2025 and will significantly contribute to PAT. Their aspiration of reaching a ROA of 4% was based on the situation when the guidance was given; for example, every one of us was expecting that RBI would start cutting int. Rate in November last year, but that didn’t happen. This led to not much decrease in the CoB. Now, if tomorrow China invades Taiwan and the world order is disturbed, we can’t lambast the management for not meeting the guidance.

At-last, have you ever heard of some anecdotes about how a grandson found the share certificates of MRF or other companies that are now worth some crores? This happens because you trust the company management and invest for some number of years. It’s an institution in making, so let them do their work. The management is super transparent in sharing numbers, their detailed presentation is testament of this.

Some statistics:

  • Depreciation of credit access Grameen in Q3 2025 was 16 CR, and they have 2000+ branches; on the other hand, for Ugro it was 12 CR with some 224 branches. Eventually, when the assets will be depreciated, the PAT will shoot up dramatically.
  • Of-course, Ugro doesn’t need to open 2000 branches, but maybe 600-700 to cover most of the MSME clusters. (Assumption: Five Star has 660 branches, and to reach this number in the medium term could be an aspiration.)
  • Ugro’s aggregate CoB is some 10.68% and recently, they have raised funds at 10%; if we were to extrapolate this, their average cost of borrowing in a year would be around 10%, the difference. Of 0.70% will flow directly to their ROA and PAT.

Disc-Invested and biased

The market is driven by sentiments and the greed to make quick bites, if by any means Ugro reaches 300, everyone will flock to buy it. Ugro should reward in the long run, but considering the macro environment, I don’t expect any wild moves in the short term.

I agree with you, not sure how Ugro has raised the debt, whether it is term loan or long term fixed interest loans. I believe majority is floating interest rate loan, hence, the CoB will decrease by the same proportion as the RBI interest rate.

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Deepak bhai,

Firstly, thank you for your posts on Ugro. They are very helpful and insightful, and I look forward to your posts on this thread. I feel I am also of the same mind in terms of long-term view on this company i.e. believe the future is bright and there is a good chance of the company performing well in the long-term.

What is irritating me (only an irritant) is the tendency of management to talk big and tom-tom positive moves, while remaining silent or not acknowledging when things don’t move so well. For example here:

I would probably have appreciated them acknowledging that the environment is tough, and explicitly calling out that their previous ROA target is now an aspiration. In the star 1 and star 2 that @Surender has kindly marked out, the removal of the explicit timeline from the ROA target is not acknowledged, the timeline is silently removed.

Doing business is very difficult, and I understand that things rarely work out per plan. I remember Laurus Labs also facing the ire of the market for giving a guidance and failing to meet it. Giving guidance is a double-edged sword. On the positive side, sharing a vision can get the market excited and may energize the org, but this could backfire if things don’t go per plan.

I like the approach of Natco Pharma’s management in terms of guidance. The promoter acknowledges that giving guidance is fraught with challenges, and does a great job of setting expectations.

This probably says more about me than about management/ promoters. Personally, I would love if Ugro’s management picks up some of Natco’s style of guidance. My guess is that since a fast-growing lending business requires regular fund raises, the “storification” and talking positive is done to help in fund-raises.

Disclaimer: Invested, with the mental expectation to harvest only in the next cycle (I expect market cycles to be 7-10 years long; so my capital here is patient)

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https://www.indiaratings.co.in/pressrelease/74171

Key take aways:

For rerating to happen - Expansion of franchisee profitably (i.e. ROA 3.5% or more) while maintaining asset quality and reducing cost of credit

For de-rating - Any funding challenges, leverage exceeding 4.5x (they guided to keep it below 4x) and deterioration in asset quality eroding operating leverage which is just about to start playing out

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@parkhi_nazar While missing the guidances on multiple occasions cannot be overlooked, but regarding the acknowledgement that you mentioned. I guess this could be treated as one?

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RATE cut by RBI!!! 0.25%

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Bulls, bear come and go but UGRO goes nowhere.

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Volumes have dried up in last few days and the prices are closing negative. Already added to a significant as a significant proportion to my portfolio at higher levels. Valuations look lucrative now.

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265 crore NCDs issued at 10.28% in times of rate cut cycle, what could it mean for cost of borrowing?

I was expecting the issuance at 10% or below, market does not like it, stock down 8%, making 52w lows

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Just a hunch:

It’s not the final placement of NCDs, they are testing the demand in the market. They shouldn’t allot NCDs at more 10%, as just a few days before they have already allocated around 75cr worth of NCDs for a tenure of 48months @10.02%.

Of-course, considering the current temporary market sentiment, maybe the liquidity is tight and the management has to pay more.

From the last earning call; once thing is outright clear that the management is not willing to pay more for the funding and will follow a more calibrated approach.

Addition: Such a great company is available at dirt cheap valuation, I reckon that the company will certainly find buyers at this valuation.

Disc- invested

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Thanks Deepak.

The earlier PDF says 10.02% pa pm, is it a typo ? Or is it per annum per month (not sure what it means though!)

And you may have a point as they are mentioning ‘tentative’ unlike the earlier reports

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Not a typo:
The term “10.15% p.a.p.m.” stands for “10.15% per annum, payable monthly.”

Note: It fell by 8% today with high volume and way higher delivery(75%). I don’t know exactly what to make out of it. Maybe high demand at this cheap valuation, maybe it has bottomed out today or?

Disc- invested

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Do you know if there is a difference between pa pm vs pa (latest fund raise?)

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The term p.a.p.m. stands for per annum, payable monthly.

This means that the interest is payable monthly as opposed to paying yearly or at the end of the tenure.

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Quick question regarding the fund raise done earlier last year. Per my understanding, there were CCDs issued which will convert at 264, which will be accretive to any shareholders buying near current prices.
My concern was with the warrants issued. Based on filings, 25% of the amount was paid upfront, with the balance to be paid on conversion at a valuation of 264/sh. Due to recent drawdowns, it would be cheaper for warrant holders to purchase at CMP ~180, instead of converting warrants by paying 198/sh.
Is there a possibility where UGRO is unable to complete the fund raise if market price remains at these levels for the next few months. Realistically, this should not be the case as most of the raise was from bigger players, and there would not be enough liquidity in open market for such a large purchase, but just curious to see if a possibility exists.

On that front, I believe this is a big challenege to UGRO in the coming years. Unlike other companies, UGRO is at a juncture where it needs the share price to go up to go up to keep growing and market is not giving Ugro any credit at all at this point (perhaps once ROA / ROE improvement is actually seen). The only other option I see would be to significantly increase off-book % if leverage needs to be maintained near the 4x range.

Current valuations are extremely tantalizing though. Very hard to see downside from here, barring a significant deterioiration in asset quality.

Disc : Invested, considering to add more

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