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, letās not directly compare SBFC with Ugro as it wonāt 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
Few years ago I remember case of kotak and icici. Uday kotak was always caustious and icici management was always agressive and the result was that kotak grew multiple times than icici ā¦. This seems to be case of sbfc and ugro.. i think having a calibrated approach works well.. both ugro and sbfc started at same time nearly .. have similar aum but sbfc is 5 times more valuable tham ugro at this time with simple business plan. No fancy data driven on tap loan, dealer financing etc.. simple LAP and gold.. both aim to grow at 25 percent this year with sbfc adding 30 branches and ugro aiming 100 plus branches.. i am invested in both but seeing this trend of diluation disturb me..Taking more money on books will furthur drive down ratio and if any aqusation is done , it will hardly work in short term time frame
This shows that Ugro is a high risk and high reward investment idea as oppose to SBFC which is decent risk and decent reward.
Letās also take an example of FiveStar finance, they are in the business since 2015 or even before, couldnāt find the data. They have AUM of 12k cr, so in short in the span of 10 years they were able to merely cross 12k crore. They have the best in class ROE, ROA..bla bla but at the end ādandha kitne ka bnaya hai ā.
Their "ROA is 8%+ and NIM is 16%+ ", do you know what does mean; they are charging average interest rate of 24%+ from the borrowers and really hand picking the dire in need borrowers. With this approach you can of-course make a very profitable NBFC but certainly not an Institution.
Ugro within the last 4-5 years of operation is able to reach the AUM of 12k crore, why? Because they are trying to (succeed or not, is debatable) create an institution by providing an ecosystem of credit to MSMEs. That too with modest asset quality, and no spike in NPAs, this is nothing less than commendable.
I canāt differentiate SBFC from FiveStar for me they are quite identical. Itās just SBFC is bit lesser greedy than Fivestar.
So you may have just two options: Follow the market sentiment and sell the holding or have trust in the company (if one has, itās very subjective) and sit tight. Having said that, Ugro is needed a risky investment, the moment I see critical departure from board or management team, I will come out of my investment. Until then, I am quite optimistic that there is a huge potential. What they are doing is not easy to comprehend and also not at all easy to build. I spoke to one of the lead analyst who wrote an analyst note on Ugro, as per him If Ugro was able to excel in their business model, it would be an institution for sure. He was speaking very highly of Ugro. The only risk he highlighted was of delayed rating upgrade. He said, SBFC and Fivestar are really playing in a small subset of MSME financing where they will face enormous competition from MFIs as they are also migrating to secured small ticket LAP.
Well, I am certainly not a fortune teller, itās just my personal take and my own thesis that I am following.
Well, I guess in the last 5 years ICICI bank grew approx. 5 times to that of Kotak. Also, the current valuation of ICICI bank is more than Kotak. What you wanted to say? I didnāt really understand.
I was telling pre sandeep bakshi era when icici used to be agressive in loan disbursement. Just google icici bank lost decade in grok it gave 3 percent cagr from 09 to 18 before sandeep bakshi took over as ceo
Ugro capital has 12000 crore AUM @42% co lendingā¦that translates to 7000 crores of loan book for ugro capital.
If SBFC and Five star business finance have loan book that pays very high interest rate and hence are very profitableā¦then its a matter of time before the competition too enters that particular segment.
On the other hand the strategy of ugro is to increase its earnings through co lending fee incomeā¦so a better metric to evaluate ugro is on the basis of its own loan book and total income. Total AUM is just a notional figure, the real metric is, whats the income / fee that ugro is earning from co lending and how its adding upto ugros income from its own loan book.
Ugro loan book of 7000 crores consists of 700 crores of myshubh life loansā¦so in a way its just around 6300 crores and net income too is modest.
Thus ugro is is an under performer vis a vis other msme financing companies on all the 4 criteria
Size of loanbook
Net income
Roe around 9%
Roa of less than 2
Additionally, there is now an issue of earlier warrant holders @264 backing out because of fall in price.
In concall just after raising 1300 crores equity (50% dilution)ā¦ugro MD sachindranath had said that he estimates post dilution yearly eps to go much beyond 25 rupeesā¦you can compare it to present eps and judge the level of under performance.
Ugro own loan book is quite modest when compared to its peersā¦its not getting much fee from co lending , getting just boasting rights about total AUMā¦its book value is going down due to excessive equity dilutionā¦the roa & roe are very modestā¦mngt not able to deliver on its promisesā¦rating upgrade still not coming inā¦and spike in global long term..intetest ratesā¦
Now tell me how is there a case for ugro capital price to trade @4 times book value
It was renamed in 2017. Before that it was MAPE Finserve.
Besides, comparing with icici should be a compliment - the bank completely learned its lesson from chanda kochar misgovernance and ran itself like morgan stanley runs for midcorporates and large corporates. The uptick from its tech will last a generation if not more.
Like previous post suggested , what UGRO team is doing is quite complex for layman investor to understand e.g. holding icici bank and not holding any hdfc bank at all post covid due to variety of macro factors supporting corporate banking and after realising what it is doing in terms of its disbursals engine.
@Mehnazfatima the strategy you quoted is 24 months old. The current strategy is high yield plus penetration.
Yesā¦they are trying to scale up high yield āemerging marketā loans to 30% of the AUM
..but the alpha to the earnings will come only from co lending. That continues to be their cornerstone for increasing earnings. And now instead of going up to 50%, the colending has fallen to 42% as banks have turned extra cautious after problems from Microfinance sector.
The worst has happpenedā¦ now earlier warrant would not get converted as same investor has commited to ccd , ugro will compensate for lost money as intreast for a yearā¦ now management should stop doing concall as there word niw have zero valueā¦ now may be this all have been done to compensate for npa not disclosed yet
As usual, the collective judgment of the market turned out to be rightā¦inspite of ambitious plans, projections and commentary by the mngt in variious forums and concallsā¦the share price continued to hover in the 230 to 260 price range since past 18 months. The market just did not trust that the mngt would deliver on their promises.
And a few months ago the stock price collapsed to 140 even when the results were good on paperā¦and then there were rumours of earlier QIP investors backing out and even the assurances of MD Sachindranath that there wont be any equity dilution, the stock did not rally much even as the nifty crossed 25000
And now there is another massive equity dilution of 70% @185 priceā¦it only proves that Ugro mngt is desperate to raise equityā¦and the conclusion is that ugro needs such massive capital only if its about to totally discontinue co lending and all the future growth in AUM will come only from its own loan bookā¦OR massive NPAs are about to be declared from Q1 onwards.
Just look at the hugely bloated equity for a very modest loanbook of 7000 croresā¦
This equity dilution will ensure thatā¦
The book value gets bloated
The eps will crash by 50%
It will now be impossible for ROE and ROA to go up
Most probably some sort of a big black swan will be declared in the next few quartersā¦
The old adageā¦that there is never a single cockroach in the kitchen is proved right once againā¦that cockroach was before us since the beginningā¦Sachindranathā¦now other cockroaches will start coming out
I am sure itās NPAs. IDFC First did 100% provisioning, other MFIās have followed similar practice if not 100%. If these large behemoths are doing good amount of provisioning even after competitve ROI then answer is clear for players like Ugro.
They have a plan to increase AUM to 20K. This would need capital. So, if we assume out of the next 8K, 50% is on own book, so they would need atleast 15% of CAR, ~600Cr of capital. Current CAR is ~20%, which is not sufficient. So they would have to increase it to grow. My understanding is that for non deposit taking NBFC, they have to keep diluting to grow. Due to the fiasco, investors donāt want to take direct equity now, so they want CCD. Everyone is optimistic that the share price will be higher at the time of conversion.
I thought first C in CCD meant Compulsorily, provided certain conditions are met. So, the subscribers to previous round of CCD will not be getting shares compulsorily because certain conditions may not be met OR because terms of previous CCD are being relaxed. I hope it is the formerā¦
What about warrants? Is there any chance that the warrant money will be refunded to the applicants? Because at current market price, the warrant premium is like free money to the company.
The CCD dilutes on maturity, but investors should assume dilution in their 18month forward eps calculations
The 25 percent warrants deposit of the earlier qip will now be for UGRO to keep - investors should ensure thats the case.
Would be interesting to see the parties that have backed out of the earlier warrants - if its non board members especially Gauri Khan etc then its fine, but if its Sameena or Danish sustainability fund then its not fine.
The management appeared on NDTV profit just now to give their side of the story - this current dilution is not fully incremental as we were also assuming. Its mostly to replace the 750 crore of outstanding warrants some (or most) of which wont convert in December if stock price is near what it is. If stock price is significantly higher then dilution is also higher. The growth trajectory is intact and theres no NPAs (neither hidden nor gross) obviously. The 250 crores of warrant deposit remains within the networth as free money (risk premium that warrant investors paid looking at the nbfc funding market in 2024)
Back to my own opinion- Any layman investors who are assuming NPAs should consider how NPAs, days past dues and collections are monitored and reported by and to RBI. Plus if fraud was being perpetrated the board members would not subscribe another 650 crores. They are basically diluting the retail investors because the market is not sustaining the price of the previous warrants within a 25 percent band, with an option for those who are sophisticated to understand to opt in the rights issue or the RE shares.
I would not like to comment on integrity and npa ā¦ see indusind bankā¦ last year when someome ask why didnot bank did right issue and did qip ā¦arrogant md response was that in right issue one has to do a discount which was not favourable to investor now he is doing 400 cr of right issue ā¦how can now anyone trust the management
Can someone please explain in a bit simple language what has happened, here is a video, they are saying to look at it as āreplacement dilutionā, how?
ā.
