Detailed Rationale

CRISIL Ratings has upgraded its rating on the long term bank facilities and debt instruments of UGRO Capital Limited (UGRO) to ‘CRISIL A/CRISIL PPMLD A/Stable’ from ‘CRISIL A-/CRISIL PPMLD A-/Positive’. CRISIL Ratings has also reaffirmed its ‘CRISIL A1’ rating on the commercial paper.

 

CRISIL Ratings has withdrawn its rating on Tier II bonds of Rs 200 crore, long-term principal protected market linked debentures of Rs 225 crore and non-convertible debentures of Rs 42.5 crore as these have not been utilised and based on issuer request. The withdrawal (see annexure 'Details of Rating Withdrawn' for details) is in line with the CRISIL Ratings withdrawal policy.

 

The rating upgrade is driven by the company’s demonstrated ability to scale up its franchise business on the back of healthy business prospects and wide operating network, comfortable capitalisation levels and improved diversification in the resource profile. These strengths are offset by improving, yet modest, earnings profile and monitorable asset quality trajectory.

 

UGRO has demonstrated its ability to scale up its assets under management (AUM) to Rs 8,364 crore as on December 31, 2023, from Rs 6,081 crore as on March 31, 2023, supported by healthy business prospects in the micro, small and medium enterprise (MSME) financing segment with growing working capital and ecosystem financing needs and UGRO’s widespread operating network to tap this. Furthermore, UGRO also receives interest from banks for priority sector loans, for which it has entered co-lending/co-origination arrangements with large banks. These form part of UGRO’s off-book portfolio, which comprise 45% of AUM as on December 31, 2023, against 40% as on March 31, 2023 and 16% as on March 31, 2022. Going forward, UGRO is expected to grow by deepening its presence in its existing network while also expanding selectively.

 

UGRO has comfortable capitalisation levels with reported networth of Rs 1,405 crore as on December 31, 2023 (Rs 984 crore as on March 31, 2023), supported by capital infusion of Rs 1,240 crore since inception which includes Rs 340 crore infused in the first quarter of fiscal 2024 from Danish Sustainable Development Goals Investment Fund K/S, which is an arm of the Denmark government along with other large Qualified Institutions. Furthermore, UGRO has been able to improve its funding diversification with increased funding from public sector banks, development financial institutions and financial institutions. However, cost of funds remains relatively higher than its peers. CRISIL Ratings believes comfortable capitalisation levels and improved resource raising ability will support UGRO in meeting its growth objectives going forward.

 

UGRO’s asset quality remains monitorable given the rapid scale-up in the loan book in recent years and limited seasoning. The company’s gross stage III on own book increased to 3.2% (Rs 158.9 crore) as on December 31, 2023, from 2.5% (Rs 95.7 crore) as on March 31, 2023, and 2.3% (Rs 56 crore) as on March 31, 2022. The company’s book has seen write offs of ~1% (Rs 38.5 crore) in the first nine months of fiscal 2024. Furthermore, ~1% (Rs 48.3 crore) of own book is also restructured of which 0.3% is in gross stage III. Going forward, asset quality will remain monitorable.

UGRO’s earnings profile has been sequentially improving,  but remains modest as it is yet to reach steady-state levels due to high operating costs. Operating cost to average managed assets ratio improved to 3.9% for the first nine months of fiscal 2024, from 5% for fiscal 2023 and fiscal 2022, but are expected to remain elevated over the medium term due to the company’s expansion plans. Going forward, scale-led operating efficiencies and moderation in cost of funds will be key to UGRO’s profitability.

Analytical Approach

CRISIL Ratings has analysed the standalone business and financial risk profiles of UGRO.

Key Rating Drivers & Detailed Description

Strengths:

Comfortable capitalisation and improved diversity in resource profile

Capitalisation metrics remain comfortable, supported by large initial capital infusion. Since inception, the company has raised total equity capital of ~Rs 1,240 crore from investors such as Newquest Asia Investments, Clearsky Investment holdings (ADV Partners), Samena Capital and DBZ Cyprus (PAG), most of which was raised upfront, before the commencement of operations in 2019. This includes capital infusion of Rs 340.5 crore, in fiscal 2024, from Danish Sustainable Development Goals Investment Fund K/S, which is an arm of the Government of Denmark, along with other large Qualified Institutions.

 

As on December 31, 2023, reported networth stood at Rs 1,405 crore on reported gearing of 3 times. The company is expected to follow an asset light model over time with a significant proportion of the AUM being off-balance sheet in the form of co-lending or direct assignment transactions, which should reduce the capital requirement for the business. Co-lending/co-origination (with UGRO as a sourcing partner) as a proportion of AUM has increased to 45% as on December 31, 2023, from 16% as on March 31, 2022. While gearing is expected to increase from current levels, it is expected to remain below 4.5 times on steady-state basis.

 

UGRO has been able to improve its funding diversification with increased funding from public sector banks (increased to 29% as on December 31, 2023, from 18% as on December 31, 2022), development financial institutions (19% from 12%) and financial institutions (10% from 6%). CRISIL Ratings believes comfortable capitalisation levels and improved resource raising ability will support UGRO in meeting its growth objectives going forward.

 

Demonstrated ability to scale up with wide operating network

The company started its operations in January 2019 with secured loans against property and unsecured business loans for the MSME segment and has, over time, diversified into other product offerings catering to the overall MSME ecosystem such as supply chain financing and machinery loans. UGRO’s AUM grew 37.5% in the first nine months of fiscal 2024 to Rs 8,364 crore as on December 31, 2023, from Rs 6,081 crore as on March 31, 2023 (Rs 2,969 crore as on March 31, 2022). This is supported by healthy business prospects in MSME financing with growing working capital and ecosystem financing needs and UGRO’s widespread operating network to tap this. The growth has been across product segments and by deepening presence in existing geographies and operating networks. Going forward, the company now plans to geographically expand selectively. 

 

The company operates through three sourcing channels including branch led for secured loans against property and unsecured business loans (67% of AUM as on December 31, 2023). Within this, secured was 35% and unsecured was 32%. Of the unsecured business loans, 23% are backed by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) )/ Credit Guarantee Fund for Micro Units (CGFMU). The second sourcing channel is ecosystem led for supply chain financing and machinery financing (21%) and third is partnership and alliances which is for business loans backed by third party guarantee (11%).

 

UGRO has established a large operating network with 104 branches across 32 states as on December 31, 2023. The secured and unsecured loans are primarily through this channel. Furthermore, the company has partnerships with 70+ anchors and 50+ original equipment manufacturers (OEMs) for its machinery financing product and supply chain financing. The company has also partnered with new age technology companies for the sourcing of loans through a co-lending model, wherein it does not have a physical presence, which adds to UGRO’s sourcing pool.

 

Weaknesses:

Improving profitability but yet to reach steady-state levels

UGRO’s profitability has been improving, but remains modest primarily due to upfronted operating expenditure for branch infrastructure, human capital and technology infrastructure build-up. The company reported profit after tax (PAT) of Rs 86.7 crore for the first nine months of fiscal 2024 against Rs 39.8 crore in fiscal 2023 and Rs 15 crore in fiscal 2022 (Rs 29 crore in fiscal 2021). The company’s return on managed assets (ROMA) was 1.4% for the first nine months of fiscal 2024  (on annualised basis) against 0.8% in fiscal 2023 and 0.6% in fiscal 2022 (1.9% in fiscal 2021).

 

The profitability of the company till fiscal 2021 included benefits derived from deferred tax created on the brought forward business losses of Asia Pragati. From fiscal 2022, the company did not benefit from such tax write-backs and therefore there was a dip in profitability from the levels of fiscal 2021. The company has written off deferred tax assets of Rs 18.3 crore in fiscal 2023 and Rs 12 crore in the first nine months of fiscal 2024, as these have lapsed. Excluding the impact of these deferred tax write offs, ROMA would be 1.6% for the first nine months of fiscal 2024, against 1.2% in fiscal 2023 and 0.6% in fiscal 2022 (0.5% in fiscal 2021). The improvement in ROMA was supported by lower operating expenses and stable credit costs.

 

The company’s pre-provisioning operating profit to average managed assets (PPOP/AMA) improved to 3.2% in the first nine months of fiscal 2024, from 2.8% and 2% in fiscals 2023 and 2022, respectively, driven by improvement in operating expenses to 3.9% (of AMA) in the first nine months of fiscal 2024 from 5% in fiscal 2023. However steady state operating expense will vary based on branch expansion plans. Credit costs remain range-bound at 1.2% in the first nine months of fiscal 2024 against 1.1% and 1.2% in fiscals 2023 and 2022, respectively. With seasoning in portfolio, credit cost could go up.

 

UGRO’s target segment is competitive and there is price sensitivity on the yield side, also its cost of funds is on the higher side. Therefore, UGRO’s ability to raise funds at competitive rates will also drive its profitability going forward.

 

As a result, for improvement from current level, UGRO’s overall profitability trajectory is contingent on steady-state levels of net interest margins (NIMs), operating expenses and credit costs. 

 

Asset quality monitorable with scale up of business and seasoning

UGRO commenced its lending operations in January 2019. The company’s AUM grew substantially to Rs 8,364 crore as on December 31, 2023, from Rs 6,081 crore and Rs 2,696 crore as on March 31, 2023, and March 31, 2022, respectively. Given the rapid scale-up in loan book in recent years and the limited track record, portfolio seasoning remains critical with majority of AUM being disbursed in the past nine months.

 

UGRO’s gross stage III on own book increased to 3.2% (Rs 158.9 crore) as on December 31, 2023, from 2.5% (Rs 95.7 crore) as on March 31, 2023, and 2.3% (Rs 56 crore) as on March 31, 2022. The company’s book has seen write offs of ~1% (Rs 38.5 crore) in the first nine months of fiscal 2024. Furthermore, ~1% (Rs 48.3 crore) of own book is also restructured of which 0.3% is in gross stage III. There is an inch up in early buckets and the ability to manage these will be monitorable.

 

The company has made significant investments in systems and processes for underwriting and risk management practices with a strong focus on technology enabled solutions. Additionally, the company has a well-diversified portfolio (with no state contributing more than 15% of the portfolio) and presence across multiple MSME segments.

 

The ability of the company to manage collections and overall asset quality metrics as the portfolio scales up will remain a key monitorable

Liquidity: Adequate

Asset liability maturity profile as on December 31, 2023, had positive cumulative mismatches in all the buckets upto one year. As on January 31, 2024, the company had liquidity of Rs 680.7 crore with Rs 397  crore in the form of cash and equivalents and liquid investments in fixed deposits and bonds and Rs 283.9 crore of unutilized bank lines, as against total debt repayment Rs 579.7 crore till April 30, 2024.

Outlook: Stable

CRISIL Ratings believes UGRO will maintain its comfortable capitalisation metrics over the medium term.

Rating Sensitivity factors

Upward factors

• Significant improvement in the market position, while maintaining asset quality
• Improvement in profitability, with return on assets of around 2% on sustained basis

 

Downward factors

• Leverage going beyond 6 times on sustained basis
• Significant and sustained weakening in asset quality leading to adverse impact on profitability

About the Company

UGRO is a non-banking finance company (NBFC) engaged in financing secured and unsecured loans to MSMEs. It was incorporated in 1993 as Chokhani Securities Ltd and was acquired and renamed as UGRO Capital Ltd in 2018 by Mr Shachindra Nath (Executive Chairman and Managing Director) who has over two decades of experience in the financial services industry.

 

The company has been publicly listed on the Bombay Stock Exchange since 1995 and got listed on the National Stock Exchange in August 2021. Mr Nath is supported by seasoned key management personnel each having expertise of over a decade in their respective functional domains.

 

The company commenced operations in January 2019 and had an AUM of Rs 8,364 crore as on December 31, 2023, of which 45% was off book.

Any other information: Not Applicable