Ugro Capital - Harnessing Technology-Driven Lending To Empower MSMEs: Systematix Initiates Coverage With A Buy

Systematix Research Report

Ugro Capital Ltd. is one of the fastest growing tech-based micro small and medium enterprise-focused non-banking financial company that has an extensive distribution franchise and superior underwriting framework.

The company currently operates through 104 branches, most of which are concentrated in Tamil Nadu (20%), Maharashtra (15%), Telangana (6%) and Gujarat (4%). Its core strengths lie in-

1. focused MSME lending,

2. technology infrastructure, backed by data analytics, and

3. asset-light model (45% off balance sheet (balance sheet) book).

As per CRISIL, the untapped market opportunity stood at Rs 92 trillion in MSME financing, which offers immense growth potential. The company has delivered superior growth (assets under management compound annual growth rate of 92% over FY20-FY23, albeit on a low base) while maintaining gross non-performing assets at less than 2.7%.

An increasing proportion of off-book AUM should aid other income and net interest margins which underpins our estimate of robust 36% CAGR in AUM.

This should translate into 37%/60% CAGR in net interest income/profit after tax over FY24-FY26E, respectively, with return on asset/return on equity of ~4%/~15% by FY26E.

Currently, the stock trades at 1.2 times FY26E book value.

We initiate coverage with a 'Buy' rating and target price of Rs 335, valuing Ugro at ~1.5 times FY26E book value.

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