UGRO CAPITAL

Betting on India's MSME Lending Evolution

When I first came across UGRO Capital, what struck me wasn't just its focus on MSME lending—it was how it does it. This isn't your traditional NBFC chasing collateral-heavy clients. UGRO goes after small business owners running cash-based operations, assessing them on what matters most: real-time bank statements and GST data. No fancy projections. No window-dressed balance sheets. Just raw, transaction-level insights.

A Unique Lending Philosophy

Chairman Shachindra Nath has built UGRO around a very clear thesis: India’s ₹90 lakh crore MSME credit gap won't be bridged by legacy approaches. And so, UGRO is doing things differently—underwriting based on cash flows, not paper profits. This shift is powered by a tech-first approach, where platforms like MyShubhlife (MSL) enable embedded finance, helping UGRO plug into MSMEs where they already operate.

As of FY25, the company’s Assets Under Management (AUM) has crossed ₹12,000 crore. That’s massive for a business that, just a few years ago, acquired a shell company (Chokhani Securities) and pivoted entirely.

What I Like: Growth with a Vision

The AUM has been compounding at 33-35% annually, even during tough quarters. Embedded finance is clearly working—₹743 crore of AUM is now routed through MSL, which also brings better yields and scale. But what excites me more is the market’s neglect. At a P/B of 0.79, UGRO is priced like a troubled asset, not a disruptor. That valuation gap, in my view, creates room for significant upside if the execution holds.

But It’s Not Without Risks

Let’s be clear: this isn’t a one-way bet.

• Borrowing Costs are High: At 10.6%, it limits spread expansion, and the company doesn’t expect this to ease anytime soon.
• Asset Quality is a Concern: GNPA has moved up to 2.3%. While that’s not alarming for MSME-focused books, it’s still early innings for many loans, and risks could flare up fast.
• Profitability Lags Growth: While AUM grows >30%, profits are tracking at ~14-15% annually. For now, scale matters more than bottom-line metrics.
• Dilution or Debt?: UGRO is stuck in the classic NBFC loop—either raise costly debt or dilute equity. The catch: if market confidence weakens, dilution becomes value-destructive. And PE investors (who hold large chunks) may not wait around forever.

The Make-or-Break Factors

There are some very real failure scenarios here:

• If ROA fails to scale up to the 4% target, internal capital generation may fall short.
• If NPAs shoot up, even modestly, profitability could vanish due to provisioning.
• If PE investors lose patience and exit en masse, stock price could spiral down further, making fundraising even tougher.

That said, this is exactly where asymmetric bets are born.

My View

I’m invested in UGRO Capital, and yes, I might be biased. But I’m also clear-eyed about the risks. What I see here is a business challenging the status quo, with a management team that understands both lending and tech. If UGRO cracks the MSME underwriting puzzle—and avoids major asset quality blow-ups—the upside is substantial. This is not just a stock; it's a thesis on how MSME credit in India can be reinvented.

But as always, execution is everything.