30% Potential Gain: Ugro Capital Gets ‘OUTPERFORM’ Rating After FPIs Raises Stake

An Indian non-deposit-taking middle-layer NBFC named UGRO Capital provides lending solutions to the MSME market. With its proprietary underwriting model Gro Score 3.0, UGRO Capital employs a data-driven underwriting methodology that makes use of technology to provide an extremely effective output. Its product line is targeted at micro-small businesses with annual revenue between Rs 2.5 and Rs 150 million. With 164 branches spread over 11 states as of June 30, 2024, UGRO Capital has Rs92 billion in assets under management (AUM).

Ugro Capital shares get an 'Outperform' rating from a leading brokerage firm Choice Broking for a target price of Rs 345 which indicates a healthy potential gain of 30%. The brokerage said, "UGRO Capital, a tech-driven NBFC, specializes in lending to the MSME sector, positioning itself strongly in a substantial market. Key factors underpinning its positive outlook include: (1) a significant opportunity in MSME lending; (2) superior productivity metrics, highlighting the scalability of its business model; (3) advanced systems and data analytics that bolster asset quality management; (4) a focus on co-lending and co-origination, which enhances capital efficiency, AUM growth, and profitability; and (5) an upward trajectory in RoA and RoE as high-yield loans gain a larger share and operating leverage improves. UGRO Capital is projected to achieve a CAGR of 41% in AUM and 42% in EPS from FY24-26E, with anticipated RoA and RoE reaching 4.2% and 15.8% by FY26E. The sustained expansion and increased profitability are expected to drive a favorable re-rating of the stock, which currently trades at a meager 1.38x FY26E P/Adjusted BVPS."

"We believe UGRO is well placed to capture the untapped growth potential in the MSME space. Increasing proportion of its off-book AUM should aid its other income and NIMs. Moreover, branch additions in new states should also support AUM growth, underpinning our robust estimate of 41% CAGR. This should translate into 55%/83% CAGR in NII/ PAT over FY24-FY26E, respectively, with RoA/RoE of ~4.2%/~15.6% by FY26E. Currently, the stock trades at 1.28x FY26E P/BV and 1.37x FY26 P/Adjusted BV. We recommend a OUTPERFORM rating and target price of Rs 345, valuing UGRO at ~1.83x FY26E P/ABV," the research analysts of Choice Broking said in a note.

The healthy target potential has been assigned to the stock after UGRO Capital became the darling stock of FII/FPIs during the Q1 of FY25. According to Trendlyne statistics, FII/FPI raised their holdings in UGRO Capital from 19.76% in the Q4FY24 to 20.27% in the June 2024 quarter. The company notified stock exchanges on September 22 that the Investment and Borrowing Committee of the Board of Directors would meet on Monday, September 23, 2024, to discuss and approve raising funds through the issuance of non-convertible debentures through public issue and private placement. However, due to unforeseen circumstances, the meeting has been rescheduled for Tuesday, September 24, 2024, for the same purpose.

Meanwhile, the research analysts of InCred Equities said in a report that "UGRO Capital is well-positioned to enter the next phase of its growth, with a rising market share in the growing landscape of MSME lending. We expect a strong AUM growth (+34.2% CAGR over FY24-27F) led by both on-and off-balance sheet growth resulting in improving margins (+160bp) along with operating leverage kicking in, which will shore up return ratios to ~4% RoA and ~14% RoE (adjusting for equity infusion of Rs12.7bn) by FY27F. We initiate coverage on the stock with an ADD rating, valuing it at ~1.5x FY26F P/BV to arrive at a target price of Rs350. Slower growth and weak asset quality are the key downside risks to our investment thesis."

UGROCAP stock has an intrinsic value of Rs 485.05 in the Base Case scenario, according to data from Alpha Spread. In relation to the present market value of Rs 267.15, Ugro Capital Ltd exhibits a 45% undervaluation. The stock price dropped from Rs 296.75 to Rs 255.73 in the past year.