UGRO Capital: Navigating MSME Lending with Strategic Recalibration and Tech-Driven Growth

UGRO Capital Limited, a prominent player in the Indian MSME financing landscape, recently unveiled its Q2 FY26 earnings, showcasing a period of strategic recalibration aimed at optimizing profitability and asset quality. The company reported a robust financial performance, with total income surging by 35% year-on-year to INR 461 crore. Profit After Tax (PAT) also saw a significant increase, rising 22% year-on-year and 27% quarter-on-quarter to INR 43 crore. This growth underscores the strength of UGRO Capital's franchise and its data-tech driven operating model, even amidst evolving market dynamics.

The company's Asset Under Management (AUM) expanded by 20% year-on-year, reaching INR 12,226 crore as of September 30, 2025. This growth was achieved alongside a conscious moderation of disbursals, a strategic move to enhance liability management and reduce borrowing costs. The management emphasized that this prudent approach, coupled with tightened underwriting standards, aligns well with the prevailing macroeconomic headwinds in the small ticket MSME segment. Net loan disbursals for Q2 FY26 stood at INR 1,789 crore, compared to INR 1,971 crore in Q2 FY25, reflecting this deliberate recalibration.

Financial Highlights: A Snapshot of Performance

UGRO Capital's financial metrics for Q2 FY26 demonstrate a balanced approach to growth and risk management. The annualized EPS for H1 FY26 was reported at INR 14.8 per share, with a Price to Earnings (P/E) ratio of 11.5x as of September 30, 2025. The company's Net Total Income percentage stood at 13.9% for Q2 FY26, with Pre-Tax Profit at INR 61.1 crore and PAT at INR 43.3 crore. The Cost to Income Ratio was 56.6%, while Return on Assets (ROA) was 2.5% and Return on Equity (ROE) was 7.7%.

Strategic Initiatives Driving Future Growth

UGRO Capital's strategic framework is built on several key pillars, including an equity fundraise, a focused expansion of its Emerging Market (EM) channel, and the growth of its embedded finance platform. In October 2025, the company successfully raised approximately INR 535 crore through Compulsorily Convertible Debentures (CCDs) to support the acquisition of Profectus Capital, with an additional INR 241 crore infused by existing investor Samena Capital. This capital infusion led to a significant credit rating upgrade, with India Ratings assigning an 'IND A+/ Rating watch with Positive Implications' and CRISIL providing a 'Crisil A/ Rating watch with Developing Implications'. The proposed acquisition of Profectus Capital is expected to add approximately INR 3,000 crore to UGRO's AUM, pushing the total AUM beyond INR 15,200 crore.

The Emerging Market vertical has completed its expansion phase, now boasting 303 EM branches across 13 states. The AUM mix from this channel has increased to about 25% of the total AUM as of September 2025, with 90 new branches added in H1 FY26. The company's current focus is on maximizing the productivity of these branches and enhancing portfolio quality. Management expects these branches to eventually deliver INR 325-330 crore in monthly disbursals once productivity targets are met, with individual branches aiming for INR 70 lakh to INR 1 crore in monthly disbursals within 12-18 months.

UGRO Capital's embedded finance platform, MyShubhLife (MSL), acquired last year, continues to demonstrate strong momentum. The platform's AUM reached INR 1,270 crore within four quarters, serving over 1.5 lakh small retailers. This segment maintains a steady monthly run rate of INR 150-200 crore, highlighting its scalability and potential to address the significant credit gap in the small retail and micro merchant space. The ongoing acquisition process for MSL is expected to further integrate UGRO's digital credit ecosystem, strengthening its embedded finance capabilities.

Asset Quality and Risk Management

Despite the recalibration in disbursals, UGRO Capital maintained stable asset quality, with Gross NPA (GNPA) at 2.4% and Net NPA (NNPA) at 1.5% of AUM as of September 2025. The company's provision coverage ratio stood at 47%, reflecting a conservative approach to risk management. The total collection efficiency improved to 100% this quarter, up from 96% last year, with 93% of the assets in Stage 1. This improvement is attributed to tightened underwriting standards in the unsecured segment and a robust 4-tier collection framework supported by data-driven early warning systems.

Management acknowledged that the unsecured portfolio had witnessed some stress due to over-leveraging, leading to the curtailment of throughput rates from 30% to 20% in the EM customer segment. This proactive measure, along with stopping loans less than INR 7.5 lakh in segments adjacent to microfinance, underscores the company's commitment to portfolio resilience and consistent profitability.

Outlook and Future Trajectory

UGRO Capital is transitioning into a phase focused on productivity and profitability. The company aims to grow its AUM by more than INR 3,500 crore at a consolidated level by the end of FY26 and expects an AUM growth of 20% to 25% in FY27. The long-term ambition is to achieve a steady-state ROA of about 4% and an ROE of 16% to 18% within the next two years. Management is confident that, based on the current run rate, the company will not require additional capital for at least the next 18 to 24 months, indicating strong internal accruals and capital efficiency.

The company's diversified funding mix and strengthening off-book strategy, with approximately 43% of AUM currently off-book, further support its financial stability. With the Profectus acquisition, which is an on-balance sheet business, the combined off-book AUM is expected to moderate to around 35%. UGRO Capital's continued investment in its proprietary data-tech driven underwriting model, GroScore, which leverages India's vast data stack, remains central to its strategy of bridging the MSME credit gap through prudent risk management and scalable distribution.