U Gro Capital | An Overview
The SME Lending Market A large yet untapped market opportunity 2
India represents a large, significantly underpenetrated market However, the credit to GDP ratio is still Significant government impetus for the One of the largest and fastest growing much lower than other markets growth of credit economies in the world Total credit to non-financial GDP PPP – US$ Tn, Real GDP Growth ▪ corporations as a % of GDP Grant of universal banking, payment banking and 25.1 small finance banking licenses 160.0% 20.2 ▪ Focus on financial inclusion – Jan Dhan Yojna, 99.9% 10.3 73.6% Pradhan Mantri Awas Yojana 54.3% 49.1% 5.5 44.8% 4.2 4.0 ▪ India Stack – Cashless, Paperless, Presence-less ▪ Credit guarantee scheme for MSMEs China US India Japan Germany Russia China US India Japan Germany Russia 6.9% 2.3% 6.7% 1.3% 2.2% 0.19% Leading to high credit growth in the country led by the NBFC sector Total credit to the private non-financial sector, US$ Bn Credit Growth rate (%) 21.2 1,426 18.8 17.9 The overall lending market in India 1,236 1,219 16.6 1,155 15.6 1,080 14.6 is expected to grow at 10-11% with 14.1 13.9 NBFCs growing at 15-17% over the 10.9 10.0 9.0 8.2 next 5 years 2013 2014 2015 2016 2017 FY13 FY14 FY15 FY16 FY17 FY18 Bank NBFC ~US$1 Tn lending opportunity over the next 5-6 years | Significant head-room for many more banks and NBFCs to emerge ! 3
NBFCs have certain structural advantages and disadvantages vis-à- vis banks… ▪ 100 % FDI ownership permitted ▪ Ability to be nimble – lesser restrictions on branches, allowed businesses ▪ No social obligations ▪ No requirements to maintain a Capital Reserve Ratio ▪ Still very regulated – NBFC-SI as regulated as a bank ▪ Cannot offer liability products ▪ Higher capital adequacy ratios ▪ Higher cost of funding NBFCs have over the years proved themselves to be more nimble and specialized than traditional banks 4
...resulting in significantly higher value creation by NBFCs 5 year Share Price Growth ROE (FY18) 5 year AUM Growth (FY13-18) 21% 18% 36% 17% 16% 17% 22% 30% 47% 13% 14% 12% Mean: 21% Mean: 18% 11% 18% Mean: 28% 11% 6% 17% 15% 30% 24% 26% 20% 37% 74% 24% 17% 17% -30% 10% -10% -38% 2% -8% -4% 6% -4% 18% 26% 26% 16% 25% 28% 1% 16% 21% Mean: 15% Mean: 0% Mean: 13% 7% 11% 11% -3% 11% 9% 13% 24% 28% 18% 22% 25% -60% -40% -20% 0% 20% 40% -20% 0% 20% 40% 60% 80% 5
The lending market can be broadly divided into three segments - • Constrained credit growth - • Structural issues Corporate, - • Higher NPA Infra, - • Low rating and leverage Real Estate - • Long term sustainable ROE is challenged - • No equity value creation. + • Healthy credit growth - • Current players are limited by credit availability, lower SME assessment ability & distribution reach. • Pricing advantage & structural support available. + • Favorable demographics + • Increasing income + + • Increasing debt appetite Consumer - • Faced with heavy price competition - • Need strong capital base and long gestation period. PSU Banks PVT. Banks NBFC ▪ ¾ of total credit ▪ Increasing NPA ▪ Diversified geographical ▪ Limited by high NPA ▪ Limited Geo. reach presence ▪ Low CAAR (Basel-III) ▪ Limited assessment ▪ Higher assessment Current Scenario Future Projection ▪ Systematic issues ability ability ▪ Limited by cost of funds and capital investment 6
Small Business Lending Isn’t A Small Business 50Mn MSMEs in India US$300 Bn | SME Credit Gap 50 Potential Addressable Credit Gap: 560Bn 45 Gross Value Add (US$) INR 20.46 Trillion growing at 7%+ 40 35 per annum 30 INR Tn 0.7 2.9 25 29% 45.0 20 Contribution to India’s GDP 15 23.7 10 20.1 5 10% 0 MSMEs with access to credit Banks NBFCs Other Total Formal Total institutions Supply Addressable Demand Bridging the USD 300bn gap will need USD 60-70bn in incremental equity capital 7
Diversity of Small Businesses Creates Challenges for Traditional Lenders Challenges in lending to the SME segment… ? Difficult to understand Fragmented set of High cost of customer High dependence on Lack of businesses/cash flows customers acquisition the ecosystem data …leading to a Frustrating Borrowing Experience for Small Businesses Time consuming Non-tailored credit Rigid collateral Product mismatch offline process assessment requirements 8
New-age, specialized SME lenders better positioned to bridge the SME credit gap Specialized SME Lenders Traditional NBFCs Banks Customized products basis nature of business, non financial parameters, Loan against property, supply Loan against property, supply Product end use, paying capacity/ frequency chain financing, unsecured loans chain financing of underlying customer Omnichannel Distribution Branch/DSA led Branch/DSA led Ecosystem based lending Sector specific approach, One size fits all One size fits all Credit Appraisal Cash Flow Based Collateral/Bureau score Collateral/Bureau score Automated Review Turn-Around Time 4-5 days 15-20 days 30-45 days Non-traditional sources. Use of Financial statements, P&L information available from public Project reports . Projected Documentation Account, Balance Sheets, Bank forums. Digital document financials , Bank statements. statements submission 9
… leading to the emergence of niche, focused lenders in India Sector Focused Geography/Segment Focused Focus: K12 Segment Focus: K12 Segment Focus: Tamil Nadu/sub-prime Focus: Rajasthan/sub-prime AUM: INR 10,000+ mn AUM: INR 30,000 mn AUM: INR 10,000+ mn AUM: INR 3,000+ mn … Capital Raised: INR 3,000+ mn Capital Raised: INR 9,000 mn Capital Raised: INR 10,000+ mn Capital Raised: INR 2,000+ mn Specialized NBFCs Product Focussed Online Community Focus: Loans against machinery Focus: POS Lending AUM: INR 4,000+ mn AUM: ~INR 10,000 mn Capital Raised: INR 1,000+ mn Capital Raised: INR 4,000+ mn 10
The U GRO Incarnation The Assimilation of Aspirations 11
U GRO Capital | Who we are Large Institutional Capital INR 9,530 Mn (~US$135mn) Of Equity A highly specialized, technology Strong Corporate Governance enabled small business lending Board Controlled, Management Run platform Technology Knowledge Experience Management Team A scalable, data driven Deep domain expertise of 250+ Years of Experience approach to ensure target segments to better dissemination of knowledge understand the customer 12
One of the only firms in the lending space to start with US$ 135Mn of capital 1994 - 2017 Formation of Chokhani Securities Preferential Allotment Qualified Institutional Placement Dec, 2017 Aug, 2018 1994 : Formation of Chokhani INR 4,350mn raised from global INR 1,120mn raised from public 1995 : Listing on the BSE private equity firms - ADV Partners, market funds, insurance companies 2004-Present: 14 year track-record NewQuest and IndGrowth of profitability May, 2018 Dec, 2017 Disbursements Acquisition of Chokhani Securities started in Revamp of the management team INR 1,920mn raised from large Demerger of the lending business of January family offices / HNIs through a Asia Pragati approved – INR 1,750 mn preferential allotment of shares Birth of U GRO Capital Preferential Allotment Family Offices Insurance Firms Private Equity Funds Public Market Funds family Group Chhattisgarh Jaspal Bindra MK Ventures Investments Taparia family 13
Strong corporate governance framework enshrined in the Articles Special Resolution of the shareholders required for effecting any changes to the AoA ▪ ▪ High degree of regulatory oversight and transparency Mandatory requirement for a Big 4 firm to be appointed as the statutory and internal auditors ▪ Ability to create an institution with a long term mind-set ▪ and for perpetuity Deloitte appointed as the statutory auditor and PWC appointed as the internal auditor ▪ Access to permanent capital ▪ ▪ Any loan > 1% of net worth or to a related party to require Independent directors to comprise majority for perpetuity unanimous approval of ALCO and approval of the Board ▪ Any shareholder holding >10% to qualify for a board seat ▪ Board approved multi-layer credit authority delegation ▪ Key committees to be headed by an independent member ▪ Removal of KMP (incl. CRO) to require 3/4th board approval with required credentials ▪ ▪ Any significant action by the Company to need 3/4 th The majority of the NRC, ALCO and the Audit Committee approval of the Board to comprise of independent directors A true board controlled, management run company No unfettered rights to promoters/management to divert strategy or business attention 14
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