Is UGRO Capital your next growth stock? Elara says 'Buy', 66% upside eyed

Elara Capital has initiated coverage on UGRO Capital with a Buy rating and a target price of ₹226, based on 1.2x FY27E book value

Elara Capital has initiated coverage on UGRO Capital, a DataTech lending platform, with a Buy rating, citing its best-in-class technology platform, a strong five-year asset under management (AUM) CAGR of 69 per cent, and a strategic shift toward profitability that is expected to drive a recovery in return on assets and support a valuation re-rating.

 

"We believe shifting gears to profitability over growth should boost cash RoA and trigger a multiple re -rating," the brokerage said in its note.

 

The brokerage has set a target price of ₹226, based on 1.2x FY27E book value, while flagging funding access and cost-of-funds risks during tight liquidity cycles. The target implies an upside potential of 66 per cent from Monday, February 9, closing price of ₹136.

 

 

On Tuesday, February 10, UGRO Capital's stock was trading almost flat at ₹135.86 on the NSE. 

Here's why Elara Capital is bullish on UGRO Capital:

Tech-led scalable MSME financier  Analysts at Elara Capital said UGRO Capital’s technology-led MSME lending model spans both prime and emerging markets, serving customers with annual turnovers between ₹2 million and ₹150 million, which keeps the business resilient across cycles due to its diversified risk and yield profile. The company has established a pan-India distribution footprint through branch-led sourcing, ecosystem partnerships and payment platforms to address varied MSME credit needs. 

 

While UGRO reported a 69 per cent AUM CAGR during FY20–FY25, growth is expected to moderate to around 10 per cent in the calibrated phase. The AUM growth was led by supported by upfront branch investments including 300 emerging branches added over the past two years, contributing ₹30 billion in AUM.  Additionally, synergistic acquisitions contributed ₹35 billion AUM from the Profectus acquisition in FY26 and an additional ₹12 billion via the MSL embedded finance platform acquisition in FY25.

  Profitability pivot to drive RoA recovery, valuation upside   According to Elara, UGRO Capital is shifting its focus toward profitability over growth to improve cash return on assets and unlock franchise value, as elevated funding costs and high operating expenses remain key pressure points.  As profitability takes priority, the brokerage expects UGRO to strategically reduce low-yielding assets and pursue calibrated expansion. This is likely to be offset by productivity gains from earlier investments in technology and branch infrastructure. Funding costs are expected to decline by 60 bps, driven by the reduction of high-cost debt and lower term-lending rates on new borrowings. At the same time, yields should improve as the company pivots toward higher-yielding emerging and embedded finance segments supported by technology initiatives. A near-term boost is also expected from co-lending and direct assignment income, Elara said.

 

Additionally, Elara Capital expects opex-to-on-book AUM to decline by 189 bps to 4.9 per cent, net interest margins to improve by 240 bps to 8.7 per cent, and earnings per share (EPS) to grow at a 40 per cent CAGR, lifting RoA from 2.1 per cent in FY26 to 3.4 per cent over FY25–FY28E, thereby unlocking franchise value.

 

Responsible lending keeps NPAs low  Analysts believe UGRO Capital’s responsible lending approach, supported by its data- and technology-driven credit assessment model, has helped keep gross NPAs below 2.5 per cent over the past five years despite broader concerns around MSME asset quality.  Amid recent market volatility, the company streamlined its portfolio by reducing exposure to riskier emerging market segments, machinery loans and MFI adjacencies, while scaling embedded finance with a focus on daily repayment collections. The brokerage expects gross NPAs to stabilise at around 2.7 per cent and credit costs at 1.7 per cent by FY28E.

 

Investments and operational gains set the stage for re-rating   Improved leadership alignment, a stronger liability profile, technology-driven cost efficiencies, and a strategic shift toward profitable growth are expected to drive a recovery in return on assets. Elara Capital expects the cost of funds to decline by around 40 basis points, opex-to-AUM to fall by 63 basis points, and credit costs to stabilise at 1.7 per cent, supporting a 5 per cent book value CAGR and nearly 40 per cent EPS CAGR over FY26–FY28E.  Despite trading at a sub-book valuation of 0.8x FY27E P/ABV, the heavy investments made over the past five years - including upfront costs, disciplined growth, and balance-sheet strengthening - are likely to lift RoA and trigger a valuation re-rating.  Disclaimer: The views or investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.