Reduce Fusion Micro Finance; target of Rs 385: ICICI Securities

ICICI Securitie's research report on Fusion Micro Finance

While Fusion’s steady growth momentum sustained during Q1FY25 as reflected in 6% QoQ AUM growth and 8% QoQ NII growth, higher sequential operating cost (up 9% QoQ) and elevated credit cost led to it reporting loss of INR 356mn. NIM remained steady at 11.6% with stable asset yield at 21.7% and 10bps QoQ reduction in cost of borrowing during Q1FY25. Notably, marginal cost of borrowing fell 19bps QoQ to 10.05% vs blended cost of borrowing at 10.1%. Disbursement stood at INR 29.7bn. Average ticket size grew 4% QoQ due to higher disbursements to existing borrower base. Average outstanding per borrower stood at INR 30,867 and net borrower base stood at 3.95mn (up 2% QoQ) as on Jun’24.

Outlook

Fusion Microfinance’s (Fusion) Q1FY25 earnings were marred by elevated credit cost at INR 3.5bn vs INR 1.2bn QoQ. This was led by it proactively moving 55k customers with exposure of INR 2.21bn from stage-1/stage-2 to stage-3 resulting in additional credit cost of INR 1.4bn and INR 0.7bn due to tightening of ECL model. Incremental stress was more visible in TN, MP, Odisha, Rajasthan and Jharkhand with 95% customers of total 55k customers being from these 5 states. Cumulative exposure of these states to total AUM stands at 25-28% as on Jun’24. Uncertainty around credit cost trajectory in the near term persists given the exposure to borrowers with 4+ lenders is at ~24% and >30% its customer have systemic exposure at >INR0.1mn as on Mar’24. Factoring significantly higher-than-expected credit cost in Q1FY25 and likely elevated credit cost in near term, we trim our earnings estimates by 46% / 11% for FY25 / 26E. Downgrade to REDUCE (from Hold) with revised TP of INR 385 (from INR 500), valuing Fusion at 1.1x (1.3x earlier) on Sep’25E BVPS.