Fusion Micro Finance IPO: Cheap valuation, smart business model but plenty of risks

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The initial public offer (IPO) of Fusion Micro Finance is set to open for public subscription today and will run through November 4. Analysts have a lukewarm stance on the issue even as they see some positives in the company’s business.

The company and its shareholders plan to raise Rs 1,104 crore from primary investors, which include Rs 600 crore in terms of fresh issue of shares while rest will be the offer-for-sale (OFS) that will give exit to existing shareholders.

Many analysts have a 'neutral' rating on the issue with some advising to 'subscribe'. They recognise diversified portfolios and an advanced operating model but also see several operational risks.

In terms of valuations, the post-issue P/B works out to 1.9x adjusted FY22 book value and P/E of 168 times FY22 Diluted EPS at the upper price band of the IPO. In comparison, CreditAccess Grameen trades at 3.3 times book value. Fusion Micro Finance has reported strong revenue growth (CAGR of 31 percent) and healthy advances growth (CAGR of 33 percent) over a two-year period.

“Though it posted strong growth in topline, it recorded declining profit due to the pandemic, and expansion spending from FY20 to FY22,” said Purves Chaudhari of Angel One. “Going forward, strong tailwinds in the banking sector, uptick in credit cycle and strong Q1FY23 results of Fusion Micro Finance, considering all the positive factors, we believe this valuation is at reasonable levels.”

He has a 'neutral' rating on the issue, and said investors may consider investment from a medium to long term perspective.

Fusion Micro Finance works with female entrepreneurs that are part of the economically and socially underprivileged portion of society to provide them with financial services. It also educates its clients about financial literacy so that they can better manage their money.

Nirmal Bang, who has a ‘subscribe’ rating on the issue, said, Fusion is well placed to deliver return on assets (RoA) and return on equity (RoE) in excess of 4 percent and 20 percent, respectively, on a sustained basis barring any unforeseen event which hampers the microfinance industry every few years.

“Fusion’s metrics are similar to those of the largest listed microfinance player i.e. CreditAccess Gremeen, while Fusion’s valuations are at a steep discount of 45 percent in comparison,” said Jehan Bhadha, Senior Analyst at Nirmal Bang.

The company has a significant footprint across India with 2.90 million active borrowers served through its network of 966 branches and 9,262 permanent employees spread across 377 districts in 19 states and union territories in India.

The company's business runs on a joint liability group-lending model, wherein a small number of women form a group (typically comprising five to seven members) and guarantee one another's loans.

Swastika Investmart, which has a ‘subscribe’ rating as well, underlined a few risks along with positives. “The company has access to diversified and recognised sources of capital and has a good financial track record,” it said. “Although this company's margins are now in declining mode and it is facing risk due to the category of borrowers it serves, an increase in the level of NPAs (bad loans) could also be a concern for the company.”

Religare Broking has a ‘neutral’ rating on the stock.

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