Buy Fusion Microfinance; target of Rs 720: Motilal Oswal

Motilal Oswal's research report on Fusion Microfinance

Fusion's 2QFY24 PAT grew 32% YoY to ~INR1.26b, aided by healthy other income. NII grew 26% YoY to ~INR3.1b, while PPoP grew 29% YoY to ~INR2.42b. The cost-to-income ratio remained stable QoQ and YoY at ~36%. Credit costs (annualized) as % of on-book loans declined ~10bp QoQ to 3.4% Disbursements grew 14% YoY/3% QoQ to INR23.4b. AUM rose ~25% YoY/3% QoQ to ~INR100.3b. Calculated NIM was stable QoQ at 13.8%. We expect minor NIM expansion over the next two years aided by decline in CoB, leading to NIM of 13.9%/14.0% in FY25/FY26. We cut our FY24/FY25 EPS estimates by ~3%/2% to factor in slightly lower AUM growth and higher credit costs. We model an AUM and PAT CAGR of 24% and 32% over FY23-FY26E, respectively, driven by strong borrower additions, NIM improvement, operating leverage and moderation in credit costs.

Outlook

These factors will also lead to an improvement in the return ratios and we estimate RoA/RoE of ~5.7%/22% in FY26. FUSION currently trades at 1.4x Sep’25E P/BV and we believe its valuations could re-rate as it credit cost normalizes to sustainable levels of ~2% and it demonstrates healthy execution on loan growth. Maintain BUY with a TP of INR720 (based on 1.8x Sep’25 P/BV).