Neutral Fusion Microfinance; target of Rs 165: Motilal Oswal

Motilal Oswal's research report on Fusion Microfinance

Fusion Microfinance (Fusion) reported a net loss of ~INR3.1b in 2QFY25 (vs. MOFSLe loss of ~INR1.8b) due to significantly high credit costs. Its 1HFY25 net loss was INR3.4b, and we expect 2HFY25 loss at INR280m. NII grew ~30% YoY to ~INR4b in 2Q, while PPoP rose ~17% YoY to ~INR2.8b (in line). The cost-to-income ratio stood at ~40% (PQ: ~38% and PY: ~36%). Recalibration of incentive structures and rationalization of manpower at field level led to higher opex. Net credit costs stood at ~INR6.9b (vs. MOFSLe of ~INR5.2b). Annualized credit costs rose sharply to ~26% (PY: ~3.4% and PQ: 13%). Disbursements declined ~44% QoQ to ~INR16.6b. AUM declined ~5% QoQ to ~INR116b. We model credit costs of 15%/3.4% (as % of loans) in FY25/FY26. We cut our FY25/FY26/FY27 EPS estimates to factor in lower AUM growth and high credit costs. We estimate an AUM CAGR of ~13%, a PAT CAGR of ~9% over FY24-FY27 and an RoA/RoE of ~4%/17% in FY26.

Outlook

Fusion will have to navigate tough times ahead to get waivers from its lenders on breach of covenants and will have to give further confidence to all its stakeholders that will remain in a position to discharge all its liabilities (both contracted as well as those repayable on demand, if any). With no other near-term catalysts, we reiterate our Neutral rating with a revised TP of INR165 (based on 0.5x Sep’26E P/BV).

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