IGI Logo

We recently hosted the management of Fusion Micro Finance for an NDR. Management reiterated its focus on deepening presence and driving customer growth without chasing ticket size led growth. Growth is likely to come from existing districts given Fusion is already is present in 20 states and currently no district is >3% of overall AUM for Fusion. The company aspires to maintain healthy medium growth trajectory (3QFY23 AUM grew 45% YoY) without losing sight of risk parameters. Fusion aspires to deliver return profile of ~4.5% on RoA and 18-20% on RoEs on a steady state basis. Management will also continue to strengthen the balance sheet by creating excess provision buffers (as stated in the past). We believe Fusion’s operating metrics remain on a strong footing and the company should see continued earnings momentum. Fusion’s stable management, focus on technology with respect to driving efficiencies and ability to grow borrower base faster than peers should hold the company in good stead as the sector enters a sweet spot w.r.t. growth and asset quality. Currently, Fusion trades at attractive valuation of 1.2x FY25E BVPS in wake of 4.6%/23.2% RoA/RoE for FY25E and earnings CAGR of 36%over FY23-25E. Maintain BUY with a target price of INR 570 valuing it at 1.7x FY25E BVPS.

* Customer addition, productivity uptick to drive AUM growth: Fusion’s rural focus (>90% rural portfolio) and a large share of agri/agri-allied customers implies that impact of the purported rural slowdown has been minimal given the “cost-plus” model of these customers. Deepening presence in existing districts (396 districts), higher productivity of branches opened over last couple of years (332 added since Mar’21 forming 31% of branch network presently) are likely to drive growth for Fusion. In 9MFY23, Fusion has added 0.68m customers (highest in our MFI coverage) and believes healthy growth rates in AUM (45% YoY for 3QFY23) are sustainable.

* Operating metrics on a strong footing: Fusion has raised lending interest rates by ~180bps over FY23 while it has seen cost of funds increase by 78bps. As a result, NIMs are likely to remain strong for Fusion in the near-term. Also, with credit rating improvement seen in Nov’22 is likely to aid cost of funds for Fusion on an incremental basis. Collection efficiency remains steady with portfolio originated post Mar’21 (which is 97% of the AUM as of Dec’22) exhibiting 98% collection efficiency. Management believes Fusion’s stance of opting for lower restructuring during Covid has aided the sharp normalization in its asset quality vs industry. As a prudent measure, Fusion intends to create provision buffer of ~2.5% of loans over the medium to long term.

* Valuations and view: Fusion’s performance in relation to outstanding restructured assets, write-offs has been relatively healthy and we expect the same to sustain given improving sector dynamics. Fusion trades at attractive valuation of 1.2x FY25E BVPS in wake of 4.6%/23.2% RoA/RoE for FY25E and earnings CAGR of 36%over FY23-25E. Maintain BUY.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer