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Strong momentum continues; creates additional mgmt. overlay

Fusion exhibited an all-round performance: a) healthy AUM growth of +7.4% QoQ, 37% YoY, aided by robust disbursements (+8.4% QoQ), b) strong operating profits (+58% YoY, 15% QoQ) driven by high NII growth (+11% QoQ) and NIMs at 10.6% (+26bps QoQ) and c) improvement in collection efficiency across geographies resulting in improved asset quality with GNPL/NNPL at 3.46%/0.87% (-23bps/-11bps QoQ). Management expects this trend to continue in the near to medium term as Fusion mines deeper into existing geographies and expands its presence in newer geographies. . We build AUM CAGR of 28% over FY24-25E. PAT for the quarter stood at INR 1.1bn (+12% QoQ) slightly above JMFe with the strong operating profits being utilised to create management overlay of INR 258mn. In our view, Fusion is set to benefit on account of continued momentum in AUM growth driven by strong borrower acquisition, robust asset quality resulting in lower credit costs, focus on technology with respect to driving efficiencies and strong cyclical tailwinds in the sector which in turn will aid Fusion in delivering superior return metrics (4.6%/22.6% RoA/RoE for FY25E). While Fusion’s stock has run up by c.27% over last 3M (vs 5.1% for NIFTY/3.69% for NIFTYFINSERVICES), the stock is still trading at discount to its larger peer at1.4x FY25E BVPS. Maintain BUY with a revised TP of INR 605 valuing it at 1.8x FY25E BVPS.

* Strong AUM growth continues: In 4QFY23, AUM growth was strong at INR 92.96bn (37% YoY, 7.4% QoQ) aided by robust disbursement trends (18% YoY, 8.4% QoQ) and solid customer additions (0.8mn borrowers added during 4Q). While majority of the AUM growth driven by customers additions (total 3.53mn borrowers; +4% QoQ), ATS on disbursements also saw an increase to INR 41,200 (+9% QoQ) and management indicated that they expect ATS to increase by 10% per year going ahead. Management expects the growth momentum to sustain in the near to medium term as Fusion mines deeper into existing geographies and expands its presence in newer geographies. We build AUM CAGR of 28% over FY24-25E.

* Inline operational performance: PAT for the quarter stood at INR 1.1bn (+12% QoQ) driven by high NII growth (+11% QoQ) with NIMs at 10.6% (+26bps QoQ) as the COB remained flat QoQ. Opex remained high (+9% QoQ, +45% YoY) as Fusion continues to invest in branch expansion and building tech for automating processes which will provide benefits in the medium term. GNPA/NNPA improved to 3.46%/0.87% (-23bps/-11bps QoQ) on the back of improved collection efficiency. Credit cost remained a tad high at 3.4% in 4QFY23 on account of management overlay of INR 258mn created this quarter. Mgmt. continues to strengthen the balance sheet with total management overlay now at 0.64%. We expect Fusion maintain its robust asset quality trends going ahead and build avg. credit costs of 244bps over FY24-25E.

* Valuation and view: Fusion is currently trading at 1.4x FY25E BVPS, which is still at a discount to larger peer. We expect the stock to deliver superior return metrics (4.6%/22.6% RoA/RoE for FY25E) on the back of continued momentum in AUM growth, robust asset quality and strong cyclical tailwinds in the sector. Maintain BUY with a revised TP of INR 605 valuing Fusion at 1.8x FY25E BVPS

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