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Fusion reported an in-line operating quarter with PPOP at INR 2.35bn (+6.5% QoQ, +96% YoY) driven by a) healthy AUM growth of +4.5% QoQ, +31% YoY, aided by robust disbursements (+15% YoY), b) 32bps QoQ NIMs expansion to 10.9% and c) higher other income (+30% QoQ) driven by cross-sell, despite slightly elevated opex levels (+7% QoQ, +38% YoY). However, PAT was at INR 1.2bn (+5% QoQ) impacted by higher provision costs (3.2% annualised) driven by a) high write-offs of INR 0.6bn and b) increase in management overlay to c.60bps. While collection efficiency stood at 97% (stable QoQ), Jul’24 has been impacted by floods in northern states which may impact incremental CE. We expect a sharp normalisation in credit costs starting 3Q24 onwards as backbook pain flows out. In our view, Fusion is set to benefit on account of continued momentum in AUM growth driven by strong borrower acquisition, healthy 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%/23.1% RoA/RoE for FY25E). While Fusion’s stock has run up by c.59% over last 6M (vs 9% for NIFTY/8% for NIFTYFINSERVICES), the stock is still trading at discount to its larger peer at 1.9x FY25E BVPS. Maintain BUY with a revised TP of INR 720 valuing it at 2.1x FY25E BVPS.

* Robust AUM growth: In 1Q23, AUM growth stood at INR 97bn (+31% YoY, +4.5% QoQ) aided by robust disbursement trends (+15% YoY, -4% QoQ) and solid customer additions. While majority of the AUM growth driven by customers additions (total 3.6mn borrowers; +3% QoQ), ATS on disbursements also saw an increase to INR 42,400 (+3% 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: PPOP stood at INR 2.35bn (+6.5% QoQ, +96% YoY) driven by a) healthy AUM growth, b) 32bps QoQ NIMs expansion to 10.9% and c) higher other income (+30% QoQ) driven by cross-sell, despite slightly elevated opex levels (+7% QoQ, +38% YoY). Management expects the NIMs to inch up further, as they have taken a rate hike of 40bps in Jul23 which should aid yields while cost of funds are expected to remain largely stable. While headline asset quality number improved (GNPA/NNPA improved 26bps/9bps QoQ) to 3.2%/0.8%), credit costs were a tad high at 3.2% of AUM driven by high write-offs of INR 0.6bn and increase in management overlay to c.60bps. While collection efficiency stood at 97% (stable QoQ), Jul’24 has been impacted by floods in northern states which may impact incremental CE. We expect a sharp normalisation in credit costs starting 3Q24 onwards as backbook pain flows out (avg. credit costs of 255bps over FY24-25E).

* Valuation and view: Fusion is currently trading at 1.9x FY25E BVPS, which is still at a c.34% discount to larger peer. We expect the stock to deliver superior return metrics (4.6%/23.1% RoA/RoE for FY25E) on the back of continued momentum in AUM growth, healthy asset quality and strong cyclical tailwinds in the sector. Maintain BUY with a revised TP of INR 720 valuing Fusion at 2.1x FY25E BVPS.

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