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Fusion Microfinance (Fusion) continues to deliver industry-leading profitability in Q1FY24- as reflected in it sustaining ~5% RoA and >20% RoE during the past 5 quarters. This is an outcome of its diversified operations with no single state contributing >20% of AUM, rural portfolio accounting for 93%, quality underwriting, proactive risk management and deep understanding of demographics in states where it operates. Disbursements fell by only 4% QoQ vs >20% for peers. Overall, AUM grew 4% QoQ, equally driven by new customer addition and ticket-size increase. While it continued to invest towards distribution expansion (opened >130 branches in the past 1 year), productivity improvement (AUM per branch increased to INR 90mn in Q1FY24 vs 78mn in Q1FY23) led to cost- income ratio remaining stable at 36%. Maintain BUY with a revised target price of INR 800 (earlier INR 650) as we now value at 2.5x Sep’24E BVPS vs 2x earlier given improved visibility on it sustaining 20% RoE in neat term.

* AUM growth remained robust at 31% YoY / 4% QoQ growth Key feature of Fusion’s growth journey so far, including Q1FY24, has been steady growth, unlike industry trend of weak first quarter. Further, Fusion has always focused on customer-led growth as reflected in 24% YoY growth in borrower base during Q1FY24 while ticket size grew only 6% YoY during Q1FY24. Outstanding per borrower now stands at INR 26,997, one of the lowest in MFI space. Total borrower base stands at 3.6mn as of Jun’23. 

* Strong operating performance led to industry-leading profitability PAT during Q1FY24 grew 12% QoQ to INR 1.2bn, largely driven by steady revenue growth and contained operating cost. NII growth remained robust 6% QoQ led by 4% QoQ AUM growth and NIM expansion of >30bps QoQ. Asset   yield expansion at 50bps QoQ to 21.5% protected NIM as cost of borrowing too increased by 20bps QoQ. Quality underwriting, stable management team, strong rural presence (less vulnerable than urban) and negligible exposure in   states that were highly covid-impacted (e.g. Kerala, Maharashtra, West Bengal, Assam) helped Fusion sail through the pandemic phase with relatively better asset quality metrics. As a result, asset quality ratios are steadily declining   from their peaks. During Q1FY24, GNPL fell to 3.2% (3.5% QoQ) while NNPL remained at 0.8% with PCR of 76%. Key risks: 1) AUM growth deceleration and 2) stress unfolding higher than anticipation.

Key risks:

1) AUM growth deceleration and

2) stress unfolding higher than anticipation.

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