IGI Logo

From fire-fighting to stability, yet profitability concerns linger GS3 improves ~250bp QoQ; AUM declines ~14% sequentially

• Fusion Finance (FUSION) reported a net loss of ~INR923m in 1QFY26 (vs. est. loss of INR434m). NII declined ~31% YoY to ~INR2.7b (in line). Opex rose 13% YoY to INR2.1b (in line) and cost-to-income ratio rose ~120bp QoQ to ~70.8% (PQ: ~69.6%). PPoP declined ~71% YoY to ~INR866m (5% miss).
• Net credit costs declined sequentially to ~INR1.8b (vs. est. of ~INR1.4b). Annualized credit costs stood at ~9.4% (PY: ~13% and PQ: ~12%).
• FUSION had breached covenants on borrowings of ~INR36b, resulting in these borrowings becoming payable on demand. The company has successfully obtained covenant waivers for ~72% of such borrowings. The company is in discussion with the remaining lenders to obtain similar extensions and no demand for immediate repayment of borrowed funds has been made by lenders to date.
• Management highlighted that the portfolio originated after Aug’24 continues to demonstrate strong asset quality, underscoring the effectiveness of revised underwriting standards (in line with MFIN guardrails) and enhanced collection processes. In 1QFY26, collection efficiency for this new portfolio stood at 99.5%. The company also reported an improvement in overall collection efficiency and reduction in forward-flow rates during the quarter, with expectations of further improvement in the coming quarters.
• Disbursements declined 18% QoQ to ~INR9.5b. AUM fell ~37% YoY and 14% QoQ to ~INR77b. Management shared that FUSION has moved beyond firefighting and is now stabilizing and strengthening. In FY26, it will focus on transitioning to a growth phase cautiously but with confidence.
• We have lowered our FY26 EPS estimate and now project a net loss in FY26, compared to our earlier expectation of a marginal profit. We estimate an AUM CAGR of ~1% and a PPOP CAGR of ~-9% over FY25-27, along with RoA/RoE of ~3.7%/12% in FY27E.
• We will keenly monitor the asset quality trends unfolding in the sector as a trend reversal is on the horizon. The recent improvement in collections and flow rates suggests signs of a positive turnaround. However, stable performance over the next 1-2 quarters will be crucial to validate this recovery as a definitive shift. With no other near-term catalysts, we reiterate our Neutral rating with a revised TP of INR170 (based on 1x Mar’27E P/BV).

GS3 declines ~250bp QoQ; collection efficiency improves

• GS3 declined ~250bp QoQ to ~5.4%, while NS3 declined ~10bp QoQ to 0.2%. PCR rose ~20bp QoQ to 96.6%.
• Stage 2 declined ~70bp QoQ to 2.45% and S2 PCR rose ~8pp QoQ to ~72%. ECL/EAD (incl. management overlay of ~INR595m) declined to ~8.2% (PQ: ~10.9%). Write-offs for the quarter stood at ~INR4.9b (PQ: INR9.2b). Current portfolio collection efficiency stood at ~98.5% in 1QFY26.
• Annualized credit costs in 1QFY26 stood at ~9.4% (PY: ~13% and PQ: ~12%). We model credit costs of 6%/3% for FY26/FY27.

Reported NIMs expand ~170bp QoQ; Calc. yields rise ~180bp QoQ

• Yields (calc.) rose ~180bp QoQ to ~22.2%, while CoF (calc.) declined ~25bp QoQ to ~10.2%, leading to a ~210bp QoQ rise in spreads to ~12%. Reported NIMs rose ~170bp QoQ to ~10.3%. This was primarily driven by lower interest income reversals (of ~INR250m-260m) during the quarter.
• Marginal CoB rose ~160bp QoQ to ~13.3%. Management shared that reported NIM is expected to remain in the range of 10.25-10.5% in FY26. We model (calc.) NIM (as a % of gross loans) of 14.6%/15.3% in FY26/FY27.

Active borrower base declines; reduction in Fusion+>=3 customers

• The borrower base declined to 2.8m as of Jun'25 (down from 3.2m as of Mar'25). Fusion + >=3 borrowers declined to 17.6% (vs. ~18.1% in Mar’25).
• FUSION successfully completed the rights issue of INR8b in Apr’25. Given that these were partly-paid up shares, the company has received ~INR4b from this rights issue. As of Jun’25, the funds were parked in scheduled commercial banks. The company had planned to utilize the proceeds from the rights issue from Jul’25 onward.
• CRAR stood at ~29.5% as of Jun’25 (post rights issue equity infusion).

Highlights from the management commentary

• The company has categorized the states where it has presence into three types of markets: Growth markets (Uttar Pradesh, Andhra Pradesh, Maharashtra, Telangana, and Assam), maintain markets (Madhya Pradesh, Tamil Nadu, Bihar, West Bengal, Jharkhand, and Rajasthan), and reduce exposure markets (Odisha and Gujarat).
• The company changed its write-off policy from 240dpd to 180dpd in 1QFY26, resulting in INR4.86b of write-offs.
• Disbursements in Jul’25 crossed INR4b, with approval rates improving to ~20% from 12-15% earlier, aided by the development of matured credit intelligence.

Valuation and view

• FUSION reported another soft quarter, with both AUM growth and disbursements remaining muted as the company maintained its strategic focus on improving portfolio quality and strengthening collection efficiency. On a positive note, credit costs saw a sequential decline, supported by improved collection efficiency and lower delinquencies during the quarter. The company is taking slow and measured steps to regain stability and normalcy.
• FUSION, in our view, is likely to deliver an AUM CAGR of ~1% and PPOP CAGR of ~-9% over FY25-27. We estimate RoA/RoE of ~3.7%/12% in FY27. With no nearterm catalyst, we reiterate our Neutral rating on the stock with a revised TP of INR170 (based on 1x Mar’27E P/BV).

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412