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Steady start to FY27; growth trajectory intact

* Fusion Finance’s (FUSION) net profit rose 67% QoQ to INR624m in 1QFY27 (~11% miss but not very significant given the base). NII in 1QFY27 declined ~11% YoY to ~INR2.4b (in line). Opex declined ~2% YoY to INR2.06b (in line). Cost-income ratio declined ~190bp QoQ to ~67% (PQ: ~69% and PY: ~71%).

* PPoP rose ~18% YoY to ~INR1.02b (6% miss). Net credit costs declined sequentially to ~INR397m (in line). Annualized credit costs in 1QFY27 declined ~115bp QoQ to ~2.5% (PQ: ~3.6%).

* FUSION’s growth is expected to be driven by sustained MFI momentum, scaling of MSME, and expansion across identified customer segments, with a focus on higher-quality, lower-leverage customers, selective market expansion, and greater productivity from the existing branch network.

* MSME will emerge as a key growth driver, where the company will leverage its existing MFI infrastructure through a hub-and-spoke model. The company expects MSME to contribute ~15% to the disbursement mix (rising to ~20% thereafter). The planned launch of individual loans should further broaden the product suite. With MFI momentum sustaining and MSME scaling up, the company is confident of delivering AUM CAGR of ~20-25% over the medium-term and scaling up to an AUM of ~INR100b by end-FY27.

* After navigating a prolonged period of industry stress, FUSION is witnessing broad-based improvement, with healthier customer profiles, stronger collections, and a more disciplined growth. We increase our FY27/FY28 PAT estimates by ~5%/~2%, primarily to factor in higher NIM and lower credit costs. The stock currently trades at 1.0x FY28E P/B. We expect FUSION to deliver an AUM CAGR of ~27% over FY26E-28, with an RoA/RoE of ~4.3%/15% by FY28. We reiterate our BUY rating with a TP of INR260 (based on 1.3x FY28E P/BV).

Higher yield and normalization of surplus liquidity to support NIM expansion

* Reported NIM expanded ~50bp QoQ to ~11.9%. Yields improved ~80bp QoQ to 22.5%, while the CoB increased ~30bp QoQ to ~10.6%, resulting in spreads improving ~50bp QoQ to ~11.9%.

* The margin trajectory is expected to improve as the benefit of higher lending yields flows through to the portfolio. The company expects this improvement to more than offset any potential increase in funding costs, with further support from a gradual reduction in surplus liquidity.

* As the re-built franchise scales up and the portfolio mix improves, management expects NIM to expand further in FY27. We expect FUSION’s NIM to expand to ~14.7%/~15.3% in FY27/ FY28.

Valuation and view

* FUSION delivered a steady 1QFY27 performance, marked by healthier portfolio quality and operating metrics. Stronger underwriting and collections supported credit cost moderation, while higher yields and improving growth momentum provide a favorable backdrop for sustained earnings growth. Overall, FY27 has started on a stronger footing, with the business positioned for a healthy growth trajectory and improving profitability ahead.

* The stock currently trades at ~ 1.0x FY28E P/B. We expect FUSION to deliver an AUM CAGR of ~27% over FY26E-28, with an RoA/RoE of ~4.3%/ 15% by FY28E. Reiterate our BUY rating with a TP of INR260 (based on 1.3x FY28E P/BV).

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