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Guidance for FY25 net credit costs revised upwards to ~3%

* Fusion’s 4QFY24 PAT grew 16% YoY to ~INR1.33b (9% miss) because of elevated credit costs. NII grew 31% YoY to ~INR3.6b, while PPoP also grew 31% YoY to ~INR2.9b (7% beat). FY24 PAT grew 31% YoY to INR5.1b.

* Cost-income ratio stood at ~37% (PY: ~36%). Credit costs stood at INR1.2b (~50% higher than estimates) and annualized credit costs rose ~75bp QoQ to 4.8%. This included management overlay of ~INR180m in 4QFY24.

* Disbursements grew 24% YoY/9% QoQ to INR29.5b despite calibrating its growth in a few geographies and halting disbursements in Punjab since Dec’23. AUM grew 23% YoY/7% QoQ to ~INR114.8b.

* We cut our FY25/FY26 EPS estimates by ~3% each to account for higher credit costs. We model an AUM CAGR of ~24% and PAT CAGR of ~28% over FY24-FY26E, driven by strong borrower additions, operating leverage, and higher other income. We estimate RoA/RoE of ~5.3%/21% in FY26. Fusion currently trades at 1.1x FY26E P/BV and we believe its valuation re-rating will depend on its ability to demonstrate predictability around credit costs. We reiterate our BUY rating on the stock with a TP of INR605 (based on 1.4x FY26E P/BV).

* Key risks include: a) credit costs higher than guidance of ~3% in FY25, and b) increase in competitive intensity leading to NIM compression

Spreads rose ~10bp QoQ despite decline in yields

* Yields declined ~10bp QoQ to ~21.8%, while CoF declined ~20bp QoQ to ~10.2%, leading to ~10bp increase in spreads to ~11.6%. Reported NIM rose ~5bp QoQ to 11.6%.

* The share of foreign borrowings in the borrowing mix dropped ~30bp to ~14.4% in 4QFY24 (PQ: 14.7%), while the share of private sector banks increased ~5pp QoQ to ~42%. The company aims to diversify its liability mix to reduce dependence on bank term loans.

* Marginal CoB declined ~20bp QoQ to ~10.25%. Fusion has wellestablished risk-based pricing and is very transparent in pricing disclosures. Further, there are no plans to reduce the lending rate in the immediate future. We model NIMs of 14.0%/13.9% in FY25/FY26.

Asset quality improved; collection efficiency stabilized in Punjab

* GS3/NS3 improved ~15bp/~20bp QoQ to 2.9%/0.6%. Stage 3 PCR rose ~5pp QoQ to ~80%.

* Stage 2 rose ~35bp QoQ to 1.2%. The company increased the PCR across all Stage 1, 2, and 3 loans, resulting in ECL/EAD (incl. management overlay of ~INR595m) of ~3.5% (PQ: 3.2%). The company added management overlay of INR180m in 4QFY24.

Valuation and view

* Fusion has a stable and experienced management team. The company’s digital orientation through its ‘touch and tech’ strategy has positioned it well to deliver a strong operating performance. It enjoys a strong rural presence with its portfolio comprising ~94% of rural AUM.

* Fusion, in our view, can deliver a calibrated CAGR of 24% in AUM and 28% in PAT over FY24-FY26E. It is also poised to deliver RoA/RoE of 5.3%/21% in FY26, aided by scale and productivity benefits, leading to a decline in the cost ratios. This is despite the guidance of higher net credit costs of ~3% in FY25. We reiterate our BUY rating on the stock with a TP of INR605 (based on 1.4x FY26E P/BV).

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