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Sharp deterioration in asset quality but early green shoots visible

Annualized credit costs at ~23%; reported NIM contracts ~260bp QoQ

* Fusion reported a net loss of ~INR7.2b in 3QFY25 (vs. MOFSLe loss of INR2b) because of NIM compression from interest income reversals and reversal of all net deferred tax assets (DTA) to date. At a normalized tax rate, Fusion would have reported a lower loss of ~INR3.8b, with a standard corporate tax rate applied on the PBT.

* NII declined ~34% YoY to ~INR2.2b (~39% miss), while PPoP declined ~75% YoY to ~INR648b.

* The cost-to-income ratio was elevated at ~76% (PQ: ~40% and PY: ~37%). Net credit costs stood at ~INR5.7b (vs MOFSLe of ~INR5.3b). Annualized credit costs in 3QFY25 stood at ~23% (PY: ~4% and PQ: ~26%).

* Disbursements declined ~57% QoQ to ~INR11.7b. AUM declined ~9% QoQ to ~INR106b.

Reported NIM contracts ~260bp QoQ; Yields decline ~6pp QoQ

* Yields (calc.) declined ~6pp QoQ to ~17.7% while CoF (calc.) rose ~50bp QoQ to ~10.7%. This led to a ~640bp QoQ decline in spreads to ~7%. Reported NIM contracted ~260bp QoQ to 8.9%.

* The share of foreign borrowings in the borrowing mix rose ~60bp to ~19% in 3QFY25 (PQ: 18.4%).

Sharp deterioration in asset quality; GS3 rises ~320bp QoQ

* GS3 rose ~320bp to ~12.6%, while NS3 declined ~70bp QoQ to 1.8%.

* Stage 2 rose ~35bp QoQ to 4.2%. The company increased the PCR across all Stage 1, 2, and 3 loans, resulting in ECL/EAD (incl. management overlay of ~INR595m) of ~16.4% (PQ: ~11%).

* Write-offs for the quarter stood at ~INR1.6b (PQ: INR2b). The collection efficiency of the current portfolio stood at ~97.7% in Dec’24 (higher than ~96.1% in 2QFY25)

Decline in borrower base; Moderation in Fusion + >=4 borrowers

* The borrower base declined to 3.65m as of Dec'24 (down from 3.85m as of Sep'24). Fusion + >=4 borrowers declined to 8.8% (vs. ~9.7% in 2QFY25).

* Fusion has successfully obtained covenant waivers for ~80% of its 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 any lender to date.

* Fusion added 43 branches in the quarter and now has a presence across 22 states (including three UT) with a total branch count of 1,506.

* Capital adequacy stood at ~22.2% as of Dec'24 (vs. 24.4% as of Sep’24)

Valuation and view

* Fusion experienced another challenging quarter, marked by peak quarterly losses and further deterioration in asset quality. AUM and disbursements continued to decline, while credit costs remained high. However, the company witnessed some early green shoots, and the measures implemented have started yielding positive outcomes for the company.

* It will be interesting to hear from the management regarding its credit cost guidance, the overall stress in the MFI sector, and when it expectsthings to be normalized. We may revise our estimates and TP after the earnings call on 13th Feb’25

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