Company Update : Fusion Microfinance Ltd by Motilal Oswal Financial Services Ltd
Moves closer to profitability; stabilization of forward flows a positive
GS3 improves ~80bp QoQ and exhibits a sequential decline in credit costs
* Fusion reported a net loss of ~INR221m in 2QFY26 (v/s est. profit of INR7m). NII in 2QFY26 declined ~38% YoY to ~INR2.5b (7% miss).
* Opex rose 9% YoY to INR2.1b (flat QoQ; inline). The cost-to-income ratio declined ~60bp QoQ to ~70.2% (PQ: ~70.8% and PY: ~40.4%). PPoP declined ~69% YoY to ~INR890m (11% miss).
* Net credit costs declined sequentially to ~INR1.1b (vs. our est. of ~INR1b). Annualized credit costs in 2QFY26 stood at ~6.4% (PQ: 9.4% and PY: 26%).
* Disbursements grew 37% QoQ to ~INR13b. AUM declined ~39% YOY and 9% QoQ to ~INR70b.
Reported NIM rises ~55bp QoQ; calc. yields up ~50bp QoQ
* Yields (calc.) rose ~50bp QoQ to ~22.7%, while CoF (calc.) increased ~30bp QoQ to ~10.5%, which led to a ~20bp QoQ rise in spreads to ~12.2%. Reported NIM rises ~55bp QoQ to ~10.9%.
* Share of public sector banks in the borrowing mix declined ~4pp to ~22% in 2QFY26 (PQ: 26%).
* The company has robust liquidity of ~INR8.9b, an aggregate of cash and cash equivalents and liquid assets, amounting to ~13% of the total assets.
Write-offs dip QoQ; collection efficiency at 98.5%
* GS3 improved ~80bp QoQ to ~4.6%, while NS3 rose ~20bp QoQ to 0.4%. Stage 3 PCR stood at 92% in 2QFY26.
* Stage 2 declined ~25bp QoQ to 2.2%. ECL/EAD (including a management overlay of ~INR445m) declined to ~7.0% (PQ: ~8.2%). Write-offs for the quarter declined to ~INR2.5b (PQ: INR4.9b). Collection efficiency of the current portfolio stood at ~98.5% in 2QFY26. The net flow forward into PAR 0+ stabilized at 0.5-0.6%.
Decline in borrower base along with Fusion + >=3 borrowers
* Borrower base dipped to 2.6m as of Sep'25 (down from 2.8m as of Jun'25). Fusion + >=3 borrowers declined to 13.9% (vs. ~17.6% as on Jun’25), and the company only onboards customers if they are in the current bucket for all their MFI loans.
* CRAR stood at ~31.3% as of Sep’25.
Valuation and view
* Fusion moved closer to profitability in this quarter, supported by a further reduction in credit costs. Disbursements saw an improvement, and the company continues to scale disbursements while maintaining prudent underwriting, which is reflected in stable PAR accretion and healthy CE. Additionally, margins improved during the quarter, aided by higher yields, which were partly attributable to lower interest income reversals.
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