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Earnings miss; sequential decline in credit costs

Sequential ~14% decline in AUM; GS3 improved ~250bp QoQ

* Fusion reported a net loss of ~INR923m in 1QFY26 (vs. MOFSLe loss of INR434m). NII declined ~31% YoY to ~INR2.7b (in line).

* Opex rose 13% YoY to INR2.1b (in line) and the cost-to-income ratio rose ~120bp QoQ to ~70.8% (PQ: ~69.6% and PY: ~38.4%). PPoP declined ~71% YoY to ~INR866m (5% miss).

* Net credit costs declined sequentially to ~INR1.8b (vs est. of ~INR1.4b). Annualized credit costs in 1QFY26 stood at ~9.4% (PY: ~13% and PQ: ~12%).

* Disbursements declined 18% QoQ to ~INR9.5b and AUM declined 14% QoQ to ~INR77b.

* Fusion successfully completed a 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 Jul’25 onward.

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

* Yields (calc.) rose ~180bp QoQ to ~22.2%, while CoF (calc.) declined ~25bp QoQ to ~10.2%, which led to spreads rising ~210bp QoQ to ~12%. Reported NIMs expanded ~170bp QoQ to ~10.3%, primarily driven by lower interest income reversals during the quarter.

* Share of foreign borrowings in the borrowing mix grew ~2pp to ~22% in 1QFY26 (PQ: 20%).

GS3 down ~250bp QoQ; sequential decline in write-offs

* 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.

Decline in borrower base; moderation in Fusion + >=3 borrowers

* The borrower base declined to 2.8m as of Jun'25 (from 3.2m as of Mar'25). Fusion + >=3 borrowers declined to 17.6% (vs. ~18.1% in 4QFY25).

* 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, which were in breach. 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.

* CRAR stood at ~29.5% as of Jun’25 (post rights issue equity infusion).

Valuation and view

* Fusion reported another weak 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.

* It will be interesting to hear from the management regarding its credit cost guidance, the overall stress in the MFI sector and by when it expects things to start trending toward normalization. We may revise our estimates and TP after the earnings call on 11th Aug’25

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