Neutral Fusion Microfinance Ltd For Target Rs.175 by Motilal Oswal Financial Services Ltd
Weak performance; front-loading stress for a cleaner FY26
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), as NIM contracted due to interest income reversals and the reversal of all net Deferred Tax Assets (DTA) to date. At the normalized tax rate, Fusion would have reported a lower loss of ~INR3.8b.
* 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. Annualized credit costs in 3QFY25 stood at ~23% (PQ: ~26%).
* Disbursements declined ~57% QoQ to ~INR11.7b. AUM declined ~9% QoQ to ~INR106b. We cut our FY26/FY27 EPS estimates by ~33%/30% to factor in lower AUM growth and NIM contraction. We estimate an AUM CAGR of ~3% and a PAT CAGR of ~-11% over FY24-FY27, along with an RoA/RoE of ~3.2%/15% in FY27.
* Fusion has obtained covenant waivers for ~80% of its borrowings. Further, the company is in discussions with other lenders and is confident that there will be no demand for immediate repayments from them.
* Regarding its announced Rights Issue, Fusion has received approval from BSE/NSE and is now awaiting SEBI’s clearance. SEBI has raised a few queries, but the company expects to receive approval soon. The Rights Issue is pending final regulatory approval.
* We will keenly monitor the asset quality stress unfolding in the sector. Fusion is seeing early green shoots of recovery and remains highly focused on collections. The company will wait another 1-2 quarters before pursuing growth, as certain regions like TN and Odisha have not yet completely recovered.
* While the improvement in collections indicates early signs of recovery, we need to monitor trends over the next 3-4 months before confidently concluding that this is indeed a trend reversal. With no other near-term catalysts, we reiterate our Neutral rating with a revised TP of INR175 (based on 0.9x Sep’26E P/BV).
Sharp deterioration in asset quality; annualized credit costs at 23%
* 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%).
* Fusion + >=4 borrowers declined to 8.8% (vs. ~9.7% in 2QFY25). Fusion has built a superior quality portfolio since Aug'24 and has seen meaningful de-leveraging within its customer segment.
* 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). Annualized credit costs in 3QFY25 stood at ~23% (PY: ~4% and PQ: ~26%). We model credit costs of 21%/3.0%/2.9% for FY25/FY26/FY27, respectively.
Yields decline ~6pp QoQ; reported NIMs contract ~260bp 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 NIMs contracted ~260bp QoQ to 8.9%, driven by the reversal of interest income from written-off loans and the non-recognition of interest income on Stage 3 assets.
* Marginal CoB rose ~120bp QoQ at ~11.3%. We model NIMs of 12.6%/13.5% in FY26/FY27
Active borrower base declines; branch expansion continues
* The borrower base declined to 3.65m as of Dec'24 (down from 3.85m as of Sep'24). Fusion added 43 branches in the quarter and now has a presence across 22 states (including three UTs) 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).
Highlights from the management commentary
* Fusion has built a superior quality portfolio since Aug'24 and has seen meaningful de-leveraging within its customer segment. While there are still flows into 0+ dpd, they have declined.
* Karnataka Ordinance: The ordinance explicitly states that it will not be applicable to lending institutions registered with the RBI. However, there are still elements attempting to exploit the situation and disrupt operations, even for registered entities.
Valuation and view
* The macroeconomic environment has intensified asset quality stress in the MFI sector in 3QFY25. While we are closely monitoring the situation, we believe that the situation is not merely transitory and that recovery is still distant (refer to our detailed sector note). Over-leveraging of customer cohorts typically manifests itself in asset quality stress over longer periods. We expect it will take another two quarters for the company to resume loan growth and stabilize elevated credit costs at relatively lower levels (than what they are today).
* Fusion, in our view, can deliver an AUM CAGR of ~3% and PAT CAGR of ~-11% over FY24-FY27E. We estimate an RoA/RoE of ~3.2%/15% in FY27. We reiterate our Neutral rating on the stock with a revised TP of INR175 (based on 0.9x Sep’26E P/BV).
.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
