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Asset quality worsens leading to going concern risks

Fusion Finance reported net loss of Rs3.1bn (Emkay: Rs1.8bn), mainly due to significantly elevated LLP at Rs6.9bn owing to further deterioration in asset quality with GNPA ratio shooting up to 9.4% (up by 395bps QoQ). Fusion’s AllIndia PAR stands high at 14.9%, including ~22% in Fusion + >=3 lenders, being impacted the most due to customer overleveraging and imposition of MFIN guardrails. Additionally, Fusion breached financial covenants on borrowings of Rs56bn making them repayable on demand and raising going concern risks as per the auditor. However, the management believes that these breaches are temporary and lenders have been supportive, while on-BS liquidity of Rs17.9bn and proposed rights issue of Rs5.5bn should help ease going concern risks. Factoring in the sharp deterioration in asset quality and impact on growth/margins, we expect Fusion to report loss in FY25E, while recovery over FY26-27E should also be slow. We reiterate our REDUCE rating on the stock with a revised TP of Rs155 (0.7x Sep-26E ABV) from the earlier Rs260.

Escalating MFI, liquidity stress to derail growth trajectory

Fusion reported 5% QoQ decline in AUM to Rs115.7bn due to conscious slowdown in disbursement and imposition of MFIN guardrails for customers >4 lenders to deleverage them. However, MSME portfolio has been reporting decent growth with AUM at Rs6.2bn. Fusion’s customer composition of Fusion + >=3 lenders/Fusion + >=4 lenders has reduced from 31.5%/16.9% in Mar-24 to 21.7%/9.7% in Sep-24, and is expected to come down further, thereby hurting growth. Margins declined by 16bps QoQ to 11.5%, mainly owing to decline in overall yields due to interest reversal, which we believe should see further pressure as Fusion’s lenders call for higher rates to offset rising risk and RBI’s continuous push to reduce MFI lending rates.

Asset quality worsens; going concern risks pop up

Slippages were elevated at Rs5.4bn/24.8% of loans leading to 395bps/116bps QoQ jump in GNPA/NNPA ratio to 9.4%/2.4%. The overall collection efficiency was 91% in Q2FY25 and PAR 0+ stood at 14.9%, but states like MP, Odisha, and TN continue to report <90% collection efficiency. The management has strengthened its collection team (550+ officers), rationalized their incentive structure, appointed third-party agencies in few geographies, and leveraged telecalling to improve its collection efficiency. Additionally, Fusion breached financial covenants on borrowings of Rs56bn, making them repayable on demand and raising going concern risks. However, the management believes that these breaches are temporary and lenders have been supportive by granting waivers from covenants, while on-BS liquidity of Rs17.9bn and proposed rights issue of Rs5.5bn should help ease going concern risks.

We reiterate REDUCE

We believe that MFI stress is on the rise across the sector, but the stress seen for Fusion seems to be disproportionately high given its exposure to few high-risk states and exposure to overleveraged customers. Additionally, Founder cum MD Devesh Sachdev’s decision to step down from an executive role too should have a bearing on the growth/asset quality outcomes in the middle of a crisis. Factoring in sharp deterioration in asset quality and impact on growth/margins, we expect Fusion to report loss in FY25E, whereas recovery over FY26-27E should be slow. We reiterate our REDUCE rating on the stock with a revised TP of Rs155 (based on 0.7x Sep-26E ABV vs earlier 1x Jun-26E ABV). Higher-than-expected NPAs feeding into lender loan recalls or the failure of rights issue leading to gradual business slowdown remains a risk.

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