Fusion Micro Finance Ltd
Finance - NBFC
Stock Info
Shareholding Pattern
Price performance
Indexed Stock Performance
Stellar Q4 numbers, strong rerating candidate
Company profile
Fusion Micro Finance Limited (Fusion) was founded in 2010 and is engaged in providing financial services to unserved and underserved women in rural areas to facilitate their access to greater economic opportunities. Fusion had the fourth fastest gross loan portfolio CAGR of 54% between the financial years 2017 and 2021 and is among the 10 largest NBFC-MFIs in India, and was one of the youngest companies (in terms of getting an NBFC-MFI license) among the top NBFC-MFIs in India in terms of AUM.
Since its inception, Fusion has prioritized organic geographic expansion with a focus on strategic management of state concentration risk by expanding into underpenetrated rural areas. Fusion’s focus customer segment is women in rural areas with an annual household income of up to INR 300,000. Fusion’s business runs on a joint liability group-lending model, wherein a small number of women form a group (typically comprising five to seven members) and guarantee one another’s loans.
Fusion employed a comprehensive “Touch & Tech” model across all their operations that focus on maintaining frequent technology-based communication points that enhance operational efficiency, and customer experience and optimize costs.
Investment Arguments
Well - Diversified and Extensive Pan-India Presence
As of March 31, 2023, Fusion had an AUM of INR 9296 cr and has achieved a significant footprint across India. Its reach extends to 3.53mn active borrowers. Fusion believes its extensive geographic presence puts it in a vantage position to lend across the country in a scalable manner while maintaining low operating costs, helping to mitigate any risks arising from economic, political, cultural, or environmental factors particular to a specific region.
Fusion Micro had the 4th lowest gross loan portfolio per district and 2nd lowest gross loan portfolio per customer among the Top-10 NBFC-MFIs in India, demonstrating better diversification and lower risk per customer. As a result of their active management of state concentration, they have been able to maintain low levels of AUM concentration per state despite their growth over the years.
Proven execution capabilities with a strong rural focus
Fusion focuses predominantly on customers in rural areas in India, who largely lack access to formal banking and present a latent opportunity for micro-loans players. Over the last decade, Fusion has built a deep rural franchise in the microfinance segment. The company has been able to achieve significant success with its growth strategy of targeting underserved and underpenetrated rural areas in both existing markets and new geographies. Fusion has a long history of serving rural markets with high growth potential in the microfinance segment and has maintained a track record of financial performance and operational efficiency through consistently high rates of customer acquisition and retention and low-cost expansion into underpenetrated areas. The company has also achieved improving customer retention rates which can be attributed to superior customer services and commitment to proactively addressing the specific needs of individuals across a large customer base.
Robust underwriting process, risk management policies
Fusion’s robust risk management policies and underwriting processes, such as extensive customer assessment methodologies and monitoring systems, have resulted in healthy portfolio quality indicators.
Fusion employs proactive practices that involve frequent evaluations of portfolio risk levels on a periodic basis and rigorous monitoring and analysis of cash disbursements and collection, roll rates and customer retention at both branch and head office levels, which minimize the incidence of bad debts. Its robust underwriting processes and risk management policies, such as its extensive customer assessment methodologies and monitoring systems, have resulted in healthy portfolio quality indicators such as low rates of gross NPAs and net NPAs.
Access to Diversified Sources of Capital and Effective Asset Liability Management
Fusion Micro has adopted a calibrated approach toward diversifying its fundraising sources and minimizing its costs of borrowings with prudent asset liability management and effective liquidity management. Prudent asset liability management and effective liquidity management led to a steady decline in the cost of borrowings.
Their focus on building a healthy balance sheet with a good mix of assets, liability, and equity and a positive net asset position has enabled them to overcome various negative market conditions in the past. They have benefited from a large and diversified mix of lenders which has increased over the years, comprising a range of public banks, private banks, foreign banks, and financial institutions to meet their capital requirements.
Fusion Micro has been able to optimize its cost of funds, liquidity requirements, and capital management over the years. Their extensive and geographically diverse distribution network allows them to offer “last-mile” connectivity to their customers in remote rural areas.
Q4FY23 Financial Performance
Fusion Microfinance reported another quarter with growth across all metrics. Net Interest Income (NII) saw a growth of 62% YoY to Rs.274 cr. Pre-provision operating profit rose 48% YoY at Rs 221 crore.
The company reported the highest-ever PAT. Net Profit jumped nearly nine fold to Rs.114.52 cr YoY on business growth. Assets under Management (AUM) saw a robust growth of 37% YoY to Rs.9296 cr. NIMs expanded by 26 bps to 10.57%. Gross non-performing asset (GNPA) and net non-performing asset (NNPA) in FY23 stood at 3.5% and 0.9%.
Key risks & concerns
Business is vulnerable to interest rate risk: The Company’s business is particularly vulnerable to interest rate risk, and volatility in interest rates could have an adverse effect on NII and NIMs.
Competitive intensity: Competition from other MFIs, banks, and financial institutions, as well as state-sponsored social programs, may adversely affect its profitability and standing in the Indian microcredit lending industry.
Exposure to unsecured loans poses a risk: Microfinance loans being unsecured are inherently riskier than other forms of loans. Further micro loans are mainly focused on the bottom of the pyramid borrowers and thus pose a high risk in the eventuality of a severe economic slowdown.
Outlook and Valuation
The runway for accelerated growth has decent scope over the next 3-5 years. The company is well-diversified and has an extensive Pan-India presence. Despite covid, Fusion has managed its asset quality well. With covid now behind us, asset quality concerns have abated and demand for micro loans is on an upswing.
We believe that with Strong financials, superior asset quality, steady return ratios, and robust AUM growth, Fusion Microfinance is poised for steady growth ahead. We expect an improvement in return ratios on account of strong credit growth, credit cost normalization & NIM expansion. At a CMP of Rs.488, the stock is trading at Price to Book value of 1.4x FY25E 9Book value – Rs.349) which appears reasonable. Hence, we recommend a BUY on the stock.