Incorporated in 1994, Fusion Microfinance Limited (FMFL) is engaged in providing financial services to unserved underserved women in rural areas to facilitate their access to greater economic opportunities. FMFL 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 were one of the youngest companies (in terms of getting an NBFC-MFI license) among the top NBFC-MFIs in India in terms of AUM as of June 30, 2022, according to CRISIL.
As of June 30, 2022, the share of AUM from customers in rural areas represented 91.37% of the total AUM. The company'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.
FML endeavors to employ a comprehensive “Touch & Tech” model across all their operations that focuses on maintaining frequent technology-based communication points that enhances operational efficiency, customer experience and optimize costs.
|Name of the company||Total Revenue (Rs. In cr)||EPS (Rs.)||P/BV||GNPA (%)||ROA (%)||ROE (%)||NAV (in Rs.)|
|Fusion Micro Finance Limited||1201.00||2.67||1.8x||5.70||0.33||1.68||161.67|
|Credit Access Grameen||2750.00||23.31||3.4x||3.60||2.78||10.09||255.19|
|Bandhan Bank Limited||16694.00||0.78||2.15x||6.50||0.10||0.72||107.91|
Well Diversified and Extensive Pan-India Presence:
As of June 30, 2022, FMFL had 29 lakh active borrowers, who were served by 966 branches and 9,262 employees across 377 districts in 19 states and union territories in India. FMFL believe 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.
According to CRISIL, 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, for the financial year 2022, 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.
Between March 31, 2016 and June 30, 2022, number of active borrowers grew at a CAGR of 33.6% and number of branches grew at a CAGR of 31.9%. As a result of this expansion efforts, as of June 30, 2022, no single state contributed to more than 20% of total AUM, and proportion of AUM in five largest states in terms of AUM concentration further decreased from 94.6% as of March 31, 2016 to 66.1% of as of June 30, 2022 (five states of Bihar, Uttar Pradesh, Odisha, Madhya Pradesh and Tamil Nadu together account for 66.1% of total AUM).
Proven execution capabilities with strong rural focus:
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. FMFL 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 of 70.0%, 68.9% and 47.4% for FY22, FY21 and FY20, respectively, which can be attributed to superior customer services and commitment to proactively address the specific needs of individuals across large customer base.
Robust underwriting process, risk management policies:
FMFL’s robust risk management policies and underwriting processes, such as extensive customer assessment methodologies and monitoring systems, have resulted in healthy portfolio quality indicators. As of Q1FY23, FY22, FY21 and FY20 gross NPA ratio was 3.6%, 5.7%, 5.5% and 1.1%, respectively, and net NPA ratio was 1.3%, 1.6%, 2.2% and 0.3%, respectively. According to Crisil, the company had the sixth lowest gross NPA ratio among the top 10 NBFC-MFIs in India during FY22, and average asset quality of 2.4% between FY15 and FY22 was the lowest among all NBFC MFIs operating in North India.
FMFL 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 towards diversifying their fund - raising sources and minimizing their costs of borrowings with prudent asset liability management and effective liquidity management. Their average effective cost of borrowings has declined at a steady rate and was 10.10%, 10.43%, 11.23% and 12.33% for the 3 months ended June 30, 2022 and the financial years 2022, 2021 and 2020, respectively. 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 and included 56 lenders as of June 30, 2022, 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 their cost of funds, liquidity requirements and capital management over the years. According to CRISIL, they had the second highest number of lender relationships among the top 10 NBFC-MFIs in India as of March 31, 2022. Their extensive and geographically diverse distribution network allows them to offer “last-mile” connectivity to their customers in remote rural areas
CARE Advisory Research and Training Ltd. have assigned them a grading of “MFI 1” or “MFI One”, which is the highest available grading on an eight - point scale. In addition, their long-term credit ratings have improved from a rating of “BBB” by CARE as of March 31, 2016 to a rating of “A-” by CRISIL, CARE and ICRA as of June 30, 2022, making them one of the youngest NBFC-MFIs with such a strong credit rating, according to CRISIL
Strong track record of financial performance:
Fusion Microfinance reported Net Interest Income (NII) CAGR growth of 34.21% between last 3 years amongst select MFI players whereas Credit Access reported CAGR growth of 23% in last 3 years. PPOP CAGR growth for last 3 years at 61% compared to 19.23% recorded by Credit Access. Asset quality has largely been stable over the past 3 years, despite COVID with GNPA at 5.7% and NNPA at 1.6%. Company has maintained Capital Adequacy Ratio at 22% as of FY22. PAT has been on a declining trend owing to higher provisions, but this should improve going forward with fall in provisions. As on March 31, 2022 FMFL had yield on advances of 20.56% against cost of borrowing of 9.72% resulting in the NIM of 8.66%.
Company has delivered strong growth in the past 3 years with interest income surging from Rs.666 cr to Rs.1064 cr in FY22. For the June quarter ended, Fusion reported a growth of 31% on a YoY basis at Rs.329 cr and maintained its strong growth trajectory. As far as provisions are concerned, it had gone up significantly in the past 3 years due to covid. However, it has substantially fallen in the June quarter on account of improvement in the quality of loan portfolio due to the easing of the COVID-19 pandemic and associated restrictions. Other income significantly increased to Rs.50 cr for the financial year 2022 from Rs.17 cr for the financial year 2021 primarily due to an increase in market support income to Rs.43 cr from Rs.14 cr. For the financial year 2022, they had a current tax of Rs.13 cr and a deferred tax credit of Rs.10 cr. For the financial year 2021, they had a current tax of Rs.59 cr and a deferred tax credit of Rs.46 cr hence tax is showing a declining trend.
Note - Other income comprises market support income, which relates to income earned from showcasing the advertising and distribution of materials of third parties at our branches, income from recovery of loans written off and miscellaneous income
Highly concentrated in the states of U.P & Bihar: Any adverse changes in regulation, social unrest, economic disruption, a natural calamity including floods/drought or any district specific political interference in the states of UP (19% of AUM) and Bihar (19% of AUM) would have an adverse impact on Fusion.
Business is vulnerable to interest rate risk: Company’s business is particularly vulnerable to interest rate risk, and volatility in interest rates could have an adverse effect on NII and NIMs.
Slowdown in rural area: Any signs of slowdown in rural areas could impact company’s financial condition and result into higher NPA’s.
Offer for Sale: There is OFS of 1,36,95,466 (Rs.504 cr worth) shares for which the proceeds will go directly to the selling shareholders.
Areas of concern
Operating in a competitive environment: 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 nature of loans poses a risk: Micro finance 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.
Decline in profitability: Company has witnessed consistent decline in net profit from Rs.69 cr clocked in FY20 to Rs.21 cr due to higher provisions which is a key area of concern.
Fusion has grown its AUM at a CAGR of 37% over FY20-22, one of the fastest amongst listed financials. With a low base of Rs. 7,389 Cr in AUM, the runway for accelerated growth has decent scope over the next 3-5 years. Company is well diversified and has extensive Pan-India presence. Despite covid, Fusion has managed its asset quality well by restricting GNPA/NNPA below the 6%/3% mark over FY21 & 22. With covid now behind us, asset quality concerns have abated and demand for micro loans is on an upswing.
On valuation basis, at upper band of IPO price the stock is valued at Price to Book value of 1.8x post issue which is reasonable as compared to its peers like CreditAccess trading at 3.4x P/BV. We believe that with Strong financials, superior asset quality, steady return ratios, robust AUM growth, Fusion Microfinance is poised for steady growth ahead and thus we assign a subscribe rating to the issue.
Use of Proceeds:
Use of Proceeds: The total issue size is Rs. 1103.99 cr, of which Rs. 600 cr is Fresh issue and balance (Rs.503.99 cr) is Offer for Sale (OFS). The company will utilize the net proceeds from the fresh issue to augment the capital base of the Company.
|Particulars||Amount (in Rs.cr)|
|Augment the capital base of the Company||600|
Book running lead managers:
ICICI Securities Limited, CLSA India Private Limited, IIFL Securities Limited and JM Financial Limited
Devesh Sachdev (Chairman and Managing Director), Gaurav Maheshwari (Chief Financial Officer), Tarun Mehndiratta (Chief Operating Officer – MFI), Kamal Kumar Kaushik (Chief Operating Officer – MSME), Ratna Dharashree Vishwanathan, Namrata Kaul, Pankaj Vaish (Independent Directors), Narendra Ostawal, Kenneth Dan Vander Weele (Nominee director).
|Particulars (Rs. In cr)||FY20||FY21||FY22|
|Net Interest Income||328.00||453.00||568.00|
|Total Operating Expenses||200.00||220.00||312.00|
|Pre-Provisioning Operating Profit||192.00||278.00||393.00|
|Profit before Tax||99.00||58.00||24.00|
|Profit After Tax||69.00||45.00||21.00|
|Earnings per share (EPS)||10.47||5.56||2.67|