Q2FY24 Review: Fusion Micro Finance: Weak on slippages & CE; valuations attractive

8 Nov 2023 , 10:05 AM

Fusion reported higher slippages of 3% (+60bps QoQ) and low CE (ex-arrears) of 95.5% in an otherwise in-line P&L performance. This was due to lower CE in 4 states contributing 10-15% of AUM. Management is taking corrective actions to improve CE in these states. Analysts of IIFL Capital Services note that Fusion’s growth and credit costs in FY24 may not be fully comparable to CREDAG’s due to the base effect: latter benefitting from lower AUM base in H1FY23 and higher write offs in FY23 (accelerated w/o policy vs Fusion). Fusion is now trading at 1.6x FY25 P/B for 21% ROEs and is at 50% discount to CREDAG for 8-10% lower profitability. Retain BUY with TP of Rs750. 

In-line P&L numbers…: 

Fusion’s Q2FY24 numbers were broadly in-line with AUM/NII/PAT growth of 25%/26%/32% YoY as spreads expanded 5bps QoQ. Disbursement growth of 15% YoY was soft due to impact of floods and seasonality but has recovered to 20% YoY run-rate in recent months. Management expects spreads to expand 10-30bps further led by lower COF (benefitting from credit rating upgrade). 

…but higher slippages and lower CE a concern: 

Credit costs moderated only 10bps QoQ to 3.0% as Fusion wrote off 1.2% of loans (shift in write off policy to 270DPD). However, slippages inched up 60bps QoQ to 3% and collection efficiency (ex-arrears) was low at 95.5%. Management attributed this to AQ challenges in 4 states (PB, HR, RJ, GJ), constituting 10-15% of AUM, where NPAs were 3x (~7%) compared to that in the remaining states (~2%). Fusion has increased employees and branch density in these geog. with focus on collections. 

Trading at 1.6x FY25 P/B for 21% ROEs: 

Analysts of IIFL Capital Services feel that stock’s sharp negative reaction yesterday is overdone and valuations at 1.6x FY25 P/B for ROAs/ROEs of 5%/21% are attractive. Fusion is now trading at 50% discount to CREDAG for 8-10% lower profitability and is at only 5% premium to Spandana despite having ~500bps higher ROEs. They cut their ests by 4-7% on 15-30bbps higher credit costs and lower NIMs in FY25/26 (pass through to borrower). Retain BUY with TP of Rs750 (reduced from Rs800).