Fusion Finance has penalty relief, but some pain points remain #CashNews.co

The stock of Fusion Finance (formerly Fusion Microfinance) has gained over 9% in three trading sessions to August 28 following the company’s announcement on exchanges that the Odisha State Tax department has dropped the show cause notice issued in May directing the company to pay nearly Rs 1.2 crore towards penalty for the excess claim of input credit regarding state GST.

While the stock has shown momentum, investors need to observe caution given the company’s subdued June quarter performance and the subsequent downward revision in the long term rating outlook to ‘negative’ from ‘stable’ by CRISIL while reaffirming A1+ rating.

In a recent sector report, Elara noted that the microfinance segment has been facing regulatory and structural headwinds. “We advise investors to proceed with caution in an industry currently enjoying one of the best margins and lowest credit costs, a trend we believe is on the verge of a reversal,” the brokerage said.

Fusion’s stock has so far lost over 27% since August 6 when the microfinance lender declared the quarterly numbers amid higher credit costs, falling asset quality and overleveraging of customers. This has prompted analysts to reduce the FY25 earnings estimates.

Fusion is present across 22 states in India operating 1,398 branches, which include 101 additional branches that were opened during the June quarter. The concentration of its assets under management (AUM) in the top five states has increased gradually to 70.4% in the June quarter compared with 68% in FY20.

The company’s net interest income increased by 34.9% year-on-year to Rs 396.6 crore in the June quarter while pre-provisioning operating profit (PPOP) grew by 26.5% to Rs 297.8 crore.

However, it reported a net loss of Rs 35.6 crore due to a sharp four and a half times year-on-year jump in impairment of assets. The non-annualised credit cost shot up to 3.3% from 1.2% a quarter ago and 0.9% a year ago. Gross non-performing assets (GNPA) ratio jumped to 5.5% from 2.9% in the previous quarter and 3.2% a year ago.

On the positive side, the company has been able to keep the cost of borrowings under check, to 10.1% in the June quarter from 10.6% a year ago and 12.3% in FY20. Net interest margin (NIM) expanded by 75 basis points (bps) to 11.6%. AUM increased by 25.5% year-on-year to Rs 12,192.6 crore.

Nearly one-fourth of the company’s borrowers are overleveraged since they have taken microfinancing from five or more lenders. This along with weak attendance of borrowers at the group meetings and on-field attrition have caused stress as collection efficiency dropped to 96.3% in the June quarter from 97.3% in the prior quarter.

“We remain watchful of the asset quality stress, which is unfolding in the sector and might again get accentuated by floods in the September quarter in various parts of the country,” said Motilal Oswal Financial Services in a report. The brokerage has reduced the earnings per share (EPS) target by 32% and 8% for FY25 and FY26.

On Wednesday, the stock closed 2.1% higher at Rs 314.3 on the BSE from the previous day’s close, implying a trailing price-book multiple of 1.1.