Fusion Micro Finance Ltd IPO

About the company:

About the Company

Fusion Micro Finance Ltd was incorporated on September 5, 1994. The company provides financial services to unserved and underserved women in rural and semi-rural regions of India. The Company has a presence in 19 Indian states with a network of 966 branches. It is the second-largest pure-play microfinance company after CreditAccess Grameen.

As of June 30, 2022, total AUM of the company was at INR 7,389 crore growing at a strong 53.8% CAGR between FY17-21. The company’s gross NPA ratio stands at 3.6% while Net NPA at 1.3% as on June 30, 2022.

Key Sector Tailwinds

Underpenetrated and huge legroom to grow

The company operates in the Micro-Finance Industry which has posted a healthy growth over the past few years. The industry’s gross loan portfolio has increased at a CAGR of 21% since FY18. As per CRISIL research the Micro Finance industry is expected to grow at a CAGR of 18-20% from FY22-25. During the same period the NBFC-MFI are expected to grow at an even faster rate. Given the under penetration of the micro-finance specially in the rural areas and the fact that NBFC-MFI has a larger focus on rural areas, the industry is expected to keep its growth momentum.

New RBI regulations to aid the growth of NBFC-MFI

The RBI has recently released a set of new master directions on micro-finance loans and each of them is set to have a positive impact on the industry. The following are some of the important steps taken by RBI ~

·         Removal of Interest rate cap applicable on loans extended by NBFC-MFIs.

·         The Increase in annual household income cap for microfinance borrowers to INR 3 lakhs.

·         Allow the companies a greater flexibility to offer non-MFI loans.

Key Company Strengths

Well-diversified and low risk of geographic concentration

One of the important factors to look out at, for analyzing micro-finance companies is their geographic concentration. A high geographic concentration is risky for the business as any natural or man-made calamity in that region could severely disrupt the business. Thus, companies should have a well-diversified mix of borrowers.

Fusion Micro-Finance has its operations in 19 Indian states spread across 377 districts. 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 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 has from 94.6% as of March 31, 2016 to 66.1%.

Access to diversified sources of capital

Not only the borrowers you also need your lenders to be diversified as concentration risk applies here too. Over the years, the company has adopted a calibrated approach towards diversifying fund-raising sources and minimising costs of borrowings. The average effective cost of borrowings has declined at a steady rate and was at 10.1%, 10.4%, 11.2% and 12.3% for Q1FY23, FY22, FY21 and FY20, respectively. The company has a large and diversified mix of lenders which has grown over the years and includes 56 lenders as of June 30, 2022. The Lenders comprises of a mix of public banks, private banks, foreign banks and financial institutions.

Strong Operating Performance

The Company’s total AUM has grown at a robust pace of 53.8% CAGR from FY17-21. In the latest quarter i.e., Q1FY23 the gross AUM stood at INR 7,389 crore growing 59.6% YoY. The Net Interest Income has grown at an impressive 34% CAGR from FY20 to FY22. Further, the pre-provisioning operating profit has grown at a CAGR of 42% in the same period.

Robust underwriting process

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. The company had the sixth lowest gross NPA ratio among the top 10 NBFC-MFIs in India during FY22. Further the average asset quality of 2.4% between FY15 and FY22 was the lowest among all NBFC MFIs operating in North India.

Key company Risks

Highly competitive Industry

The company faces significant organised competition from other MFIs, banks and states sponsored social programs in India. Traditional commercial banks as well as regional and cooperative banks may continue to increase their participation in microfinance given the attractive yields on the offerings.

Negligence on Asset quality could be detrimental

The NBFC has been growing aggressively in the past years given the under penetration and scope. It is important to appreciate the fact that the company deals with a very sensitive segment of society. The company’s clients are the underserved & marginal thus are more prone to be affected by any macro or micro event. Therefore, any divergence on their underwriting practices to attract growth could turn out to be catastrophe for the company.

Any major upside changes in the Cost of the Funds could impact the margins of the company

The liquidity and profitability of business depends, in large part, on timely access to, and the costs associated with, raising funds. The funding requirements have historically been met from various sources, including bank loans, NCDs, equity and subordinated debt as well as cash flows from operations to fund operations, capital expenditure and expansion. Given the rising interest rates scenarios, the cost of funds of this NBFC is expected to rise. The movements in borrowing costs are something that should be kept an eye on.

Conclusion

At the upper end of the band, Fusion micro finance demands a price to book (P/B) of 1.8x. Its close competitors CreditAccess Grameen and Spandana Sphoorty financials command a P/B of 3.5x & 1.5x respectively. Given the intense competition, rising interest rates and uncertainty over the revival of rural economy, the IPO appears to be a risky affair. Investors could therefore look to Avoid this IPO as of now and wait for better opportunities.

Key Financials