Fusion Micro Finance Ltd.’s Q2 FY24 profit after tax grew 32% YoY to ~Rs 1.26 billion, aided by healthy other income. Net interest income grew 26% YoY to ~Rs 3.1 billion, while pre-provision operating profit grew 29% YoY to ~Rs 2.42 billion.
The cost-to-income ratio remained stable QoQ and YoY at ~36%. Credit costs (annualised) as % of on-book loans declined ~10 basis points QoQ to 3.4%.
Disbursements grew 14% YoY/3% QoQ to Rs 23.4 billion. Assets under management rose ~25% YoY/3% QoQ to ~Rs 100.3 billion.
Calculated net interest margin was stable QoQ at 13.8%. We expect minor NIM expansion over the next two years aided by decline in CoB, leading to NIM of 13.9%/14.0% in FY25/FY26.
We cut our FY24/FY25 EPS estimates by ~3%/2% to factor in slightly lower AUM growth and higher credit costs.
We model an AUM and profit after tax compound annual growth rate of 24% and 32% over FY23-FY26E, respectively, driven by strong borrower additions, NIM improvement, operating leverage and moderation in credit costs.
These factors will also lead to an improvement in the return ratios and we estimate return on asset/return on equity of ~5.7%/22% in FY26.
Fusion currently trades at 1.4 times Sep-25E price/book value and we believe its valuations could re-rate as it credit cost normalises to sustainable levels of ~2% and it demonstrates healthy execution on loan growth.
Maintain ‘Buy’ with a target price of Rs 720 (based on 1.8 times Sep-25 P/BV).
Key risks include:
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Sustained asset quality stress from states like Punjab and Haryana which has been a pain point for Fusion;
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regulatory changes toward asset recognition and provisioning; and
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increase in competitive intensity leading to NIM compression.