Fusion Micro Finance IPO Fundamental Analysis (Avoid)

Fusion Micro Finance IPO Review

Incepted in the year 2010, Fusion MFI provides financial services to underserved women across India in rural areas with an annual household income of up to ?300,000. The Issuer’s microfinance lending business is based on joint liability group-lending model.
Fusion MFI had 2.90 million active borrowers which were served by a network of 966 branches and 9,262 employees spread across 377 districts in 19 states and union territories in India.
The total AUM was Rs 7389.02crore (Q1FY23), Rs 6785.97 crore (FY22), Rs 46,37.84 crore (FY21), and Rs 36,06.52 crore (FY20), respectively. As of June 30, 2022, the share of AUM from customers in rural areas represented 91.37% of the total AUM.
Gross NPA ratio was 3.67% (Q1FY23), 5.71% (FY22), 5.51% (FY21), and 1.12% (FY20), respectively, and net NPA ratio was 1.35%, 1.64%, 2.20%, and 0.38%, respectively.
The Issuer has access to 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 capital requirements.
The Issuer raised Rs 10853.09 crore in debt as well as Rs 572.70crore in equity over the last three financial years despite volatility across the financial services industry during this period.
Consistently maintained healthy capital adequacy ratios and, as of June 30, 2022, March 31, 2022, 2021, and 2020, our CRAR was 21.13%, 21.94%, 27.26%, and 35.82%, respectively, which were well above the requirement of 15.00% for NBFCs prescribed by the RBI, and debt to equity ratio (in times) was 4.24, 4.32, 3.56 and 2.48, respectively.

Financial Profile

Fusion Microfinance earned an interest income of Rs 360.45 crore for Q1FY23 and posted a PAT of Rs 75.10 crore for the same period. The Issuer's interest income rose by 29% to Rs 1064.32 crore for FY22 against Rs 827.56 crore for FY21. However, PAT has reduced to Rs 21.76 crore for FY22 from Rs 43.94 crore in FY21. The decrease was due to higher finance costs and operating costs during the year.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Particulars	Q1FY2023	Q1FY2022	FY2022	FY2021	FY2020
Total Revenue	360.45	264.96	1201.35	873.09	730.31
Interest Income	329.36	249.97	1064.32	827.56	666.49
PAT	75.1	4.41	21.76	43.94	69.61
EBITDA	224.79	129.86	525.76	495.79	440.24
Total Assets	7615.24	5824.87	7290.48	5837.93	4239.99

Fusion MFI has a higher debt-equity ratio of 4.24 (Q1FY23), 4.32 (FY22), 3.56 (FY21), and 2.48 (FY20). The total borrowings were Rs 6182 crore as on 30th June 2022. In this nature of business, MFI/NBFCs have to raise funds through a mix of debt and equity and thus their debt and finance costs are on the higher side. For Fusion MFI also, debt and finance costs show an increasing trend.

Valuation and Peer Comparison

The IPO is valued at 10.14 times with annualized EPS of 36.28 for Q1FY23 calculated at the upper price band of Rs 368. However with EPS of 2.67 for FY22, P/E is 137.83x as compared to industry average of 114.50x which indicates that the IPO is valued at a higher side. For listed peer related data and information, refer the Peer table comparison given below.

Table 2 - Listed Peer Comparison
Particulars	Credit Access Grameen	Spandan Sphoorty	Bandhan Bank	Ujjivan	Equitas	Suryoday	Fusion
Face Value/share	10	10	10	10	10	10	10
Total Income for FY22 (Cr)	2750.13	1480.04	16693.9	3126.1	3997.2	1035.4	1201.4
EPS (FY22)	23.31	10.75	0.78	-2.4	2.43	-8.76	2.67
NAV per share	225.19	447.21	107.91	16.22	33.91	141.78	161.7
Return on net worth	8.98%	2.26%	0.72%	-14.91%	6.61%	-6.98%	1.63%
P/E	42.6	52.76	342.44	NA	20.21	NA	NA
Gross NPA(FY22)	3.60%	15%	6.50%	7.10%	4.10%	11.80%	5.70%
Current market price	953.1	599.2	265.35	25	49	99.2	NA
IPO price	422	856	375	37	33	305	368
Listing price	385	825	487	58.75	31	292	NA
Listing Year	Aug-2018	Aug-2019	Mar-2018	Dec-2019	Nov-2020	Mar-2021	NA

Issue Details

FusionIPO opens on 2^nd Nov- 4^th Nov 2022 with a price band of 350-368 per share. The retail quota is 35% and investors can apply with a minimum bid of 40 shares (Rs 14,720). The maximum lot size is 520 shares (Rs 1,91,360). The issue is both a fresh issue and an offer for sale by promoter group, Oikocredit, and Global Impact Funds. The issue is expected to list on 15^th Nov 2022.

Conclusion and Investment Strategy

The Issuer has been one of the youngest companies in terms of getting an NBFC-MFI license and among the top NBFC-MFIs in India in terms of AUM as of June 30, 2022. The Issuer had the fourth fastest gross loan portfolio CAGR of 53.89% between FY 2017 and FY 2021 among the 10 largest NBFC-MFIs in India.

However, If we analyze the listing of NBFCs as shown above, one can see that NBFCs listed in the last couple of years have not been able to give good returns to investors. This is mainly due to the challenges faced by the sector such as raising sufficient funds, high credit costs, compliance issues, and high operating costs.

In addition to the above, the Issue appears to be overvalued and hence one can avoid this IPO.

Reviewer recommends Avoid to the issue.

Review By CA Priyanka Choudhary on 27th Oct 2022

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.