Incepted in 2010, Fusion Micro Finance Ltd. (FMFL) is one of the youngest companies (for getting an NBFC-MFI license) to reach amongst the top NBFC-MFIs in India in terms of AUM as of June 30, 2022. The company’s key product offerings include income-generating loans that provide capital for women entrepreneurs in rural areas to fund businesses operating in the agriculture-allied and agriculture, manufacturing and production, trade and retail, and services sectors. The business runs on a joint liability group-lending model, wherein a small number of women form a group (typically comprising five to seven members) and guarantee one another’s loans. Apart from this, FMFL also offers its existing customers top-up loans to manage interim working capital requirements for existing businesses and emergency loans to fund urgent financial needs. In addition, they provide the existing customers cross-sell loans that are utilized for livelihood and productivity-enhancing purposes as well as MSME loans to eligible enterprises. The company prioritizes organic diversification with a focus on strategic management of state concentration risk leading to no single state contribution of more than 20.00% of the total AUM. As of June 30, 2022, the company extended its reach to 2.90 million active borrowers through its network of 966 branches spread across 377 districts in 19 states and union territories in India.
The company credits its success in the growth strategy to serving underpenetrated rural areas with high growth opportunities. Fusion Micro Finance benefits from less competition, lower credit penetration, less migration, and better credit behavior in such regions which in turn leads to lower delinquency rates. Among the top ten NBFC-MFIs in India, the company witnessed the highest decline of almost 19% in its cost-to-income ratio between the period FY2019 to FY2022. Additionally, the company had the fourth-lowest gross loan portfolio per district and second-lowest gross loan portfolio per customer in FY2022. The company focuses on a customer-centric model which led them to achieve improving customer retention rates of 71.75%, 70.00%, 68.99%, and 47.43% for the three months ended June 30, 2022, and the financial years 2022, 2021, and 2020, respectively.
With prudent asset liability management and effective liquidity management, Fusion Micro Finance Ltd. aims to diversify its fundraising sources and minimize its costs of borrowing. The company’s average effective cost of borrowings has declined at a steady rate and was 10.10%, 10.43%, 11.23%, and 12.33% for the three months ended June 30, 2022, and the financial years 2022, 2021, and 2020, respectively. Also, to meet its capital requirements the company has 56 lenders in total which include a range of public banks, private banks, foreign banks, and financial institutions. As of
FY2022, this is the second-highest number of lender relationships among the top 10 NBFC-MFIs in India. This is attributable to improving rating upgrades and the company having a stable credit history.
The microfinance industry has seen rapid growth over the past few years owing to the small ticket size and doorstep disbursement. Despite this, a large portion of the market remains underpenetrated, thus creating significant growth opportunities for MFIs like Fusion Micro Finance Ltd. The company’s average asset quality of 2.4% is ranked lowest among all player groups in the northern region between the financial years 2015 and 2022. However, a large portion of the company’s collections and
disbursements from customers are in cash, exposing them to certain operational risks. On the upper end of the price band, the issue is valued at a P/B of 1.1x based on FY22 annualized earnings. However, P/E of 139.4x based on the FY22 annualized earnings is aggressively priced and despite of growth in revenue, the company recorded declining profits. Hence, we are not comfortable with the current valuation and suggest investors to “AVOID” this issue .