Fusion Micro Finance: Brokerages see up to 64% upside in stock after analysts' meet

Shares of Fusion Micro Finance Ltd have wiped out one-third of their wealth from its 52-week highs at Rs 690.15, hit in August 2023. The stock has remained range-bound for last few weeks, but analysts from various brokerage firms remain largely positive on the shadow lender, after its analysts meet held over the weekend.
 

Brokerage firms see up 64 per cent upside in the counter after the management's guidance in the analysts meet. The company is confident to maintain healthy growth ratio, focus on key markets and emphasis on MSME growth. However, the elevated credit cost remains a concern for the company.
 

Fusion Micro Finance exuded confidence on the delivering healthy return ratios while containing credit costs in the range of 2.6-2.8 per cent in FY25, reiterating that the Punjab portfolio has stabilised with no fresh slippages. Management continued to emphasise on building provision buffers to be used under extraordinary circumstances, said JM Financial in its note.
 

Fusion plans to scale up its secured lending MSME business to 10 per cent of the book in 2 years, utilising its effective credit assessment capabilities. MSME business is currently spread over 10 states and 97 branches catering to more than 17k customers. Increasing geographic reach, enhancing branch productivity and considerably lower credit costs in this business should support overall return ratios going ahead, it said.
 

"We believe that Fusion's valuations remain inexpensive and stability in credit costs will drive rerating from current levels," added JM Financial, which has maintained a 'buy' rating on the stock with a target price of Rs 770, valuing it at 1.9 times FY26e P/BV, suggesting a 64 per cent upside in the stock. "Further disappointment on credit costs guidance is a key risk to our call."
 

Fusion MicroFinance reported a 16 per cent year-on-year (YoY) rise in March quarter net profit at Rs 133 crore against Rs 115 crore in the year ago period, supported by business expansion and higher earnings. The lender's net interest income was 32% higher at Rs 360 crore, while its operating profit was also 31.5 per cent up at Rs 291 crore.
 

Shares of Fusion Micro Finance dropped 1.33 per cent to settle at Rs 475.15 on Tuesday, with a total market capitalization of more than Rs 4,800 crore. The stock is down 32 per cent from its 52-week high. However, the company launched its IPO in November 2022, issuing shares for Rs 368 apiece.
 

Fusion highlighted the capabilities that it has built across its MFI and MSME verticals, treasury and finance, risk management, information technology, and internal audit. Instead of focusing on steep guidance/targets, the management focused on its aim of building a granular and robust balance sheet that can withstand any external stress events, said Motilal Oswal Financial Services.
 

"The management targets to increase the management overlay to 1-1-25 per cent over the next 2-3 years. The management expects NIM expansion to continue in FY25 with better visibility on its borrowing costs. In the long term, it aims for NIM of 12 per cent while optimizing the cost to borrowers and returns to shareholders," it added with a 'buy' call and a target price of Rs 605.
 

Fusion Micro Finance has entered into a loan agreement with the United States International Development Finance Corporation (DFC) for an overall facility of $25 million. The microfinancier received an initial disbursement of $20 million as external commercial borrowing (ECB), which will be used for the expansion of business operations.
 

Takeaways from Fusion Microfinance’s analyst day were flow forward from Punjab contained; management does not envisage further impact of the Punjab portfolio on credit cost and the company shall continue investing towards reinforcing its core MFI business by adopting latest technology to better customer service and underwriting, said ICICI Securities in its note.
 

It would keep at building management overlay – plans to elevate it to 1–1.25 per cent by FY26, from its current 0.6 per cent and the credit cost in FY25 to remain below 3 per cent, which, it aspires to maintain it at 2.6-2.8 per cent. It would incrementally focus on expanding its product portfolio to boost financial inclusion in rural areas., it said with a 'hold' rating and a target price of Rs 500.
 

 

 

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