Fusion Finance Limited — Q3 FY25 earnings call

Call held 13 Feb 2025

Management summary

Fusion Finance reported a challenging Q3 FY25 but highlighted significant improvements in asset quality metrics, with NNPA reducing to 1.7% and Stage 3 provision coverage increasing to 88%. The company proactively addressed building stress through stringent credit criteria and operational changes, leading to improved collection efficiency. While growth is expected to remain calibrated for the next 1-2 quarters, management is optimistic about stabilization from Q1 2026, supported by a planned INR800 crores rights issue and continued lender support despite covenant breaches.

Highlights

  • Net Collection Efficiency for current portfolio improved to 97.7% in December '24 from 96.1% in Q2 FY'25, indicating positive early green shoots.

  • NNPA significantly reduced to 1.7% in December '24 from 2.4% in the previous quarter, supported by increased provision coverage.

  • Provision coverage on Stage 3 loans increased to 88% in December '24 from 76% in September '24, prudently strengthening the balance sheet.

  • Capital Adequacy Ratio remained healthy at 22.2% as of December 31, 2024, with a planned INR800 crores rights issue expected to boost it to over 30%.

  • Successful waivers obtained from majority of lenders for covenant breaches, demonstrating continued faith in Fusion's business fundamentals.

Concerns

  • Gross NPA stood at 12.58% as of December '24, indicating a significant portion of the portfolio under stress.

  • The company is in breach of financial covenants amounting to INR5,288 crores, though waivers have been obtained for most of it.

  • Disbursement pick-up and active growth are expected to take another 1-2 quarters, with stabilization anticipated from Q1 2026.

  • High attrition rates for loan officers were observed in August/September, though they have since come down to under 50%.

Key financials

3 periods

Headline

  • AUM
    ₹10,599 Cr
  • Capital Adequacy Ratio
    22.2%
  • NNPA
    1.7%
    QoQ -29.2%
  • GNPA
    12.6%
  • Stage 3 Provision Coverage
    88%
    QoQ +15.8%
  • Net Collection Efficiency
    97.7%
    QoQ +1.7%
  • Pre-provisioning Operating Profit
    ₹646.36 Cr

Q3

  • ECL Provision
    ₹572 Cr

9M

  • FY25 NIM
    10.7%

What they filed

Q1 FY27: revenue up 3.6%, net profit up 167.4% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue692 474 466 442 401 −42%416 −12%424 −9%458 +4%
Net profit-305 -719 -165 -92 -22 +93%14 +102%114 +169%62 +167%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Capital allocation

high confidence
  • Debt Debt disclosed Cost 10.2%
    • New borrowing Raised in Q3 FY25, including INR95 crores of direct assignment. ₹395.18 Cr
    • New borrowing Raised in 9M FY25, including INR1,010 crores of direct assignment. ₹4,450 Cr
    • New borrowing Incremental liability raised since December till date in Q4 FY25. ₹400 Cr
    Our marginal cost of fund stands at 10.15% for 9M FY25, which is a reduction of 43 bps on a year-on-year basis. The average cost of fund stands at 10.21%, and it has decreased by 32 bps on a year-on-year basis.
  • Liquidity Cash ₹1,151 Cr · Undrawn ₹1,223 Cr Liquidity stands at INR1,151 crores as of December 31, 2024, with sanctions in hand of INR1,223 crores. As of February 12, 2025, liquidity was closer to INR1,400 crores.
    As of December 31, 2024, our liquidity stands at INR1,151 crores. And we have sanction in hand of INR1,223 crores. As of yesterday, the liquidity stands at closer to INR1,400 crores.

Guidance & targets

Capital Adequacy

  • Capital Adequacy Ratio Capital Adequacy · post INR800 crores rights issue · High confidence 30-plus percent
    capital adequacy ratio, which would be 30-plus percent if you pro forma for the INR800 crores rights issue planned, further strengthening our balance sheet.

    — Devesh Sachdev

  • Capital Adequacy Ratio Capital Adequacy · after first tranche of rights issue · High confidence around 25%
    Even if we get in the first tranche the INR400 crores, I think our capital adequacy will start touching around 25%.

    — Devesh Sachdev

Business Stabilization

  • Stabilization of Operations Business Stabilization · Q1 2026 · Medium confidence Q1 2026
    While we'll continue to closely watch the situation, we should start seeing stabilization from Q1 2026.

    — Devesh Sachdev

Growth

  • Disbursement/Growth Pick-up Growth · next 1-2 quarters · Medium confidence 1-2 quarters
    I believe that this will continue further 1 or 2 quarter. And then I think you will see us coming back.

    — Devesh Sachdev

  • Active Growth Growth · next 1-2 quarters · Medium confidence 1-2 quarters
    I think it will take us another 1 or 2 quarters before we start looking at very actively on the growth.

    — Devesh Sachdev

Regulatory Impact

  • Impact of New MFIN Guardrails Regulatory Impact · from April 1, 2025 · High confidence minimal impact
    Therefore, there will be minimal impact of new MFIN guardrails to be effective from April 1, 2025.

    — Devesh Sachdev

Portfolio Quality

  • Fusion plus less than, equal to 2 lenders bucket share Portfolio Quality · over the period · Medium confidence increase further

    From 80% today

    About 80% of our clients fall under Fusion plus less than, equal to 2 lenders bucket as of December '24; and we expect this share to increase further over the period.

    — Devesh Sachdev

Asset Quality

  • Write-off Recovery Rate Asset Quality · over a period of time · Medium confidence 5% to 7%
    I think you will see broadly the recovery will be anywhere between 5% to 6%, to 7%.

    — Devesh Sachdev

What to watch in Q4 FY25

Business Stabilization & Growth

next 1-2 quarters, stabilization from Q1 2026
Current Collections improving, disbursals slowed
Target Stabilization and active growth

Why it matters

This is crucial for the company's return to sustainable growth and improved financial performance.

I believe that this will continue further 1 or 2 quarter. And then I think you will see us coming back.

Risks & concerns

  • Covenant Breaches with Lenders

    high

    Breach of financial covenants amounting to INR5,288 crores as of December '24, though waivers have been obtained for INR4,145 crores, and discussions are ongoing for the remainder.

    Management acknowledged

  • Building Stress in the Industry

    medium

    Management recognized and proactively addressed 'building stress at the beginning of this financial year' through various initiatives.

    Management acknowledged

  • Credit Squeeze for Microfinance Customers

    medium

    Strong industry-wide guardrails may lead to a 'credit squeeze' for microfinance customers for some time, though seen as positive long-term.

    Management acknowledged

  • High Employee Attrition

    medium

    High attrition rates for loan officers were observed in August/September, but have since reduced to under 50% due to operational changes and incentives.

    Management acknowledged

  • Karnataka Ordinance Impact

    medium

    Newly notified Karnataka ordinance, while not directly applicable to RBI NBFCs, requires 'watchful' monitoring for potential 'collateral damage' in the field.

    Analyst acknowledged

  • Lagging States in Collection Efficiency

    medium

    Tamil Nadu and Odisha are identified as states still 'lagging behind' in collection efficiency among the top 5, despite overall improvements.

    Management acknowledged

  • Impact of New MFIN Guardrails

    low

    New MFIN guardrails effective April 1, 2025, are expected to have 'minimal impact' due to proactive portfolio deleveraging.

    Management acknowledged

Q&A highlights

6 direct
Outlook on Disbursals and Collections Stabilization Partial
I believe that this will continue further 1 or 2 quarter. And then I think you will see us coming back. Because we have 1,400 branches and we have the team experience.

Analyst sought clarity on the timeline for business normalization and growth resumption, which management indicated would take 1-2 more quarters.

Asked by Shreya Shivani, CLSA India

Loan Officer Attrition Rates Direct
We have seen very high attritions, especially in August, September, but now what we see is that accretion is coming down but still remains high... Yes. It has come down to under 50% now.

Addressed a key operational concern in the industry, with management providing specific figures for attrition reduction due to internal initiatives.

Asked by Shreya Shivani, CLSA India

Rights Issue Status and Capital Infusion Direct
we are hopeful that very soon we'll get the approval from SEBI and we'll get over with it. So there is no hesitancy. We are not waiting for any other thing. It is just procedural regulatory approval is awaited from SEBI.

Clarified the status of the crucial INR800 crores rights issue, confirming it's pending SEBI approval and not due to promoter hesitancy, with a positive impact on CAR expected.

Asked by Abhijit Tibrewal, Motilal Oswal

Credit Cost Outlook and Interest Reversal Direct
Abhijit, the idea is that we are future-proofing the balance sheet to make sure that since all actions are whether the action is taken at the operating level or a balance sheet level, are to make sure that we are able to future-proof it, make it very solid and start fresh and set it up for the financial year '26, '27.

Management explained the strategic rationale behind the significant interest reversal and provisioning, aiming to front-load pain and prepare for future financial years.

Asked by Abhijit Tibrewal, Motilal Oswal

Impact of Karnataka Ordinance Partial
However, there are elements in the field which try to take benefit out of it. I think the intent of the government has to be seen very positively, where they are mostly talking about the code of conduct.

Addressed a new regulatory development, acknowledging potential indirect impacts despite direct exclusion of RBI-regulated NBFCs.

Asked by Ankit Surana, JM Financial

Write-off Recovery Performance Direct
Now from November, December, we have put a separate team for the write-off pool. And we are hoping and we have seen that the December numbers are in this pool, the collection is better than November... I think you will see broadly the recovery will be anywhere between 5% to 6%, to 7%.

Provided details on initiatives to improve write-off recoveries and historical recovery rates, addressing concerns about low current recovery figures.

Asked by Ashlesh Sonje, Kotak Securities

Rationale for DTA Reversal Direct
So we have clarified that. And also, as soon as in medium term our balance sheet turns back to black, I think we can always accrue this. So it's more of an accounting entry. And it is a noncash item and it does not impact anything else, but we have clarified in the notes to account, in point number 7.

Clarified the accounting treatment and strategic prudence behind the DTA reversal, linking it to the going concern note and future balance sheet strength.

Asked by Pranav Gupta, Aionios Alpha

Collection Efficiency in Lagging States Direct
Tamil Nadu and Odisha are still lagging behind. That I also covered that these 2 states... it has not shown much improvement from December, but I think these Tamil Nadu and Odisha are 2 states where we are still seeing some kind of lag.

Identified specific geographies (Tamil Nadu, Odisha) where asset quality and collection efforts continue to face challenges, providing granular insight into portfolio stress.

Asked by Zakir Husain, AU Small Finance Bank

3 min read 6 chapters

Detailed narrative

Q3 & 9M FY25 Business Performance & Portfolio Quality

Fusion Finance's AUM moderated to INR10,599 crores as of December '24, reflecting tightened underwriting norms. Despite this, the company observed early green shoots with net collection efficiency for the current portfolio improving to 97.7% in December '24 from 96.1% in Q2 FY'25. Customer composition showed meaningful deleveraging, with 80% of clients now falling under the 'Fusion plus less than or equal to 2 lenders' bucket, up from 79.3% in December '24 and 68.4% in March '24. The MSME vertical, with 85% secured loans, is growing well and is considered a key pillar for future growth.

Capital & Liquidity Position

The company maintained a healthy Capital Adequacy Ratio of 22.2% as of December 31, 2024. This is expected to rise to around 25% after the first tranche of the planned INR800 crores rights issue, and over 30% pro forma for the full amount. Liquidity position was strong, with INR1,151 crores as of December 31, 2024, and INR1,223 crores in sanctions in hand. An additional INR400 crores of liability was raised in Q4 FY25, bringing total liquidity to INR1,400 crores as of February 12, 2025.

Asset Quality & Provisioning

Fusion Finance demonstrated significant improvement in asset quality, with NNPA reducing to 1.7% in December '24 from 2.4% in the previous quarter, despite a Gross NPA of 12.58%. Provision coverage was substantially enhanced across all stages: Stage 3 coverage increased to 88% (from 76% in Sep '24), Stage 2 to 72% (from 60%), and Stage 1 to 2.68% (from 1.84%). The company prudently reversed all deferred tax assets and did not recognize interest on Stage 3 loans, resulting in approximately INR95-98 crores of interest reversal and non-recognition, and made ECL provisions of INR572 crores in Q3 and INR1,615 crores in 9M FY25.

Operational Initiatives & Technology Adoption

The company implemented stringent credit criteria, even tighter than MFIN guardrails, leading to a superior-quality portfolio since August '24. Operational changes included reducing the field officer load from 550 to 400 customers, providing telecalling support, and revising incentive structures to improve collections and retention. Technology investments continued with the in-house LOS and LMS platform FinDost for MSME, and plans for a hybrid model for microfinance in the coming financial year, leveraging risk and data analytics for better customer engagement.

Regulatory Environment & Industry Outlook

Management expects minimal impact from new MFIN guardrails effective April 1, 2025, due to proactive deleveraging. While acknowledging a new Karnataka ordinance, they noted it excludes RBI-regulated NBFCs but will monitor for any collateral impact. The overall industry is undergoing consolidation, and Fusion Finance believes that strong guardrails will lead to a healthier, more disciplined sector in the long run, with stabilization anticipated from Q1 2026.

Covenant Breaches & Lender Support

Fusion Finance reported covenant breaches amounting to INR5,288 crores as of December '24. However, they successfully obtained waivers from the majority of lenders, covering INR4,145 crores, and are in discussions with the remaining five lenders for INR939 crores. Management emphasized that lenders continue to have complete faith in Fusion's business and governance fundamentals, and no acceleration notices for repayment have been issued.

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