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    Fusion Finance

    FUSION
    Financial Services·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

    5
    • 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

    4
    • 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%.

    What Changed2

    vs Q4 FY25

    Guidance items6 → 8 (+2)Risks discussed5 → 7 (+2)
    Key financials

    Metrics

    9

    Periods

    3

    Headline

    7
    • 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%

    Q3

    1
    • ECL Provision
      ₹572 Cr

    9M

    1
    • FY25 NIM
      10.7%

    Capital allocation

    2
    high confidence
    CategoryHeadline
    Debt

    Debt disclosed

    Cost 10.2%

    Liquidity

    Cash ₹1,151 crores · Undrawn ₹1,223 crores

    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.

    Guidance & targets

    8
    CategoryTargetPriority
    Capital Adequacy
    Capital Adequacy Ratio
    30-plus percent
    High
    Capital Adequacy
    Capital Adequacy Ratio
    around 25%
    High
    Business Stabilization
    Stabilization of Operations
    Q1 2026
    Medium
    Growth
    Disbursement/Growth Pick-up
    1-2 quarters
    Medium
    Growth
    Active Growth
    1-2 quarters
    Medium
    Regulatory Impact
    Impact of New MFIN Guardrails
    minimal impact
    High
    Portfolio Quality
    Fusion plus less than, equal to 2 lenders bucket share
    increase further
    Medium
    Asset Quality
    Write-off Recovery Rate
    5% to 7%
    Medium

    Business Stabilization & Growth

    next 1-2 quarters, stabilization from Q1 2026
    CurrentCollections improving, disbursals slowed
    TargetStabilization 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.

    How to verify

    key_financials.metrics[label='AUM'], key_financials.metrics[label='Net Collection Efficiency']

    Risks & concerns

    7
    RiskSeverity

    Building Stress in the Industry

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

    medium

    Covenant Breaches with Lenders

    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

    high

    Impact of New MFIN Guardrails

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

    low

    Credit Squeeze for Microfinance Customers

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

    medium

    High Employee Attrition

    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

    medium

    Karnataka Ordinance Impact

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

    medium

    Lagging States in Collection Efficiency

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

    medium

    Q&A highlights

    8

    “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

    3 min read6 chapters

    Detailed Narrative

    01

    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.

    02

    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.

    03

    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.

    04

    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.

    05

    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.

    06

    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.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.