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The initial public offering (IPO) of Fusion Microfinance, backed by private equity (PE) majors such as Warburg Pincus, opens for subscription today. At ₹350–368 a share, it is valued at about 1.8 times FY22 price-to-book. This puts the ₹1,104-crore issue (₹600 crore of fresh issue and ₹504 crore of offer for sale, which would see Warburg, Creation Investment Fusion and other investors, including the promoters, selling a part of their stake) at an advantage vis-à-vis CreditAccess Grameen’s trading at 3.3 times FY23 estimated book. The valuations are somewhat comparable to Spandana Sphoorty trading at 1.5 times FY23 estimated book.
Yet, Fusion Microfinance doesn’t pose an interesting proposition for investors.
Uninspiring financials
With an asset size of ₹7,389 crore as on June 30, 2022, Fusion is the second largest microfinance institution (MFI) in the non-banking financial company (NBFC) categorisation. In FY21–22 the industry witnessed shrinkage and most players, including Fusion (in FY21), had to downsize their books for reasons of asset quality and unfavourable business conditions. Therefore, much of the loan growth happened in FY22, with Fusion’s book growing 46 per cent year-on-year to ₹6,785 crore. With the overall growth momentum turning positive after two years of lull, and the MFI industry set to post 22–25 per cent loan growth in FY23, as per rating agency ICRA’s estimates, it remains to be seen if Fusion can consistently outpace the industry trend to retain its second position. For instance, the gap between Fusion and CreditAccess Grameen in terms of loan book is around ₹8,000 crore, based on FY22 financials. CreditAccess has a strong promoter, which saw it as the first player to come out of crisis on every occasion, and this justifies the stock’s premium valuation. Fusion needs to demonstrate that it can bridge the gap with CreditAccess consistently.
Secondly, while the asset quality of Fusion has improved in the June FY23 quarter vis-à-vis FY22, it is still far from the pre-pandemic levels of around 1 per cent gross non-performing assets. At 3.7 per cent gross NPA and 1.4 per cent net NPA, further improvement will largely hinge on the lender’s ability to grow at an annual compounded rate of 35-40 per cent year-on-year. Also, with the cycles in the MFI industry shrinking, any prudential calls on handling asset quality issues, including setting aside a buffer, may come at the cost of profitability. Investors need to observe the financials for another 2–3 quarters before taking an optimistic stand on the stock.
Lack of differentiation
Fusion follows the JLG or joint liability group model for its MFI business, while in the NBFC business (₹200-crore loan book) it caters to borrowers on an individual basis. JLG is the oldest, low-cost and common model of doing MFI business
However, when the gameplay of the MFI business has changed dramatically and is no longer just about the woman borrower’s income, but also encompasses her family income and its indebtedness, the strategy appears a bit outdated.
Further, 7–8 years ago, NBFC-MFIs were the dominant lenders in the MFI territory. Today they have been replaced by banks that offer better pricing and customisation of loan products. With higher credit bureau penetration and the ambit of MFI widening to cover households with annual income of ₹3 lakh, it needs to be seen how MFIs can ramp up their play.
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