Fusion Microfinance IPO opens on Nov 2nd: Should you subscribe?

Fusion Micro Finance Limited IPO opens for subscription on 2nd November. The company is looking to raise up to Rs 1,103.99 crore through the public issue. Here are the details:  

Fusion Micro Finance Limited IPO Details

• Fusion Micro Finance IPO Date: 2 November - 4 November 2022
• Fusion Micro Finance IPO Price band: Rs 350 - Rs 368
• Fusion Micro Finance IPO Issue Size: Rs 1,103.99 crore (Fresh Issue of Equity shares aggregating up to Rs 600 crore and remaining Offer for sale)
• Reservation: QIB 50%, Retail - 35%, NII 15%
• Minimum Investment: Rs 14,720
• Bid lot: 40 shares, and in multiples of 40 shares

Fusion Micro Finance Limited IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

• Augment the capital base of the Company (for a fresh issue)

Fusion Micro Finance (FMF) Limited IPO: About Fusion Micro Finance

• The company was incorporated in 1994 and is engaged in providing financial services to women entrepreneurs in the economically and socially deprived section of society.
• FMF is not only responsible to provide financial support but also to acquaint the clients to manage their finances by sharing financial literacy.
• As of June 30, 2022, Fusion Micro Finance is one of the youngest companies among the top ten NBFC-MFIs in India (in terms of AUM).
• The company has 966 branches and 9,262 permanent employees spread across 377 districts in 19 states and union territories in India (June 30, 2022).
• They were also featured on India’s “Great Place to Work” list, consecutively in the financial years 2021 and 2020.

Fusion Micro Finance Limited IPO: Industry Outlook

• The microfinance industry has recorded healthy growth in the past few years. The industry’s gross loan portfolio increased at a CAGR of 21% since FY18 to reach approximately Rs 3.1 trillion in the first quarter of FY23.
• CRISIL Research expects MFI Industry to grow at 18-20% CAGR between FY22 - FY25. During the same period, NBFC-MFIs are expected to grow at a much faster rate of 20-22% as compared to the MFI industry.
• The average ticket size of MFIs has risen to Rs 38,716 in FY22 from Rs 23,196 in FY18, translating into a CAGR of 14%. 

Fusion Micro Finance IPO: Listed peers

The company has many listed peers - Credit Access Grameen Ltd, Spandana Sphoorty Financial Ltd, Bandhan Bank, Ujjivan Small Finance Bank, Equitas Small Finance Bank, and Suryoday Small Finance Bank. The comparison of FMF with listed peers is as below:

• In terms of total income (revenue), Fusion Micro Finance is towards the bottom end of the list, while Bandhan Bank is the clear winner.
• The PE for most listed peers is on the higher side, but Fusion Micro Finance is quoting PE higher than most listed peers. It is quoting PE of 139 (on the upper band).
• Earning Per Share (EPS, Basic) for Fusion Micro Finance is 2.67, and it is second on the list, only behind Spandana Sphoorty Financial Ltd.
• Return on Net Worth (RoNW) is 1.63% for FMF, lower than Credit Access, Spandana, and Equitas Small Finance Bank.

Fusion Micro Finance Limited IPO: Financials

• For FY20, FY21, and FY22, the company reported revenue of Rs 720.3 crore, Rs 855.8 crore, and Rs 1151.3 crore, respectively. Revenue for the three years has grown at a CAGR of 26.44%.
• The net income for FY20, FY21, and FY22 was Rs 69.6 crore, Rs 43.9 crore, and Rs 21.8 crore, respectively. The profit has declined continuously in the last three financial years.
• The margin for the same period was 9.66%, 5.13%, and 1.89%, respectively.
• Between March 31, 2016, and June 30, 2022, the number of active borrowers grew at a CAGR of 33.63% and the number of branches grew at a CAGR of 31.92%.
• Total AUM grew at a CAGR of 37.17% from Rs 3606.52 crore as of March 31, 2020, to Rs 6785.97 crore as of March 31, 2022.
• The company has achieved improving customer retention rates of 71.75%, 70.00%, 68.99%, and 47.43% for the three months ended June 30, 2022, and the FY22, FY21, and FY20, respectively.
• It has reported an average EPS of Rs 6.15 and an average RoNW of 3.66% for the last three financial years.
• As of June 30, 2022, and for FY22, FY21, and FY20, the gross NPA ratio was 3.67%, 5.71%, 5.51%, and 1.12%, respectively. Net NPA ratio was 1.35%, 1.64%, 2.20% and 0.38%, respectively.
• At the end of FY22, Fusion Micro Finance had Debt to Equity ratio of 4.32.

Fusion Micro Finance Limited IPO: Unique Selling Propositions

Well-diversified and pan-India presence: The company has millions of active borrowers spread across 377 districts in 19 states and union territories in India. It helps them mitigate any risks arising from economic, political, cultural, or environmental factors particular to a specific region.

Strong rural focus: The company believes that they have been able to achieve significant success with a growth strategy of targeting underserved and underpenetrated rural areas in both existing markets and new geographies. As of June 30, 2022, 70.77% of total customers, 72.05% of total branches, and 91.37% of total AUM, were from rural areas. 

Access to Diversified Sources of Capital: In the past decades, they have adopted a calibrated approach towards diversifying fundraising sources and minimizing costs of borrowings with prudent asset liability management and effective liquidity management. 

Robust Underwriting Process and Risk Management Policies: Their risk management division is divided into separate teams that are respectively dedicated to managing and mitigating credit risk, market risk, and operational risk, and which are subject to oversight by their Risk Management Committee and Board of Directors. 

Fusion Micro Finance Limited IPO: Growth Potential

Expand Geographic presence: They plan to grow their business operations by mining deeper and attracting new customers in existing markets that remain relatively untapped and entering new regions where borrowers are underserved, and there is lower penetration by microfinance companies.

Invest in technology: They plan to continue automating and digitizing various aspects of business, which they believe would allow them to identify and capitalize on cross-selling and upselling opportunities, improve understanding of customer behavior, and develop and implement customer targeting and product personalization strategies.

Diversify Borrowing Mix: They plan to continue to grow the scale of operations and further increase the lender base to access funds from insurance, pension, and provident funds, mutual funds, overseas lenders, and external commercial borrowings through the issuance of NCDs and commercial papers.

Fusion Micro Finance Limited IPO: Risks

Higher NPAs: Their management of credit risk involves having appropriate credit policies, underwriting standards, approval processes, loan portfolio monitoring, etc. However, it has a higher NPA, and an increase in the level of NPA from the current levels will affect its business and financials.

Customers from the rural market: A significant majority of their customers are located in rural markets, which may have limited infrastructure, particularly for transportation and electricity. At branches in remote markets, they may face difficulties in conducting operations, such as accessing power facilities, transporting people and equipment, and implementing technical measures.

Operational risks: given the high volume of transactions involving cash processed by them, certain instances of fraud and misconduct by their representatives or employees may go unnoticed for some time before they are discovered and successfully rectified.

Fusion Microfinance: Detailed review and Recommendation

• Robust rise in revenues: Fusion Microfinance has seen a robust 26% CAGR rise in revenues between FY20- 22.
• Decline in profit: The company’s net profit declined from Rs 69.6 crore to Rs 21 crore in Fy22.
• Decline in margins: Higher provisioning on account of the pandemic, natural calamities, and branch expansion expenses have led to steep decline in Fusion Microfinance’s margins over the last 3 years. 
• Dominant market share: . According to CRISIL, it had the second-highest number of lender relationships among the top 10 NBFC-MFIs in India as of March 31, 2022. Technology is an integral part of Fusion Microfinance’s overall business strategy.
• Reasonable valuations: At the higher end of the price band,  Fusion Microfinance is attractively priced at post issue at a PE ratio of 12.33 times FY22  earnings (consolidated). This is lower than peers  CreditAccess Grameen (26 times), , Bandhan Bank (67 times) and Ujjivan SFB (17 times).  
• Fusion Microfinance Ltd review: Given factors such as a strong rise in revenues, good runway for growth and reasonable valuations, analysts have given a ‘positive’ rating on the company’s long-term prospects.