Fusion Microfinance - Motilal Oswal Maintains 'Hold' Rating On Stock After Its Q2 Results ; Here's Why

Motilal Oswal Report

Fusion Microfinance Ltd. reported a net loss of ~Rs 3.1 billion in Q2 FY25 (versus our estimate loss of ~Rs 1.8 billion) due to significantly high credit costs. Its H1 FY25 net loss was Rs 3.4 billion, and we expect H2 FY25 loss at Rs 280 million. Net interest income grew ~30% YoY to ~Rs 4 billion in Q2, while pre-provision operating profit rose ~17% YoY to ~Rs 2.8 billion (in line).

The cost-to-income ratio stood at ~40% (previous quarter: ~38% and previous year: ~36%). Recalibration of incentive structures and rationalization of manpower at field level led to higher opex. Net credit costs stood at ~Rs 6.9 billion (versus our estimate of ~Rs 5.2 billion). Annualized credit costs rose sharply to ~26% (previous year: ~3.4% and previous quarter: 13%)

Management shared that the macroeconomic environment accentuated the asset quality stress in the MFI sector in Q2 FY25. We are also monitoring the situation closely but believe that the situation is not just ‘transitory’ and that the recovery is still distant (refer to our detailed sector note).

Over-leveraging of customer cohorts typically manifests itself in asset quality stress over longer periods rather than just one or two quarters. We believe that credit costs are likely to remain high in Q3 as well and will be far from normal levels.

Fusion, in our view, can deliver an AUM CAGR of ~13% and PAT CAGR of ~9% over FY24-FY27E. We estimate an return on asset/return on equity of ~4%/17% in FY26.

With the company having to navigate tough times ahead, we reiterate our Neutral rating on the stock with a revised target price of Rs 165 (based on 0.5 times Sep’26E price/book value).

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