By FMTeam Fusion Microfinance Ltd. recently faced a significant downturn as its share price plunged by 20%, hitting a lower circuit in response to its disappointing Q1 FY25 results. The company’s financial performance for the quarter revealed several concerning metrics, contributing to the steep decline in investor confidence.
Key Financial Metrics
The company’s net interest income (NII) showed a year-on-year increase of 34.85%, rising from ₹294.07 crore in Q1 FY24 to ₹396.55 crore in Q1 FY25. Despite this growth, the net interest margin (NIM) only saw a modest improvement, from 10.89% to 11.64%. However, the rise in net interest income was overshadowed by elevated credit costs and a surge in gross non-performing assets (NPAs).
Elevated Credit Costs and Asset Quality Concerns
Fusion Microfinance’s credit costs surged to an annualized 13%, significantly impacting its overall profitability. This increase was partly due to the company’s proactive stance in reclassifying 55,000 customers, with an exposure of ₹221 crore, from Stage 1/Stage 2 to Stage 3 assets. This move was aimed at tightening the Expected Credit Loss (ECL) model but resulted in additional provisioning.
The gross NPAs also climbed sharply to 5.46% in Q1 FY25, up from 2.89% in the previous quarter. This increase was attributed to several factors, including over-leveraging of customers and weaknesses in specific states such as Tamil Nadu, Madhya Pradesh, Odisha, Rajasthan, and Jharkhand.
Impact on Share Price and Market Reaction
Following the release of these results, Fusion Microfinance’s share price fell below its IPO price of ₹368 per share, trading at ₹346.40 on the day of the announcement. The stock had previously hit a 52-week high of ₹674 on January 31, 2024, but the recent downturn saw it reach its lowest level since November 2022.
The market reaction was further influenced by the downgrade from brokerage firms. Motilal Oswal downgraded the stock to ‘Neutral’ with a revised price target, citing the high credit costs and increased asset quality stress. Analysts noted that while the company’s pre-provision operating profit (PPOP) increased by 26.5% year-on-year to ₹297.75 crore, the elevated provisioning significantly eroded net profitability.
Strategic Adjustments and Future Outlook
In response to the deteriorating asset quality, Fusion Microfinance has tightened its customer onboarding criteria and halted disbursements at 104 branches. These measures are expected to impact incremental disbursement growth in the short term but are aimed at stabilizing the company’s financial health in the long run.
The management remains cautiously optimistic, expecting a return to normalcy in the second half of FY25. However, the current macroeconomic environment and sectoral stress due to high customer leverage suggest that the recovery may take longer than anticipated.
Conclusion
Fusion Microfinance’s recent financial performance has highlighted significant challenges in terms of credit costs and asset quality. The market’s reaction, coupled with the strategic measures undertaken by the company, underscores the need for cautious optimism moving forward. Investors will be closely monitoring the company’s efforts to stabilize its operations and improve its financial health in the coming quarters.