5 reasons behind Fusion Micro Finance's 20% fall today

Fusion Micro Finance Ltd hit 20 per cent lower circuit limit in Wednesday's trade on elevated credit cost, which pushed the micro finance lender withdraw its full year FY25 credit cost guidance. The information that 24 per cent of Fusion Micro Finance's loan book comprised of borrowers with MFI loans from five or more lenders hit investor sentiment hard. 

Add to that was a surge in gross non-performing assets and incremental stress in key states such as Tamil Nadu, Madhya Pradesh, Odisha, Rajasthan and Jharkhand.

Tepid disbursement growth and weak customer addition also hurt and so did losses due to higher provisioning. Net-net Fusion Micro Finance's saw its earnings estimates getting chopped by up to 50 per cent for FY25, thus, dragging its shares lower today.

Fusion Microfinance’s earnings were marred by elevated credit cost, which stood at 13 per cent on an annualised basis. Fusion Micro Finance proactively moved 55,000 customers with exposure of Rs 221 crore from stage-1/stage-2 to stage-3, resulting in additional credit cost due to tightening of ECL model. 

ICICI Securities said incremental stress was more visible in TN, MP, Odisha, Rajasthan and Jharkhand with 95 per cent customers of total 55,000 customers being from these five states. 

"Cumulative exposure of these states to total AUM stands at 25-28 per cent as on June 2024.  Uncertainty around credit cost trajectory in the near term persists given the exposure to borrowers with 4+ lenders is at 24 per cent and over 30 per cent its customer have systemic exposure at over Rs 1 lakh as on March 24," said ICICI Securities

Factoring in significantly higher-than-expected credit cost in Q1FY25 and likely elevated credit cost in near term, this brokerage trimmed its earnings estimates by 46 per cent for FY25 and 11 per cent for FY26, as it cut its target to Rs 385 from Rs 500. 

Disbursement, collection efficiency 
After a rise in default risks at the customer level, Fusion Micro Finance categorically stopped disbursements at 104 branches and has also tightened the customer onboarding criteria which, in turn, would impact incremental disbursement growth. 

"The fall in collection efficiency to 96.3 per cent for the quarter from 98.3 per cent in the last quarter (ex-Punjab) indicates unfavourable ground reality for lending. The company has always been facing concentration risk, which continues to remain intact with the share of the top five states staying elevated at 70.4 per cent," InCred Equities said.

Weak customer addition
InCred Equities said it had been highlighting its concerns over the adversities visible in 'per borrower data' since the past few quarters. Fusion Micro Finance added 90,000 borrowers in the June quarter against 80,000 in the March quarter. It noted that the micro finance company added a net 3,30,000 customers during FY24 against 8,10,000 additions in FY23, which remains a disappointment. 

This also indicates that incremental disbursement growth is largely contributed by the rise in loan ticket size, the brokearge said.

"With no upside catalysts, we downgrade the stock to Neutral with a revised target price of Rs 440 (based on 1.1x FY26E P/BV)," said MOFSL: