Fusion Ltd IPO: Reasonably priced

Fusion Microfinance Limited is tapping the capital markets with a fresh issue of Rs600 crore and an offer for sale of 136.95 lakh shares. The issue opens on Tuesday, November 1st and closes on November 3. The price band is Rs 350-368.

The company has seen tremendous growth in the Covid period where it took the help of its robust systems and lent to people who had loans from one and even two institutions after taking due precautions. This bold, strong and robust system driven initiative helped the company move in its rank from the 9th position pre-Covid to the 2nd position post Covid.

The objects of the fresh issue are to use the proceeds for augmenting the capital base of the company. Currently the loan book as of March 2022 is Rs7,400 crores. This would allow the company to expand significantly and build a war chest when money is required. It would also help in increasing its loan book. It has a capital adequacy of about 20 per cent and is comfortably placed on that front.

The company lends to the microfinance segment through the joint lending system. The collateral is of the group members and is currently present in 19 states and Union territories. It has over 2.9 million customers and has 966 branches as of RHP date. Its average ticket size is Rs25,000. The interest rate is in the region of 21 per cent. It has no concentration risk, as no state has an exposure of higher than 20 per cent of its corpus. While it has a large presence in UP and Bihar which makes it unique when compared with other microfinance lenders, the penetration of the state is significantly lower than the Sothern states where microfinance began. Even though UP has a population far greater than say Karnataka or Tamil Nadu, the exposure in the southern states is more because of the number of people already under microfinance there. This provides the added opportunity.

The company has been concentrating on just one type of loan that is under the group lending or joint lending scheme. It is now looking at MSME loan and has been doing it as a pilot with loans of a small amount. Its total exposure to the sector is Rs400 crores. In performance metrics, the company has an average yield on loan portfolio of 19.5 per cent while they have been able to reduce their cost of funds from around 12.3 per cent to 10.1 per cent. Further they have marquee relationships with all types of lenders which include PSUs, private banks, NBFCs and other financial institutions. They have a comfortable lender mix as far as lenders are concerned.

The company has been able to have collection efficiencies in the region of 93 per cent - 98 per cent and these have risen when compared to the last 12 months. With this collection, the company has also been able to bring down the earlier delayed payments.

As a prudent measure, Fusion had provided coverage of all overdue loans and cleaned the balance sheet as on 31st March. These higher provisions had affected the profitability in FY22 and reduced its earnings.

If one considers the EPS for March 2022, it is a mere Rs2.64 for the full year, while it is Rs8.98 on a fully diluted basis for the quarter ended June 22. Considering that the quarterly numbers are annualised for simplicity's sake we are talking of an EPS of Rs35 to Rs36 for the full year March 2023.

While valuing the company this would be the way I would calculate the EPS and treat FY22 as an aberration. Another way to look at it is the price to book for the bank. The NAV for March 22 is Rs161.67, which has improved to Rs171.10 at the end of June quarter. The issue is priced at a price to book ratio of 2.27 based on March 22 numbers and 2.15 times June 22 numbers.

The microfinance lender is well positioned to continue its growth, which is better than the industry and capitalise on its robust systems. The digital drive is enabling the company to deliver with a lower cost and thereby earn higher margins. The company looks reasonably priced/valued and offers returns in the medium and long term. There may also be some listing gains which could be the icing on the cake. Invest and hold the shares for the medium term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)