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Motilal Oswal Report
Fusion Micro Finance Ltd.’s Q1 FY24 profit after tax grew 60% YoY to ~Rs 1.2 billion, aided by net interest margin expansion and higher other income. Net interest income increased by 59% YoY to ~Rs 2.95 billion, while pre-provision operating profit grew ~96% YoY to Rs 2.35 billion.
The cost-to-income ratio stood at ~36% (previous year: ~45%). Net credit costs (annualised) remained high and rose ~10 bp QoQ to 3.3%. Disbursements grew 15% YoY to Rs 22.8 billion, driving assets under management growth of 31% YoY/5% QoQ to ~Rs 97 billion.
Fusion has transmitted higher borrowing costs to customers and also benefitted from the spread deregulation that was announced in March 2022. Net interest margin expanded by ~30 bp QoQ in Q1 FY24 and we expect this margin expansion to sustain over the next two years, with NIM of 13.8%/14% in FY24/FY25.
We increase our FY24/FY25 EPS estimates by ~2%/3% to factor in higher other income.
We model an assets under management and profit after tax compound annual growth rate of 28% and 39% over FY23-FY25E, respectively, driven by strong borrower additions, NIM improvement, operating leverage and moderation in credit costs.
These factors will also lead to an improvement in the return ratios and we estimate return on asset/return on equity of ~5.7%/23% in FY25.
Fusion currently trades at 1.8 times FY25E price/book value and we believe its valuations would re-rate as it demonstrates healthy execution on loan growth and asset quality.
Maintain 'Buy' rating with a target price of Rs 740 (based on two times FY25E price/book value).
Key risks include:
Political interference, announcement of loan waivers or natural calamity resulting in asset quality deterioration;
regulatory changes toward asset recognition and provisioning; and
increase in competitive intensity leading to NIM compression.
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