Fusion Microfinance IPO: All You Need To Know

Warburg Pincus-backed microfinance lender Fusion Microfinance Ltd., will launch its maiden public offering on Wednesday to raise as much as Rs 1,100 crore. The issue consists of Rs 600-crore worth of fresh stock and a secondary sale of 1.37 crore shares.

Fusion Microfinance IPO: Key Details

• IPO Dates: Nov. 2-4

• Fresh Issue: Rs 600 crore

• Offer For Sale: 1.37 crore shares

• Price Band: Rs 350-368 apiece

• Book Running Lead Managers: ICICI Securities, CLSA India, IIFL Securities, JM Financial

The selling shareholders of the company include:

• Devesh Sachdev (6,50,000 shares)

• Mini Sachdev (1,00,000 shares)

• Honey Rose Investments (14,00,000 shares)

• Creation Investments Fusion (14,00,000 shares)

• Oikocredit Ecumenical Development Cooperative Society (66,06,375 shares)

• Global Impact Funds SCA (35,39,091 shares)

The New Delhi-headquartered microfinance company intends to use the IPO proceeds to augment its capital base. As on June 30, the company's capital adequacy ratio stood at 21.13%, while Tier-I capital ratio was at 19.45%.

Business

Fusion Microfinance had assets under management worth Rs 7,389 crore as on June 30, according to its draft red herring prospectus. Bihar, Uttar Pradesh, Odisha, Madhya Pradesh and Tamil Nadu cumulatively account for 66.12%, or Rs 4,885 crore, of the AUMs.

The company currently has 966 branches, with 9,262 employees, spread across 377 districts in 19 states and union territories of India. In Assam alone, Fusion Microfinance has 20 branches, and the state accounts for only Rs 10.65 crore worth outstanding loans, the DRHP showed.

Profitability

Fusion Microfinance was one of the many microfinance companies which saw its profitability impacted by the pandemic in India. In the year ended March 2020, the company's net profit stood at Rs 69.6 crore, which dropped to Rs 44 crore by March 2021.

In the year ended March 2022, net profit dwindled to Rs 22 crore, data provided in the DRHP shows. In the quarter ended June 30, the net profit for the company improved to Rs 75 crore, owing to higher interest income and lower provisions.

"We expect to derive benefits from economies of scale as there is limited incremental sourcing cost for existing customers, and they are eligible to borrow higher loan amounts from us since they have progressed to higher loan cycles," the company said. This, it believes, will ensure adequate risk mitigation from a volatile interest rate regime and will drive profitability going ahead.

As on June 30, the company holds expected credit loss provisions worth Rs 160 crore against its stage 3 assets, compared with Rs 255.3 crore as on March 31. Provision coverage ratio stood at 63.32% at the end of the first quarter of the current financial year.

Asset Quality

As on June 30, Fusion Microfinance's gross non-performing assets stood at Rs 253 crore, or 3.67% of gross assets. Adjusted for provisioning, the net NPAs stood at Rs 93 crore, or 1.35% of net assets.

The company's customers, who are primarily in the low and middle-income groups, have less financial wherewithal than other customers and may face difficulties with their ability to make timely repayments on their loans, whether due to a decrease in their earnings or other strains on their financial position as a result of the pandemic, the company said.

Going ahead, a change in the Reserve Bank of India's norms require microfinance companies to move to a 90-day recognition cycle for NPAs, from the current 180 days, which may put some strain on the bad loan numbers, it said.

Key Risks

Apart from the risks involved in the microfinance business, Fusion Microfinance has some specific challenges in operations.

For the quarter ended June 30, Rs 1,527 crore worth of collections were conducted in cash for the company. In the year ended March 31, 2022, the number stood at Rs 4,648 crore.

"Large cash collections and disbursements expose us to the risk of theft, fraud, misappropriation or unauthorised transactions by employees responsible for dealing with such cash collections," the company said.

In fact, the company has witnessed instances of embezzlement by its employees in the past. In the June quarter, the company reported embezzlement worth Rs 30 lakh, where it has been able to recover Rs 15 lakh. In FY22, the cumulative embezzlement stood at Rs 1.27 crore, where it recovered Rs 60 lakh.

"We may also be party to criminal proceedings and civil litigation related to our cash collections, and we may be subject to regulatory or other proceedings in connection with any unauthorised transactions, fraud or misappropriation by our representatives and employees, which could adversely affect our goodwill," the company said.

It has also breached covenants on gross NPA and net NPA ratios with relation to non-convertible debentures held by Indian Bank, it reported. As on June 30, an amount worth Rs 19.8 crore was outstanding in relation to the Indian Bank NCDs.

"Unless we are able to receive the relevant waiver, we expect that we will continue to be in breach of such covenants and we cannot assure you that we will receive the relevant waiver in the future or whether any cross-default provisions will be triggered under our other financing agreements," the company said.