Fusion Micro Finance IPO Analysis

About the Company

Fusion Micro Finance Ltd (FMFL), founded in 1994, provides financial services to women entrepreneurs from economically and socially disadvantaged backgrounds. Its network and services have increased access to formal credit (loans) at low-interest rates, ultimately improving the lives of people in rural India. FMFL provides financial assistance as well as financial literacy classes.

FMFL operates on a joint liability group-lending concept, in which a small group of women (5-7 members) guarantees each other's loans. The firm has largely focused on strategic regional diversification with a rural emphasis, embracing technology for development, nurturing and developing staff, and risk management.

Fusion Micro Finance Limited IPO

IPO DateNov 2, 2022 to Nov 4, 2022Listing Date[.]Face Value₹10 per sharePrice₹350 to ₹368 per shareLot Size40 SharesIssue Size[.] shares of ₹10(aggregating up to ₹1,103.99 Cr)Fresh Issue[.] shares of ₹10(aggregating up to ₹600.00 Cr)Offer for Sale13,695,466 shares of ₹10(aggregating up to ₹[.] Cr)Issue TypeBook Built Issue IPOListing AtBSE, NSEQIB Shares OfferedNot more than 50% of the Net OfferNII (HNI) Shares OfferedNot less than 15% of the Net OfferRetail Shares OfferedNot less than 35% of the OfferCompany PromotersThe promoters of the Company, namely, Devesh Sachdev, Creation Investments Fusion, LLC, Creation Investments Fusion II, LLC and Honey Rose Investment Ltd

600 crore fresh equity shares will be issued in Fusion Microfinance IPO. Apart from these, an offer for sale (OFS) of 13,695,466 equity shares by promoters and existing shareholders is included. Devesh Sachdev, Mini Sachdev, Honey Rose Investment Ltd., Creation Investments Fusion, LLC, Oikocredit Ecumenical Development Co-operative Society U.A., and the Global Financial Inclusion Fund.

Objects of the Fusion Micro Finance Limited IPO

The issue comprises OFS and Fresh Issue. Net Proceeds from Fresh Issues will be used to Augment the capital base of the Company.

Fusion Micro Finance Limited IPO financials

• The company's revenue increased at a 16.92% CAGR from Rs.720 Cr in FY20 to Rs.1151 Cr in FY22.
• Profit after tax fell from Rs.69.61 Cr in FY20 to Rs.21.76 Cr in FY22, owing mostly to an increase in the impairment cost on financial assets.
• The operating margin fell to 4.7% in the previous fiscal year from 19.7% in FY20.
• As of June 30, 2022, the company's Gross GNPA was 3.67%, while its Net NPA was 1.35%.

Competitive Strengths

• Broad and Diversified Pan-India Presence.
• Proven execution skills with a strong rural focus.
• Access to Diversified Capital Sources and Effective Asset Liability Management
• Proven execution skills with a strong rural emphasis.
• Access to diverse financing sources and effective asset liability management
• Strong underwriting and risk management policies.
• A cutting-edge technological operating model.
• Stable and experienced management team backed by prominent investors.

Risk Factors

1) In the previous three years, company margins have been declining. Profits in FY20 were Rs 69.6 crores, compared to Rs 21.8 crores in FY22. Despite a rise in revenues, a decline in margins is a major issue.2) OFS receives Rs 504 crores from the total IPO proceeds, while the firm receives nothing.3) A Covid epidemic has previously harmed the industry. Such pandemics are unpredictable and may have an influence in the future.4) An increase in NPAs might have an impact on the firm.5) The microfinance business in India confronts specific risks owing to the borrowers it serves, which are not often connected with other types of lending.

Outlook & Valuation

The microfinance industry has recorded healthy growth in the past few years, with microfinance lenders emerging in good numbers. Fusion Micro Finance is one such company that is among the top 10 NBFCMFIs in India. It offers loans to women entrepreneurs. Its business runs on a joint liability group-lending model, wherein a small number of women form a group and guarantee one another’s loans. The company works with a strong focus on rural areas and has a well-diversified and extensive pan-India presence. The company also has access to diversified and recognized sources of capital and has a good financial track record. Although this company's margins are now in declining mode and it is facing risk due to the category of borrowers it serves, an increase in the level of NPAs could also be a concern for the company. Secondly, the company demands a price-book (P/B) multiple of 1.8 on a post-IPO basis, whereas its peers like credit access command a P/B of 3.3. Thus, considering all the factors, we recommend a Subscribe rating for this issue, but only for high-risk investors with a long-term view.

GMP

According to market watchers, the shares of Fusion Microfinance are trading at a premium (GMP) of ₹24 in the gray market today. The company's shares are expected to be listed on the stock exchanges BSE and NSE on Tuesday, November 15, 2022. The allotment of shares is expected on 10 November 2022. The company has said in its draft paper that it wants to use the capital received from this issue to increase its base.