Fusion Micro Finance unlikely to cheer investors on debut

Non-banking finance company (NBFC) Fusion Micro Finance is unlikely to gladden investors on its stock market debut on November 15 despite positive market conditions. This is due to the muted subscription witnessed by its initial public offering (IPO) and higher risks faced by the microfinance sector amid elevated inflation.

Even in the grey market, the scrip doesn't enjoy any healthy premium. Currently, the company’s shares are trading at a 2-3 percent premium over its final issue price of Rs 368 per share, analysts say. The grey market is an unofficial platform for trading in IPO shares, and generally, investors look to this space to get a hint of the upcoming stock listing.

Exchanges said effective November 15, the equity shares of Fusion Micro Finance will be listed and admitted to dealings on the bourses in the list of 'B' Group of securities, BSE said.

"Despite positive sentiments in the broader market, Fusion Micro Finance’s offer failed to garner investor interest for subscribing to the IPO, which could be the reason for subdued interest in the grey market," Prashanth Tapse, Senior VP Research at Mehta Equities, said.

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The weak response from investors, followed by underperformance and high challenges in the listed small NBFC space and no wow factor in its business model may result in listing at par or discounted price, Tapse added.

At Rs 368, the issue was valued at a price-to-book-value (P/BV) of 1.8X on post-issue book value per share (BVPS). Return ratios of the NBFC remained depressed ― the average return on equity (RoE) of 2.6 percent over FY21-22 ― due to higher credit costs. Hence, any unexpected shock on the credit cost front may weigh heavily on return ratios, said Satish Kumar, Research Analyst at Choice Broking, who had assigned an ‘avoid’ rating to the Fusion Micro Finance IPO on expensive valuation and higher risks to the microfinance sector amid elevated inflation.

Meanwhile, equity markets rallied more than 7 percent in the last month, backed by positive global cues on easing inflation concerns and rising hopes of lesser-than-expected interest rate hikes by the US Federal Reserve in the upcoming policy meetings.

Fusion Micro Finance provides financial services to unserved and underserved women in rural and peri-rural areas across India. The company operates on a joint liability group-lending model, in which a small number of women, typically five to seven in numbers, form a group and guarantee each other’s loans.

Fusion has the fourth fastest gross loan portfolio, growing at a CAGR of around 54 percent between FY17-21 among the 10 largest NBFC-MFIs in India, according to CRISIL. The growth was aided by its customer-centric approach, strategic geographic diversification with a rural focus, technology adoption, good corporate governance, prudent risk management and support from marquee investors in a challenging macroeconomic environment.

But the majority of its revenue comes from certain states (Bihar, Uttar Pradesh, Odisha, Madhya Pradesh, Tamil Nadu, Punjab, Rajasthan) and business is exposed to interest rate risk, debt to equity ratio, said Narendra Solanki, Head-Equity Research at Anand Rathi Shares & Stock Brokers, who believes Fusion will list at par.

Its proportion of assets under management (AUM) in its five largest states in terms of AUM concentration has decreased from 94.61 percent as of March 2016 to 66.12 percent as of June 2022. As of June 2022, the company’s share of AUM from customers in rural areas represented 91.37 percent of its total AUM.

Fusion Micro Finance raised a little over Rs 1,100 crore via the public issue. The issue, which hit the market during November 2-4, was subscribed 2.95 times, as the portions set aside for qualified institutional buyers (QIBs), retail and non-institutional investors were subscribed 8.6 times, half a percent and 1.38 times, respectively.