Fusion Finance tanks 10%, hits record low on higher ECL provisioning in Q2

Fusion Finance said it may be required to make an estimated credit loss (ECL) provisioning between Rs 500 crore to Rs 550 crore in Q2FY25 as compared to Rs 348 crore provision in Q1FY25.

Fusion Finance shares slip in trade: Shares of financial service provider Fusion Finance hit a record low of Rs 274.40 per share, as they tanked 10 per cent on the BSE in Monday’s intra-day trade in otherwise a strong market. 

The fall in the Fusion Finance share price came after the company said it may be required to make an estimated credit loss (ECL) provisioning between Rs 500 crore to Rs 550 crore in July to September quarter (Q2FY25) as compared to Rs 348 crore provision in Q1FY25.

The stock of microfinance institutions has fallen below its previous low of Rs 282 on August 16, 2024. It plunged 59 per cent from its 52-week high level of Rs 67 touched on January 31, 2024.

 

Fusion Finance, in an exchange filing said, since the release of the Q1FY25 results, the management of the company has been focused on tracking the evolving credit behavior of its borrowers. Consequently, the Audit Committee of the Company was briefed by the management on an internal review of the credit quality of the loan portfolio in Q2FY25 and the associated provision that may be required for its current loan book.

Based on asset quality and collection trends so far in Q2FY25, Fusion may be required to make an higher ECL provisions during the quarter. This translates into an annualised credit cost of approximately 19 per cent in Q2 (versus about 13 per cent in Q1).

The board has asked the management to prepare a plan for a fresh equity capital raise of up to Rs 550 crore. Fusion had capital adequacy of approximately 26 per cent as of June 2024. Although the company does not immediately need equity capital, it will consider this equity raise to strengthen its balance sheet given the stress evident in the microfinance sector and the company’s loan book. The company noted that its promoters support the equity raise.

In order to strengthen its executive team, the company will initiate a search process for selecting a suitable candidate for the CEO role. It expects the selection process to be completed in the next few months. Devesh Sachdev, current MD & CEO, will remain in his role as MD for a period of time and then will be appointed as the Chairman of the board. This will ensure a smooth and orderly transition and continuity of the business.

According to Motilal Oswal Financial Services, the stress evident in the MFI sector and Fusion’s loan book could be because of a combination of customer over-leveraging, high employee attrition, payments default by customers who have taken multiple loans with multiple (fake) voter-ids and are not getting new loans, and heavy rainfall and floods in certain parts of the country.

The brokerage firm said it see no signs of improvement in asset quality in the near term and remain watchful of stress unfolding over the next 2-3 quarters. “In the near term, we will look forward to the appointment of the new CEO, but with no other upside catalyst, we maintain our Neutral rating on the stock with a revised TP of Rs 330 (earlier: Rs 440), based on 1.0x FY26E price-to-book value (P/BV),” the brokerage firm said in company update.