Fusion Micro Finance IPO review (Apply)
• FMFL is one of the youngest companies among the top NBFC-MFIs in India.
• Amidst all odds, it maintained growth in its top line.
• It suffered for the last two fiscals on bottom lines due to higher provisioning on account of the pandemic, natural calamities, and branch expansion expenses.
• Based on its FY23 annualized earnings, the issue is lucratively priced.
• Investment may be considered with medium to long-term perspectives.
Fusion Micro Finance Ltd. (FMFL) is one of the youngest companies (in terms of getting an NBFC-MFI license) among the top NBFC-MFIs in India in terms of AUM as of June 30, 2022, according to CRISIL. In addition, it had the fourth fastest gross loan portfolio CAGR of 53.89% between the financial years 2017 and 2021 among the 10 largest NBFC-MFIs in India, according to CRISIL. It achieved growth through commitment over the years to key pillars of growth comprising customer centricity, strategic geographic diversification with a rural focus, embracing technology for growth, emphasis on nurturing and developing personnel, good corporate governance, stakeholder management, and prudent risk management, as well as ability to raise growth capital through the support of marquee investors even during difficult macroeconomic conditions.
FMFL was incorporated with the core idea of creating opportunities at the bottom of the pyramid. It provides financial services to unserved and underserved women in rural and peri-rural areas across India. Its network and services have improved accessibility to formal credit at affordable prices, thereby positively impacting the lives of customers in rural India. The company prioritized organic geographic diversification since its inception in 2010, with a focus on strategic management of state concentration risk by expanding into underpenetrated rural areas that offer significant growth opportunities. As a result, it achieved a significant footprint across India, where it extended reach to 2.90 million active borrowers which were served through its network of 966 branches and 9,262 permanent employees spread across 377 districts in 19 states and union territories in India, as of June 30, 2022.
It believes that its significant footprint of active borrowers and branch network puts it in a vantage position to further penetrate and deepen its presence in areas in which it established branch infrastructure but remains relatively untapped and also to expand into new regions that have significant growth potential. Its extensive and geographically diverse distribution network allows it to offer “last-mile” connectivity to its customers in remote rural areas. According to CRISIL, FMFL had the fourth lowest gross loan portfolio per district and second lowest gross loan portfolio per customer among the top ten NBFC-MFIs in India, for the financial year 2022, demonstrating better diversification and lower risk per customer. As a result of its active management of state concentration, it has been able to maintain low levels of AUM concentration per state despite growth over the years.
It benefits from a large and diversified mix of 56 lenders comprising a range of public banks, private banks, foreign banks, and financial institutions, as of June 30, 2022. According to CRISIL, it had the second-highest number of lender relationships among the top 10 NBFC-MFIs in India as of March 31, 2022. Technology is an integral part of FMFL’s overall business strategy. Through the early adoption of cloud computing software and emphasis on best-in-class security practices, it established a foundation in enabling automation and digitalization of several processes across business functions including customer onboarding, customer service, loan disbursements, internal audit, and risk management. FMFL continues to invest in and upgrade technology platforms and solutions with the goal of applying a comprehensive “Touch & Tech” model across operations that focuses on maintaining frequent technology-based communication points that enhance efficiency and customer experience.
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its needs for augmentation of capital base, and listing benefits, FMFL is coming out with a combo book building route issue of fresh equity shares of Rs. 10 each worth Rs. 600 cr. and an offer for sale (OFS) of 13695466 shares. It has announced a price band of Rs. 350.00 – Rs. 368 per share. The company will issue around 16304360 fresh equity shares (Rs. 600 cr.) and coupled with OFS the total number of shares to be issued will be 29999826 for an overall issue size of Rs. 1104.00 cr. (at the upper cap). The company has allocated 50% for QIBs, 15% for HNIs, and 35% for Retail investors. The issue opens for subscription on November 02, 2022, and will close on November 04, 2022. A minimum application is to be made for 40 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 29.81% of the post-issue paid-up capital of the company.
The joint Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., CLSA India Pvt. Ltd., IIFL Securities Ltd., and JM Financial Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue.
Having issued/converted initial equity shares at par, the company issued further equity shares in the price range of Rs. 20.11 to Rs. 290.48 per share between May 2010 and December 2019. It also issued bonus shares in the ratio of 3 for 10 in February 2010. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 16.02, Rs. 87.13, Rs. 100.59, Rs. 104.07, Rs. 117.63, Rs. 194.94, and Rs. 220.10 per share.
Post-IPO, FMFL’s current paid-up equity capital of Rs. 84.33 cr. will stand enhanced to Rs. 100.63 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 3703.21 cr.
On the financial performance front, FMFL has posted a total income/net profit of Rs. 730.31 cr. / Rs. 69.61 cr. (FY20), Rs. 873.09 cr. / Rs. 43.94 cr. (FY21), and Rs. 1201.35 cr. / Rs. 21.76 cr. (FY22). Thus while its top line posted growth, its bottom line marked declining trends. Declined profits for the last two fiscals attributed to higher provisioning on account of the pandemic, natural calamities, and branch expansions. It earned a net profit of Rs. 75.10 cr. on a total income of Rs. 360.44 cr. for Q1 of FY23 ended on June 30, 2022.
For the last three fiscals, FMFL has reported an average EPS of Rs. 4.87 and an average RoNW of 2.96%. The issue is priced at a P/BV of xx based on its NAV of Rs. 171.10 as of June 30, 2022, and at a P/BV of xx based on its post-IPO NAV of Rs. 201.81 (at the upper cap).
If we annualize FY23 earnings and attribute it to the post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 12.33.
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects.
COMPARISON WITH LISTED PEERS:
As per the offer documents, FMFL has shown CreditAccess Grameen, Spandana Sphoorty, Bandhan Bank, Ujjivan SFB, Equitas SFB, and Suryoday SFB as their listed peers. They are currently trading at a P/E of 26.06, 00, 66.80, 226.82, 16.75, and 00 (As of October 28, 2022). However, they are not truly comparable on an apple-to-apple basis.
MERCHANT BANKERS’ TRACK RECORDS:
The four BRLMs associated with this issue have handled 74 public issues in the last three fiscals, out of which 24 issues closed below the offer price on the listing date.
Conclusion / Investment Strategy
Over the years, the company has gained credentials to be among the first two MFIs in India. Though it marked growth in top lines, it posted declining profits amidst the pandemic, natural calamities, and expansion spending from FY20 to FY22. It is on a recovery path as indicated by Q1 of FY23 and based on these earnings, the issue is lucratively priced. Investors may consider an investment with a medium to long-term perspective.
DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here. With entry barriers, SEBI wants only well-informed investors to participate in such offers. With crazy listings in the past, SME IPOs drew the attention of investors across the board. However, as SME issues have entry barriers and continued low preference from the broking community, any reader taking decisions based on any information published here does so entirely at own risk. The above information is based on information available as on date coupled with market perceptions. The Author has no plans to invest in this offer.
(SEBI registered Research Analyst-Mumbai).
About Dilip Davda
Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.
Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.