Secured MSME Lending And Digitization Will Drive Stronger Long Term Earnings Quality

Catalysts

About Fusion Finance

Fusion Finance is a diversified financial services provider focused on microfinance and MSME lending across rural and semi urban India.

What are the underlying business or industry changes driving this perspective?

• Scaling of the secured, high yield MSME portfolio as a second growth engine, with conservative loan to value and strong approval metrics, is expected to lift overall asset yields and drive faster growth in net interest income and earnings.
• Accelerating formalization of rural and semi urban economies, aided by GST rationalization and rising digital adoption, is likely to expand Fusion Finance's addressable market and support higher quality disbursement growth, sustaining revenue momentum.
• Ongoing digitization of origination, KYC, collections and audit, including AI led underwriting and fraud controls, is expected to further reduce processing errors and improve field productivity, supporting lower operating cost ratios and stronger net margins.
• Improving asset quality trends, with declining credit costs, high Stage 3 coverage and rising write back recoveries, could create room for a structurally lower provisioning burden over time, directly affecting profitability and earnings stability.
• Robust capital adequacy, a successful rights issue and strong lender confidence provide funding capacity to reaccelerate disbursements as demand strengthens, enabling operating leverage and supporting faster growth in assets, revenue and bottom line.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fusion Finance's revenue will grow by 281.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2253.4% today to 16.1% in 3 years time.
• Analysts expect earnings to reach ₹4.0 billion (and earnings per share of ₹23.52) by about December 2028, up from ₹-10.0 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from -2.5x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The recent improvement in asset quality and collection efficiency may be cyclical rather than structural. If rural cash flows weaken due to adverse monsoons, crop prices or wage growth, PAR and GNPA could rise again from current levels, increasing credit costs and pressuring earnings.
• Fusion is relying on faster disbursement growth to reverse AUM degrowth at a time when sector wide funding remains tight and marginal borrowing costs are elevated. If lender risk appetite or securitization markets turn less supportive, growth in the loan book and revenue could undershoot expectations.
• The plan to expand disbursements while keeping approval rates high and maintaining tougher than industry credit guardrails assumes underwriting models will remain effective across cycles. If bureau based and AI led models fail to capture emerging stress pockets or over concentrate exposure in key states like UP, losses in stressed cohorts could erode net margins and delay a sustainable return to profitability.
• Management is counting on technology driven productivity gains and headcount optimization to stabilize the high cost to income ratio as AUM grows. If OpEx savings from digitization and branch consolidation do not materialize as expected or are offset by higher compliance, collection and technology expenses, operating leverage may remain weak, capping improvements in operating profit and return on equity.
• The strategy to scale the secured MSME book as a second growth engine assumes resilient property markets and steady small business cash flows in semi urban clusters. If collateral values soften, legal recoveries slow or informal sector demand weakens, loss given default on secured loans could rise, putting pressure on provision coverage, earnings and capital buffers.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹186.11 for Fusion Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹225.0, and the most bearish reporting a price target of just ₹155.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹24.6 billion, earnings will come to ₹4.0 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 20.9%.
  
• Given the current share price of ₹155.94, the analyst price target of ₹186.11 is 16.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.