Fusion Finance Limited (FUSION.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Fusion Finance Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Smit Shah from Ad Factors. Thank you, and over to you, sir.

Yes. Thank you. Good morning, everyone, and thank you for joining us on the Q1 FY '26 Results Conference Call of Fusion Finance Limited. We have the company's senior management team with us on this call today. Before we begin, I would like to remind you that certain statements made in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available in the Q1 FY '26 investor presentation that has been uploaded on the stock exchanges and the company website. I now hand over the call to Mr. Devesh Sachdev, Managing Director, Fusion Finance Limited, to begin the proceeding of this call. Thank you, and over to you, sir.

Good morning, everyone, and thank you very much for joining us for Fusion's Q1 Financial Year '26 Earnings Call. The results and investor presentation are available on the exchanges for your reference. I will begin with a very brief overview before handing over to my colleague and CEO, Sanjay Garyali, for detailed remarks. As you know, financial year '25 was a challenging year for the industry, marked by a prolonged credit cycle and operational headwinds. At Fusion, we remained proactive and transparent, flagging early signs of stress and acting decisively. We implemented corrective measures and well ahead of the curve, staying true to our commitment as a responsible and responsive organization. So this financial year has begun on a strong note for us. Q1 performance reflects the early impact of the strategic actions we took last year. Credit costs have moderated, collections remain robust, and our operating model is delivering with greater consistency. With renewed confidence and sharper execution, we are well positioned to build momentum through the year and drive long-term value creation. Since August 2024, we have taken firm measures to strengthen our foundation, and we are now seeing tangible signs of recovery. The direction is clearer. Our confidence is stronger, and we remain focused on monitoring progress and taking calibrated action. Credit costs have steadily declined quarter-on-quarter from INR 571 crores in Q3 of FY '25 to INR 253 crores in Q4 of '25 and further to INR 178 crores in Q1 of FY '26. GNPA has improved from 7.9% in Q4 to 5.43% in this quarter. The quality of the new portfolio originated post August 2024 has been strong, reflecting the effectiveness of our revised underwriting and collection processes. At the sector level, we are seeing renewed focus on credit quality, discipline and responsible growth. Regulatory moves such as the lowering qualifying asset threshold from 75% to 60% are supportive steps. As India advances towards its $30 trillion economy vision by 2047, microfinance will continue to play a pivotal role in fostering inclusive growth. Amidst this evolving landscape, I remain confident in Fusion's ability to capitalize on emerging opportunities powered by a strong foundation, agile culture and a clear vision. As many of you know, I am currently transitioning from my role and the process is progressing smoothly. This is the next step in our leadership journey. I want to assure you that the institution we have built together is resilient, well positioned and fully committed to delivering long-term sustainable growth. Thank you. And now I will hand over to my colleague, Sanjay.

Thanks, Devesh, for setting the direction. Let me begin by expressing gratitude to all our stakeholders, internal and external, who have helped me settle in my role. This is my first full quarter at Fusion, and I'm pleased to share that the improvement, as a team, we saw last quarter has continued. These results reflect the strength of our refreshed operating model, which incorporates environmental realities directly into our credit operations and growth strategies. Credit quality and profitability have continued to strengthen for the third consecutive quarter. Credit costs declined to INR 178 crores from INR 253 crores in the previous quarter and INR 571 crores 2 quarters back. While we maintained Stage 3 provision at 97%. GNPA has further reduced to 5.43% from 7.92% last quarter and NNPA stands at about 0.19%. Losses have narrowed to INR 92.25 crores compared to about INR 165 crores in Q4, driven by lower credit costs and improving NIMs, although operating expenses remain high due to our continued investments in field and tech infrastructure. On the most important metric, the current bucket collection efficiency, we have improved to 98.55% from 98.44% in the previous quarter. The flow forward rate as well from current to par fell further to 0.54% compared with 0.57% in Q4 and 1.8% 2 quarters back. The current bucket post retention now stands at 99.46%, showing consistent improvement quarter after quarter. The new book with the extended guardrails disbursed since September 2024 is now at 44% of our portfolio and has maintained July current bucket demand efficiency above 99.5%. We've also seen encouraging growth momentum. Q1 disbursements stood at INR 950 crores. This was despite a drop initially due to the final guardrails in April and our own additional steps we had taken to strengthen customer identification. The composition of this disbursement, 79% of which came from Fusion and Fusion+1 clients and the remainder evenly split between new to credit and new to Fusion. 76% of our disbursements went to existing customers, showing continuous step-up month-on-month. Our state-level strategy remains disciplined with UP, AP, Telangana, Maharashtra and Assam in the grow category; MP, Tamil Nadu, Bihar, Rajasthan, Jharkhand and West Bengal in maintain; and Orissa and Gujarat in reduce. In July, we disbursed over INR 400 crores with approval rates improving to around 20% from the earlier 12% to 15%, driven by maturing credit intelligence. Our new products, Ujala and Sugam launched in March, designed to reward disciplined Fusion +0 and Fusion+1 borrowers now contributed 40% of July disbursements. These pre-approved offers reduced front-end effort and improve conversion. Operational efficiency and risk discipline have also strengthened. The customer load per relationship officer, which now remains at 350, but upcoming technology enhancements will help increase this in the quarters ahead. Over-leveraging, defined as having more than 3 lenders in our customer base fell from 20.6% in December to 17.6% in June and is still lower at about 14% in the nondelinquent book in June. The dedicated collections vertical, we introduced last quarter, over 75% of whose staff have now 6 months of tenure is delivering results. Our specialized NPA recovery team continues to target customers with identifiable external transactions for sharper recovery. Flow rates have improved across all delinquency buckets supported by targeted interventions, alternate channels and expansion of digital collections, which have now grown to 21% in October, which have now grown from 21% in October to 35% in June. On collections in the 90-plus portfolio, which includes the written-off portfolio, we were averaging 0.25% monthly cash recovery, and this is showing month-on-month scale up through committed and definitive work. The MSME vertical is going to be emerging as our second growth engine. We have an AUM of INR 684 crores, which is 91% secured and an average LTV of 42% and IRR of 23%. Operating across 8 states through 105 branches, the business maintains a 50% approval rate and combines cash flow assessment with lending against self-occupied residential and commercial properties. Our distribution reach significantly broader than that of typical NBFCs remains a key competitive advantage. Our people and processes remain a central focus. We have over 15,000 employees predominantly in customer-facing roles, attrition among branch managers and above is well controlled with 75% having more than 3 years tenure. Front-end attrition has improved significantly over the last 2 quarters, and we are continuing to invest in further improvements. Every branch now has at least one non-sales resource to ensure strong maker-checker controls and governance oversight. Enabling functions, technology and HR remain strategic priorities. Our IT team continues to build core LOS components in-house while leveraging partnership with industry leaders for speed and adaptability. The focus is on reducing borrower level risk and simplifying onboarding. Key transformative projects in onboarding and portfolio management remain on track for delivery by March 2026. Over the last quarter, L&D has been realigned under HR for sharper execution. We have added a senior leader to manage customer service and grievance redressal, both essential for retaining customers and protecting franchise value. In summary, Fusion has moved beyond firefighting. We are stabilizing, simplifying and strengthening. As we enter FY '26, our focus is on transitioning to a growth phase cautiously, but with confidence, supported by industry +1 guardrails, multiple credit-led products and the advantage of a strong vintage in key MSME markets. With that, I will hand over to Amandeep to take you through the financials.

Thanks, Sanjay. Good morning, everyone. I will take you through the key financial highlights for the quarter, which marks continued progress in strengthening our balance sheet and reinforcing lender confidence. Firstly, talking about liquidity and cost of fund. We raised INR 1,220 crores through fresh funds between January '25 and July '25, including INR 32 crores through DA MSME and INR 81 crores via PTC. As of June 30, 2025, we hold INR 724 crores in liquidity, along with INR 1,496 crores in sanctioned lines and INR 400 crores of balance call money from the right issue. Our capital adequacy remains strong at 29.52% post the successful completion of partly paid up right issue. Lender confidence continued to be evident for quarter 4 FY '25 from the initial waivers received, which was 86% as of then, the same now stands at 93% of the covenant breaches. For quarter 1 FY '26, we are on the track for similar waivers as previous quarters, which is either received or in process. This support has come alongside fresh credit lines, demonstrating the depth of our -- the average cost of funds declined 25 bps Q-on-Q to 10.27%, while marginal cost rose 160 bps to 13.3% during the timing of new borrowings. NIM improved by 172 bps Q-on-Q to 10.29%, driven by higher lending yields and reduced Stage 3 assets, which lowered nonrecognition of interest income. Coming on ECL and asset quality. We revised our write-off policy from 240-plus DPD to 180-plus DPD in Q1, resulting in INR 486 crores in write-offs. This step ensures early portfolio hygiene and enhances forward-looking credit quality. Post write-off, gross NPA improved to 5.4% and NNPA stood at just 0.2%. Credit cost was INR 178 crores, that is 2.3% of average on book loans. ECL provisions totaled INR 579 crores, down from INR 887 crores in the previous period. Stage 3 coverage remains robust at 96.6% and Stage 2 and 3 coverage at 88.7%, ensuring minimal future P&L volatility. These metrics reflect a conservative approach to recoverability and a resilient balance sheet. Now coming on operating performance. Our cost-to-income ratio was 70.81%, marginally higher than Q4, 69.61% due to portfolio contraction and nonrecognition of income on incremental Stage 3 assets. Operating cost stood at 10.1% for the quarter. Operating cost for the MFI business was 9.86% and MSME business 0.22%. The slight cost increase aligns with planned investment in collections, field operations optimization and efficiency enhancements. The implementation of regulatory guardrails ahead of schedule in August 2024 and then subsequently in the successive quarters made onboarding more stringent, leading to 14% quarter-on-quarter reduction in gross advances and asset size, which also impacted our cost ratios. Despite this, the PPOP was 86.61%, demonstrating underlying core strength and positioning us for further improvement on asset quality, gains flow and lead us towards profitability. Concisely, quarter 1 FY '26 reflects disciplined execution on both sides of balance sheet, reducing funding cost, protecting margins and sustaining high provision coverage. With strong liquidity, lender support and improving portfolio quality, we are confident in our ability to continue narrowing losses and funding growth under robust guardrails. Thank you.

Sir, would you like to start with the Q&A?

Yes, please.

[Operator Instructions] We take the first question from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, first thing is, Sanjay sir, just trying to understand, you closed your opening remarks by saying Fusion is now outside the firefighting mode and the focus in FY '26 will be on cautious and calibrated growth. So if you could just expand on this a little bit. I'm just trying to understand when we say we are outside the firefighting mode, are we now in a zone where we can say that the leadership hiring, particularly for people who will be reporting into you, is that complete now? And secondly, when we say cautious and calibrated growth, what will be the trajectory of growth like now in terms of disbursements for the next few quarters? And lastly, I mean, given that this quarter, credit costs significantly declined, which is a positive, what will be the credit cost trajectory looking like in the next couple of quarters? And when can we get to profitability? Can that be in the second quarter or in the third quarter?

Yes, so I think your -- the first question, so 3 questions you have asked. I'll first take on the most critical one, which is back to growth and cautious optimism. I think, Abhijit, what we mean as a team here is that we see multiple opportunities in the market. There are a lot of changes that are happening the way the entire JLG structure works, the number of people required, the -- how do we manage ODs or overdue amounts, which go beyond a certain day? Is there any cover that the front-end guy gets -- or is the field collection the only way to go about? So there are multiple questions that we are looking at. Then on top of that, the challenge is that versus our existing customers, when do we start accelerating on new to credit and new to Fusion customers. I think the -- if you look at the final guardrails have actually come in April. And I think it is prudent for any financial services company, not just microfinance with a new set of guardrails, give some vintage before you start getting into, let's say, either new to Fusion or new to credit or any customer where -- which is a little unknown to you. And that is why the entire focus is initially on our existing customers. And this is not -- and the guardrails that we have kept are not simple guardrails. They are very complex. But what it essentially does is that there is enough headroom within our existing customers to be showing growth for the next 2 to 3 quarters. I don't think that -- so right now, I explained to you that 76% of our business comes from existing customers. Will it be like that beyond 3 quarters? I don't think so. I think eventually, we will have to come back to -- the right number is somewhere between 60% to 65% and 35% customers have to be from outside Fusion. But I think we have 3 quarters for that. The next 3 quarters, there is sufficient growth that can come from existing customer scale up, and the value that we are seeing on the existing customers in terms of the current bucket collection efficiency, that is extremely encouraging. So that's what -- so I think from our current strategy, there is enough headroom that is available for growing. Just to give you a number, the average number in the previous quarter that went by was close to about INR 310 crores. In July, we have already crossed INR 400 crores. While we are sitting in August, we are seeing a 10% upside over July as well. So that is giving us confidence and collection efficiencies are either improving or staying stable. So that's your first one. The second question was on the leadership. I think that's a process that we will continue to work on. There will be people who we will be requiring the kind of skill set that microfinance requires, will be very different from the erstwhile microfinance. And hence, we will borrow from other NBFCs, other financial services, maybe nonfinancial services as well. But just to reflect on this, I think the way decision-making happens in Fusion is not what Devesh or I decide. There's a core committee which does most of the heavy lifting. There's an executive council that we have, which takes 95% of the decisions, people with very diverse skills. Some of them have very large vintage in the organization. And I think that's what both, Devesh and I, are relying on. If you ask me, my role is essentially as a catalyst or like a disruptor where I push them that what extra can we do. But I think most of the decisions, 95% of the decisions are taken by this team. So we will be in the process of hiring people, hiring skill set, which maybe microfinance did not have at a certain point of time. On the third thing, credit cost, like you see, I think we are seeing extremely positive. We have shared with you the ECL provisioning. If you just put the numbers together, the credit cost, you can clearly see will come significantly down. And if you were to look at the numbers, which is INR 92 crores of loss, I think over the next 1 or 2 quarters, the significant impact to this will come from the further reduction of credit cost. Now I cannot give you an exact forward-looking statement that whether Q2 will be profitable or Q3 will be profitable. And that is the reason why we have shared data with you transparently, Abhijit. I think if you just put this in a model, and we have shared the flow rates with you, I think you will yourself get the confidence from a direction that we are able to set up that profits could happen quicker than a lot of us expected. But I think most of the data we have shared very transparently. And I think you understand how this modeling operates. I think you can put together when exactly will the profits come. But directionally, I think as a team, we are very happy to share with you that we are moving towards profits very soon. So Abhijit, hope I have taken your 3 -- hope I have answered your 3 questions.

Yes, sir. And one last question I had. I think during your opening remarks, you also said that AP and Telangana will be among our growth states. Sir, I mean, of late, right, I mean, especially in this quarter when companies reported, they have started talking about some weakness that they have started seeing in AP and Telangana. Some of it is also to do with the fact that MFIs as a whole, right, were not really present in a big way in AP, Telangana and it has started only in the last 1 year. So what is it that we are seeing in AP and Telangana, if you could just elaborate on that? And lastly, on the fee income side, are we taking some steps to improve the fee income stream in the coming years?

Okay. So I'll take the first question, which is AP and Telangana. I think AP and Telangana -- so the way we are operating, I think, other than 2 states, which we have identified, which we think are broadly over-leveraged at states. We do not see structural issue in any of the states. And we have identified 2 states as reduce states. Other than that, we do not see structural issues in rest of the states. Now I think -- and there will be cycles in states, there will be cycles at a, let's say, at a district level, there will be cycles at a zone level. I think what we are very clear, and we have realized, I think this is a learning that has come to us is that the cycle comes towards the fringe customers, and it doesn't come across the good paying customers. If you see our strategy, it is the guardrails are Industry +1, which means we'll be a little tougher than the industry on ourselves in terms of credit. So if you see, I have explained to you that between Fusion, technically, microfinance allows the guardrails are up to, let's say, self +2, so up to 3 lenders. But 80% of our business happens just in 1 or 2 lenders because we think that it is prudent to ensure that we work on less leveraged customers. So I think whether it is AP and Telangana or a lot of people are talking about Bihar from that perspective, I don't think the problem is at a state level. I think problem is at a customer level. And if we continue to keep our watch on leverage of customers, I think, we'll be through other than these 2 states, which we have identified as reduced. On the fee income, we're looking at -- so there'll be -- so give us some time, we will give you some good news on fee income in future that what are the opportunities we are looking at. We have already applied for our corporate agency license for insurance. We will come back to you and the progress is significant. We will come back to you in the next quarter on what the status is on that. But I think if you see that the way we are operating on our -- there is some amount of leeway, which is also available on our existing book where we are also focusing for some additional income and not just relying on outside income, which will start coming in, let's say, a quarter or so.

[Operator Instructions] We take the next question from the line of Viral Shah from IIFL Capital.

Two questions. One is we wrote off nearly 4% of the book in this quarter. Despite that, the share of customers who have loans from, say, Fusion +3 or more lenders, that has not actually declined as much on a sequential basis. And my second question is also relating to the same slide wherein we have given numbers of the Unique to Fusion customers and those things. So over there, I'm seeing that on a sequential basis, the Unique to Fusion customers are reducing. Also the customers -- the Fusion customers within the smaller ticket size bucket, that is also reducing sharply. So are we again starting to see some signs of, say, leverage now again getting to rebuild for all of these customers? And also with regard to the approval rates that saw a very sharp jump in July, so if you can just speak on that, that will be helpful.

Okay. Great. So I think, Viral, first on the write-off, we essentially wrote off what we thought was prudent. And entire -- if you see the entire write-off policy, we have kept at about now 180 days because we have realized the recovery percentage in those buckets. So on the -- however, if you -- your second question, which is, let's say, Unique to Fusion, if you look at our overall base of about 1.7 million customers, that's about the base that is available between Fusion+0 and Fusion+1. If you look at -- so we have given to you the overall portfolio. Now when you look at -- on the overall portfolio, this greater than 2 lenders has significantly come down from close to about 31% to 17% now. This is on the overall book. This also includes the delinquent portfolio. So March '24 was 31.5%, which is greater than Fusion+2. And now we are at about 17.6%. Now this is the overall portfolio. If you remove the write-off portfolio, and if you remove the delinquent portfolio, so you look at the current book alone, this 17.6% is about 13%. And we have -- we are looking at the flow rates of this 13%. Clearly, this 13% is behaving as good as the customers, which are Fusion+2 or Fusion+1. So it is not that all of Fusion+ greater than 2 is bad. But the challenge is that we are also keeping a watch on Fusion+2 with retail leverage. So if you go down and look at our customers having with us greater than INR 60,000 to INR 1 lakh exposure in that same table where you saw Fusion+1 and Fusion+2, you see that we have made serious progress in ticket size between INR 40,000 to INR 60,000, so which was initially 19% are now 21% and 3.2% has moved to 12%. These are the 2 categories where we see much better credit separation, and we will continue to focus on this.

Before you go to the third question, just a few clarifications. So the relationships that we have, this includes the write-off customers and portfolio or no?

So this includes the delinquent portfolio, 90-plus.

But it does not include the write-off?

It does not include the write-off portfolio, but it includes the delinquent portfolio. So if you...

So then my question, Sanjay, with regard to this, 4% write-off in this quarter, then -- and the reduction in the Fusion+3 although is only 50 bps, so 3.5% of the write-off has happened in the customers who have less than 3 -- or actually -- yes, less than 3 customer relationships, lender relationship.

So what we will do is, we will give you a complete sense on this. We have complete data. But if you look at against, let's say, similar period last year, okay, on Fusion+3 because that is also a like-to-like comparison that includes the overall book without the write-off was close to 30%, right? Now if you see before write-off was about 18.1%. Now the -- what you have to realize is that the guardrails came into effect from August, September '24. So the customers, which had to go bad in Fusion in greater than Fusion+2 already had a window of 6 months to go bad and their actual progress, their deterioration happened between August to March '25. The most stringent guardrails for existing customers, which came in April '25, that further caused some disruption. But most of it -- most of these customers were not available for further funding to the market, and this happened from August, September '24. So most of the -- so now the customers that you have in your book are not just defined by Fusion+1 and Fusion+2. The sense we have given is only Fusion and Fusion+1. And that is why the third question is very relevant that has the approval rate come only from giving more to Fusion+1 and Fusion+0? No. Those approval rates have come from 3 clear guidelines. Customers who do not have external exposure at any point of time more than a certain amount, and that is much lower than the -- what the MFIN guardrails have been set up, their overall retail exposure and what kind of assets they have lending with. And then is the third one, which is Fusion. So while we have shared with you Fusion alone, that is not the only criteria or that is not the only credit separation point. So -- and the approval rate increase has come from 2 areas: one, this new product which came in. Two, now we have preapproved products to the front end. So the entire guardrail testing we are doing at the back end, which includes some stringent guardrails on overall retail exposure and then going and giving to our existing front-end sales guys. So they don't have to go through the entire process of customer identification. So while I'm talking this approval rate is inched further by about 1% or 2%, if you see the industry is at about 28%, 30%. I think we were lagging on this respect because of 2 reasons, because of our IT that was in process, the capabilities that we were developing and this process of pre-approval, which a lot of progressive players in the market were doing. So it is not that we have gone aggressive and the approval rates have not come from some aggressive segment that we have identified.

Got it, Sanjay. Sanjay, just on my second question, which was there, what I was referring to is the Fusion customers. Over there, I see that in the March quarter, the less than INR 40,000 ticket size bucket was 83% that is now down to 67% and whereas the INR 40,000 to INR 60,000 has gone from 12.5% to 21% and similarly in the INR 60,000 to INR 10,000 range, so what has driven this? Is this on disbursement basis or on a portfolio basis?

Correct. So this has essentially happened because of the initial -- because the second cycle has significantly gone up. If you see the existing customer, which used to be about 50% right now contributes about 76%, which means that the customers, which are -- which have been with a vintage of at least 14 months or 16 months, they are the customers who are returning back to us. So the ticket sizes go up because now you're giving not to entry-level customers, you're giving to customers who are tested with you for 14 months.

And what is the ticket size in the second and the third cycle now and what it was, say, 6 months?

The ticket size in the second cycle for a regular customer continues to be the same. The percentage of second cycle customers has gone up. So let's say, my second cycle customers had a 55,000 ticket size or -- and my first cycle had 40,000 ticket size. My initially -- it was equally divided 50-50 between first and second cycle. Now close to 70%, 74% customers are in the -- actually more than that, close to 77% customers are now in the second cycle. So the weightage of that has gone up.

Got it. And just last, if I may, a data point. What is the ex-bucket collection efficiency in July?

So the ex-bucket collection efficiency in July continues to be same that we exited June across states, which was a bit close to about 98.5%, roughly in the same range. There is some state, which is 10 bps up or 10 bps down, but roughly, we are in the same range. And the same is true for the net roll forward rate. This is at a portfolio level. The question that you had asked, this is not -- this is the data that you are referring to is at a portfolio level.

We take the next question from the line of Rajiv Mehta from Yes Securities.

Congrats on good collection performance. So again, just taking forward the collection efficiency point and the net addition in the first bucket. Sir, you're saying that it's been stable in June and July. But when you look at the portfolio churn and the portfolio mix, the new portfolio, which has been originated post the guardrail and which is much better in quality where the ex-bucket collection efficiency is 99.5%, that will keep on climbing up as a proportion of the book. Then shouldn't be -- your ex-bucket collection efficiency and the net roll forward rate in the first bucket should also improve commensurately with that mix change in, say, maybe July, August, September?

Okay. Is that your only question? Is there any...

No, I do have. So that is one on how the net flow forward will keep on climbing. And in terms of subsequent bucket flows, is there any scope of further improvement? Because I think we have seen the bucket 1 onwards forward flows have improved in this quarter. Given the effort that we are putting on the collection, do we see the resolution rates getting better? And third is on the PCR on the Stage 2 and Stage 3 ECL coverage, we have been maintaining very high coverage of 72% and 97%, maybe because we are seeing -- we were seeing higher flows and we wanted to write off and we were wanting to take concurrent provisions. But any thought process as the collection environment settles and normalizes in the next 2, 3 quarters, would you want to maintain such high coverage on Stage 2 and Stage 3 going forward also?

Okay. So I'll take the first 2 questions. So one is on the current bucket collection efficiency. Let's say, if you see the flow forward rates and your question is that because your new book is growing, currently, the new book is at about -- the new book currently is at about 44%. What kind of differentiation you're seeing between the old book and the new book and the weighted numbers, they should show a significant...