Fusion Finance Limited (FUSION) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Fusion Micro Finance Limited Q3 FY '23 Earnings Conference Call hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Bhise from JM Financial. Thank you, and over to you, sir.

Thank you, Nirav. Good morning, everyone, to the 3Q FY '23 Earnings Conference Call of Fusion Micro Finance Limited. At the outset, I would like to thank the management of Fusion Micro Finance for giving us the opportunity to host this call. From the management team today, we have Mr. Devesh Sachdev, MD and CEO of Fusion Micro Finance; Mr. Gaurav Maheshwari, Chief Financial Officer; Mr. Tarun Mehndiratta, Chief Operating Officer of the Microloans business; Mr. Deepak Madaan, Company Secretary and Compliance Officer. As always, we will have an opening comments from the management, and then we open the floor for Q&A. With this, I would like to hand over the floor to Mr. Devesh Sachdev, MD and CEO. Over to you, sir. Thank you.

Thanks, Sameer, and thank you to JM Financial for hosting us. Good morning, everyone, and thanks for joining Fusion's Q3 results conference call. I am here along with my colleagues Tarun Mehndiratta, who's the Chief Operating Officer; Gaurav Maheshwari, my CFO; Deepak Madaan, my Compliance Officer and Investor Relations. I would request you to keep the presentation, which we have uploaded, handy because I may refer to some slides. Picking up from our conference call after Q2 results, the company continues to make good progress even in Q3. The credit demand is robust and consistent in our client segment, which we expect to further get boiled by the recent budgetary reallocation for rural India. We continue to deliver good portfolio growth and client acquisitions with strong profitability and return ratios, operating metrics in Q3 as well. In the risk of interest rate environment, inflation, tightening liquidity and global uncertainty, and considering the total increase by the RBI in the current rate cycle, our NIM has increased and we have a strategy in place to further increase as per our guidance. We are confident of ending the financial year '23 on strong notes, subject to market conditions. Our consistent and focused strategy of diversification, building network, investing in human capital, strengthening the processes, digitalization and building for future is playing out well. Now I'll take you through our quarterly and 9-month performance, which you will see clearly reflects that we have remained focused on Fusion's building blocks, which have been our key strength across the years. If we can take you to Slide #17 in the PPT, which has been uploaded, diversification is up, one of our key strength. We have grown from 12 states in 2017 to 20 states as of Q3 financial year 2022. The top 5 states, Bihar, UP, Odisha, MP and Tamil Nadu having concentration of 67.7% as of December 2022 versus 74% in 2017. The portfolio in Bihar and UP has moved slightly up to around 20.5%. If you remember, in the last call, we have mentioned that this may go up to 22% in the short term, but we stay committed to keep it less than 20% with share of other states increasing. We have always been a rural-focused MFI, and composition of rural portfolio has been 93% over the last few years. Now staying on the same Slide 17, I would also like to take you through how we have built a very solid distribution network in all the 20 states. With our focus on organic growth, we added 123 branches in the 9 months until Q3 of this year. Our brand strength now stands at 1,057 versus 934 as of financial year 2022, which is a growth of 13% versus the last financial year. I would also like to mention here that we have started operations in Karnataka, taking tally of total states to 20. We have opened 9 branches to start with. Let me also mention here that we will be following a very calculated approach. Whenever we enter a new state, we actually look at the portfolio, we look at the client behavior, we settle down human capital, then only we expand. We also continue to mine deeper in our existing states. As was mentioned in my last call that we were targeting to open 170 branches in this financial year between the 2 business lines, MFI and MSME, of which around 140 -- 123, which are open, there are now 17 which have got sanctioned, are done, and we are confident of closing near to 170. You can see that Slide 18 depicts the resulting outcome where our AUM as of Q3 is INR 8,653 crores, registering a year-on-year growth of 45%. You can also see consistency in disbursement over the last 3 quarters. And this was made possible by early implementation and execution of new harmonized guidelines, helping us achieve consistent disbursement numbers in Q1, Q2 and Q3, pent-up demand and our diversified and extensive network. Let me also mention here that we have followed a very calibrated approach with equal focus on processes, risk and portfolio quality. We believe in quality growth with an eye on long-term sustainability. I would also like to mention here that we do not believe in doing the seasonal quarters. As you can see that our disbursement growth has been very consistent, even in the Q4, you will find a consistency. You will not find a certain spike in the Q4. The growth rate will be in this range only even in Q4. We were among the earliest to incorporate the new guidelines in May 2022. The guidelines clearly broaden the strike rate and define the parameters of household income and fixed obligation to income ratio, which will help streamline for borrower exposure and also give an updated statement of a household debt servicing capacity. Given that our portfolio is 93% rural, our retail overlap is 12% to 14% against semi-urban, urban overlap of 30%, 34%. I would also like to mention here that the impact -- the early impact I want to share about the -- after the implementation of the new harmonized guidelines. We have seen that approval we have marginally increased in terms of -- sorry, decreased by 8% to 10% after launch of this new guideline, which we see is a constant thing because it will improve the overall client acquisition, quality of the client acquisition and long-term sustainability of the sector. Moving you to Slide 20, which I would request your attention to. It highlights that while maintaining consistent growth, we continue to maintain our focus on fundamental prudence. Let me briefly cover the key metrics here. It will be really pertinent to talk about our consistency in adding new clients. The way our field teams are oriented with overarching, organized strategy of diversification organic growth. Fusion team members are focused towards broad-basing our coverage and leveraging a diversified network by adding new customers to the portfolio. We have now total 3.4 million borrowers as of Q3, registering a year-on-year increase of 37% and quarter-on-quarter increase of 7% where a number of borrowers in Q2 was 3.18 million. I would also like to add here that in 9 months till -- in this financial year, we have added 6.7 lakh customers in comparison to 3.6 lakh customers that were added in the corresponding 9 months post last financial year. We continue to have a healthy mix of new and existing customers as defined in our overall average ticket size -- disbursement size of 38,700 as of quarter 3 versus 37,000 in quarter 2. So you will see that the growth which you are seeing is not coming by increasing the ticket size. What we are seeing is that our borrowers are now moving to the next cycle that may have some impact in terms of our disbursement side. Also, I would like to mention here that the first loan cycle, we have not increased in the last 3 years because of the COVID. We are -- as we have mentioned in the past, we are very calibrated. We look at 10%, 12% increase in the ticket size depending on inflation, market conditions, competition, so we are really looking at some of these aspects. But let me assure you that this will be as per our guidance of events. If you see our outstanding for borrowers, which in Q3 is INR 24,800, a very -- it's basically flat -- largely flat if you compare from the last quarter. Another very relevant data point in the context of our focus on borrower addition -- Sorry, customers unique to Fusion as of September is around 36%, 37% as per the data from the bureau. If you remember, we had mentioned the last call that this number as of March '22 was 41%. There is a marginal decline because of the fact that disbursement at the sector level have increased. Going ahead, Slide 19, mentions our performance results is the key productivity metrics and clearly demonstrate our focus on leveraging scale and consistently -- and constantly working prudently on improving operational efficiency. Our GLP per branch has consistently grown and now stands at INR 8.4 crores per branch as of Q3 versus INR 7.1 crores as of Q3 of financial year 2022. Even from Q2 of financial year 2023, from INR 7.9 crores, it has moved to crores 8.4 crores. Similarly, our gross portfolio per field officer, or what we call a relationship officer, has also been tracking strongly across quarters, with Q3 being at INR 1.3 crores per RO versus INR 1.14 crores per RO as of Q3 of financial year 2022. Even from Q2 of 2023, it has moved from INR 1.25 crores to INR 1.3 crores. We also continue to focus on optimizing retail customer coverage. Our borrowers per branch now stands at 3,381 per branch as of financial -- Q3 of financial year -- this financial year versus 2,983 as of Q3 of financial year 2022. Even from finance -- Q2 of this financial year, it has -- it was 3,223. Our borrower per RO for MFI business now stands at 549 as of Q3 versus 505 in the corresponding quarter last financial year, and it was 534 in Q2. 50 -- let me also mention to you that out of our total branches, 57% of the branches had vantage of more than 3 years, and their contribution to the portfolio is 72%. So you can see the kind of high [indiscernible], which is available for growth. Continuing to -- on -- coming to -- sorry, Slide #7. Composition of our portfolio sourced between pre-April and post-April as of December '22. Portfolio sourced post April '21 is INR 8,180 crores, which is 97% of our total MFI book, and the pre-April portfolio is INR 252 crores, which is 3% of the total MFI book. The stand -- and you can see the collection efficiency, which is depicted in this slide. The stand-alone collection efficiency in the portfolio sourced after Q2 is more than 98% total overdue, but without prepayments. Moving to the Slide #8. Our GNPA stands at 3.69% and net NPA at 0.98%. As per our earlier guidance, we have added another INR 7.7 crores to management overlay. Now, the management overlay stands at INR 25 crores as of December 2022. As we mentioned in our last call, we want to build extra buffer for any uncertainty. And whenever there is any pressure on the profitability, because of the credit cost, we can dig into this buffer. We are taking a long-term view on building our business. It helps us anchor our business much more strongly. We are working internally on some very key strategic initiatives which cut across various verticals of the organization. Hopefully, we'll further strengthen our business, customer engagement, efficiencies, credit underwriting, risk management and create long-term sustainability. Thanks a lot.

Thanks, Devesh. Here are the key highlights for finance and accounts from Q3 FY '23 perspective. Interest income has increased to 51.75% on a Q-on-Q basis. Total income has increased to 57.22% on a Q-on-Q basis. As Devesh has mentioned, NIM has expanded in Q3 from Q2 perspective by 10 bps. The company has provided impairment in 9 months of INR 131.17 crores, out of which INR 25.52 crores is management overlay. As Devesh has mentioned, in this current quarter, we have provided INR 7.77 crores. And in the earlier quarter, we have provided INR 17.77 crores for the management overlay. In this quarter, we have also done a write-off of INR 45.04 crores. Cumulatively, we have written off INR 201.42 crores which is 2.3% on December '22 portfolio. Marginal cost of borrowing has increased by 50 bps in this quarter, and the annualized cost of funds has increased by 14 bps from Q2 FY '23 to Q3 FY '23 perspective. In the first 9 months of the year, the total increase in our cost of borrowing is 78 basis points, whereas RBI has increased the rate by 225 bps until December '22. We expect the benefit of last meeting upgrade, which happened in the month of November 2022 to play out in coming quarters. Given that we run our liability maturity longer than the asset maturity, we will continue to maintain the same. In December, we have utilized the IPO proceeds, and we have only borrowed INR 60 crores in the month of December. For -- in the month of January, we have utilized our IPO proceeds totally. And our new borrowing in Q4 quarter would be lower than Q3 marginal cost of fund. In this quarter, we have done direct assignment of approximately INR 350 crores in comparison to the Q2 of INR 383 crores. We would like to continue the same momentum, and in the same range, subject to market condition as far as the direct assignment is concerned. The proportion of BA the total AUM stands at 9.86% as on December '22. As far as operating cost is concerned, so operating cost has reduced by 9 bps in this quarter from last quarter. However, if we compare it from March '22, it has increased only 5 bps only despite opening 123 branches. Cost-to-income ratio has reduced from 48.13% to 39.41% on a 9-month basis. We are reasonably confident that we are able to sustain these metrics and reduce it further as we move forward in the next quarter and the next financial year. As mentioned before, we have done a write-off of INR 45.07 crores in this quarter, so there was a reversal of income which has happened in this quarter. Due to that, there was a reduction -- very minuscule reduction in the PPOP, which is approximately INR 3 crores from the previous quarter. Now, key highlights for the liabilities. We are borrowing 80% to 82% from the banks, 10% to 11% from NBFCs. The rest is ECBs and entities issued to the foreign portfolio investors. The borrowing mix will largely be the same and steady in the coming quarters. As on December '22, the sanction in hand is INR 3,033 crores and sanctioning pipeline, approximately INR 2,000 crores. So this is from the finance point standpoint. Thank you very much.

Sir, shall we open the floor for questions?

Please.

[Operator Instructions] The first question is from the line of [ Manju Oberoi ] from YES Securities.

This is Rajiv here. Congrats on strong results. So sir, my question is on the bad debt recovery experience of peers. So when I compare with the bad debt recovery versus the overall written-off pool, it's slightly lower for us versus peers. So in the last 7 quarters, we would have written off INR 500-odd crores worth of portfolio, and the recovery we've got is only INR 20 crores so far. So why would this difference be in terms of recovery experience?

So this is Tarun. As you would -- refer back to our last call, we had mentioned that post '21, a large part of the COVID portfolio when RBI had allowed us to kind of restructure under the RS II norms, Fusion had undertaken a very, very selective, about 2.5%, 2.4% of the portfolio, at that point in time, only about 85,000 cases. Versus a lot of peers in the sector would probably taken very high double-digit composition of their portfolio to be restructured under that program. So we have always believed very strongly in A, looking at very justifiable arrangements, especially under the restructuring program itself, where we did not take in the large part of the portfolio. Also, we believe in also kind of doing a physical engagement with the customers in order to give them the kind of relief and rehabilitation that they required coming out of COVID. So if you see from a -- we are very organic when it comes to even kind of resolving hardships of our customers, and that is why probably the pace of recovery would tend to differ a bit when you look at peers. However, I think the devil lies in the detail. And we have a dedicated set of team now, which is a 360 members strong team like we mentioned last time, which looks after, dedicatedly, customer in 60-plus buckets also especially 90-plus buckets. And we have seen very progressive engagement and results coming in via that team in almost all pockets where we thought there were some prolonged hardships because of COVID, and I will try and name those geographies, be it parts of Tamil Nadu, be it parts of Chhattisgarh or parts of [indiscernible] Punjab, which were also reeling after the farmers-related events. So yes, you're absolutely right. For the sector, the progression of these recoveries have been a little kind of curtailed, but I would say that we have chosen the path to take it in a more organic manner. And you will see as we go along with the further quarters, because we have seen the early indicators of that particular thing. So people in our portfolio who probably did not pay us any single installment have come down significantly. So month-on-month, I am seeing reduction in people who did not service any part of their debt even when their loans are active. Or for that matter, there has been very, very encouraging improvement in current efficiencies across all our states. Thank you.

And the second question on the flows. So when I look at flow into Stage 3, adding back the write-off, the flow is about INR 50 crores, INR 55 crores. Slightly higher number again here because when I look at the collection efficiencies being reported on the new pool and the old pool, they are pretty high, even adjusted for prepayments and not adjusted for prepayments. So they are not indicative of such slightly higher flow forwards. So how should we look at NPLs now? Because if every quarter if we have slightly material flows forward and even if you try to clean up the book, because we've got significant amount of provisions and we can keep on writing off the old NPLs, but then where do we see this growth in PL number settling? Because there is some consistency in flow also going into the gross NPL number?

So as far as the gross NPA flows is concerned, so largely out of the total portfolio, which we have on about 90%, near about 65% to 70% is largely towards on the older portfolio. And looking at the base of the new portfolio which we have like at 97%, so obviously, the historical patterns suggest that there would be a flow which is going to happen naturally, which is as a part of the business. So if you see the total combination -- so 65% to 70% is the older portfolio and the 30% on a larger pool, I think that will give you a greater sense that once we are slightly go beyond this progression of a write-off from the coming quarters, maybe post that we will see a sustainable gross NPA level going forward in the next financial year.

Got it. So then that normal and sustainable number of credit cost will be around what number?

So it would be very difficult because as of today, the pool which we have on a 90-plus largely pertains to the older portfolio. And as Tarun has mentioned, that we have a separate collection team, which is putting in place on that to have a collection. So to give a number to that, I think Q4 guidance -- Q4 results, when we are going to give, there would be a slightly more particular guidance around that. So let's wait for the Q4 results to give a guidance for the next year going forward.

Yes, sir. Sir, lastly, more on the other income being lower in this quarter, INR 12 crore, in this quarter was INR 7 crore, and the balance sheet liquidity has slightly gone up. So why this other income is slightly lower?

So there are 2, 3 things which has happened because once you receive IPO money, you can't invest in a mutual fund. You have to put it in a fix deposit. And because we are going to utilize that money for our disbursement perspective, so we have put it into the shorter term of the FD, which are not that equivalent to your mutual fund rates when you put it into some period for more than 14 days or more than 21 days. So your alpha becomes dead, so that was the case for this quarter. But you will see because now, we have utilized our proceeds, this number coming back in Q4.

The next question is from the line of Darpin Shah from Haitong.

Yes, congratulations for a great set of numbers. A few questions from my end. The first is if we can help it, the overlap with other lenders in our key geographies, if you can help with that number?

Yes. So look, as I mentioned to you that our 35%, 36% customers out of a total 3.4 million customers are rare -- they're unique to Fusion. There are 25%, 26% are first-time borrowers and another 20% are -- 15%, 20% are customers who are unique at that point of time. They have closed their loans to others. So that is what -- and the trend slightly differ in different geographies like Tamil Nadu, this number is -- the unique borrower is lower in comparison to UP and Bihar, so I think that is what we have at consolidated.

Okay. Fair enough. So can we assume that the borrowers in our key states will be -- or slightly on a lower side because now, we are seeing many of the new players -- or not other new players, many of them are players still entering UP and Bihar, and then making the place more crowded there?

See, we have very closely looked at how the level potential available in all our sales of operation, and I think that's a very key input that goes into our selection when we enter into either a new state or part of the state when you look at the district or a cluster of locations. We still think that with a state like, let's say, Uttar Pradesh with about 24 crore plus population, penetration level only been about 16% to 19% or 20%, we still think there is a lot of headroom there. And I think the overall ecosystem over the last 2 years has been very conducive for not only germination of more practitioners to reach out to the unserved interest of people in the state. And similarly, seeing across the country where we see the situation now improving significantly post-COVID, there has been a lot of momentum, which is coming into rural level likelihood generations from the government standpoint as well. So we're very hopeful that even with where we are currently and over the next few years, given the fact that there are new, harmonized guidelines which have been kept in place, I think uniform adherence of the guidelines across the country by all practitioners, we should be able to kind of see a sustainable growth as we go forward for the sector as a whole and all practitioners in largely all these potential states.

Also, I want to just like to add here that you see today, Uttar Pradesh, we have 212 branches, and Bihar, we have close to 145 branches. So we are very well established in terms of geographies. I think our understanding, our people are closeness to the customer and the vantage, because we were very early entrance of Bihar. So -- and we keep on improving, or say tightening our credit norms. So all that will make sure and all of the -- as I mentioned in my opening remarks that some of the strategic initiatives we are taking, we will make sure that we are able to navigate if there's any challenge from the competition or anything. I think we are confident that -- and for us, competition is always welcome. It makes you more razor sharp. So we are very confident that we have such a vantage position in some of these states, and we will be able to maintain.

The next question is on growth. So if you can help us what kind of growth you're looking for, say, FY '23 and then beyond for the next couple of years?

Yes. I think -- look. This year, we are already at 44%, 45%. Because there was, as I mentioned, again, in my opening remarks, there was a pent-up demand. We had the network, we had opened around close to 400 branches in the last 3 years before this financial year, so all that has now played a role in making sure that we have been able to grow at [indiscernible]. I think once we will [indiscernible] grows, you will see some tapering in terms of the growth numbers. So -- but we will give a clear guidance in terms of some range-based guidance in the -- once we come out with our Q4 results.

Okay. And the last question on asset quality, if you can provide some numbers, if possible, on the GNPA state-wide stock [indiscernible] statewide? If you can provide that number, it will be helpful.

Okay. Yes. So for us, our top 5 states, like I mentioned in my earlier answer to the question, was that our -- all our top 5 states continue to show significant improvement in current efficiency month-on-month over the last 8 to 10 months. So assuming, if you look at 90-plus numbers for our top 5 states, very happy to share that for the state of Bihar, our 90-plus numbers are in the range of about 1.2% to 1.4%. For Uttar Pradesh, the number is again in the similar range of about 1.2% to 1.3%. Odisha and MP again, are at our -- almost like a national average of around 3% to 3.5% range. And we have seen a lot of improvement in our fifth largest state, which is Tamil Nadu, which has shown great kind of recovery from its post-COVID times.

Next question is from the line of Renish Bhuva from ICICI Securities. The next question is from the line of Shreepal Doshi from Equirus.

Sir. So wanted to understand, which are the companies between you will be having the largest overlap in our top 5 states in terms of lenders?

So look, Bharat is everywhere. So I'll say that if I talk about UP, it could be Bharat in some parts, it could be Utkarsh or [indiscernible]. So these are -- could be in UP. Like similarly if we go in Bihar, it is -- somewhere, it is Bandhan also, Bharat, then you have Arohan in some -- in Bihar. Similarly, I think it's state-wide, but there are some common players which are across India. If I talk about Odisha, basically, it is Annapurna and Bharat other than us, I think, are the top -- and L&T, which are, I think, top players. So I think it varies, but there are some common lenders. But otherwise -- and now, we have -- as we are in Tamil Nadu, [indiscernible] would be there, has a major share there.

Sir, who would be like at book level, at overall company level, who will be like the largest? If you can highlight a couple of players with whom we have the highest overlap?

So typically, like, to be mentioned -- good morning, this is Tarun. As I think Devesh mentioned earlier that we are in 20 states, and while the 20th state has been added just very recently. But 19 states, when we look at the listing of the top 10 states, even let's say, in the micro, you realize that all of [indiscernible] in 14-plus states. So there is a overlap, which you will see in every geographies. However, some of these financials over the years have grown in selective geographies more. So like Devesh mentioned earlier that in Uttar Pradesh, we would see this in parts of geographies with Utkarsh or with [indiscernible] and Bharat. And similarly in Bihar with parts of Arohan, in Odisha with L&T. So there is no really 1 state overlap, which I would say has -- we have more kind of a matter in every state, so there is a difference. So credit access especially in Tamil Nadu and now, parts of South Madhya Pradesh, or let's say -- so it does -- that's the makeup of every state, because everyone is diversified. And that's -- their listing is very, very clear there. And if you -- similar question is asked, you will find them having Fusion as an overlap or competition in, let's say, 4 or 5 of those bigger states rather than all the states. So it depends how one is placed.

Got it. Sir, second question was with respect to tenure. So like have you tweaked the feature of our loan products by providing 3-year loan tenures to our customers, or?

No. We have not done that because the higher ticket size, which we'd give, is still in the range of [ INR 85,000 ], [ INR 90,000 ], so we don't see, but yes. I mean, right now, we have not done that.

Okay. So we -- right now, the highest tenure that you provide to our customer would be 2 years?

Yes, yes.