Fusion Finance Limited (FUSION) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 FY '24 Earnings Conference Call of Fusion Micro Finance Limited 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, Muskaan. Good morning, everyone, and welcome to the 4Q FY '24 and FY '24 Earnings Conference Call of Fusion Micro Finance. First of all, we would like to thank the management of Fusion Micro Finance for giving us the opportunity to host the call. From the management today, we have Mr. Devesh Sachdev, MD and CEO; and Mr. Gaurav Maheshwari, Chief Financial Officer; Mr. Tarun Mehndiratta, COO of the MFI Business; and Mr. Deepak Madaan, Company Secretary and Chief Compliance Officer of the company. As usual, we will have opening remarks from the management team, post which we will open the floor for Q&A. With that, I would now like to hand over the call to Mr. Devesh Sachdev for his opening comments. Thank you, and over to you, sir.

Thank you, Sameer and JM Financial for hosting us. Good morning, everyone, and thank you for joining Fusion's Q4 Financial Year '24 Results Earnings Call. As mentioned by Sameer, I'm here along with my colleagues, Tarun, our MFI COO; Gaurav, CFO; Deepak Madaan, Chief Compliance Officer and IR. I would like to take you through the key highlights of our performance in financial year '24, in which we delivered strongly on all key parameters in spite of challenges we faced in Punjab. Request you to keep the presentation handy. If you refer to Slide #5, we had a very strong close to the financial year '23-'24 with the disbursements of INR 2,953 crores in quarter 4 and overall disbursement of INR 10,294 crores, translating to an AUM growth of 23.45% over financial year '23. This is in line with our guidance of AUM growth in mid-20s for financial year '24. We delivered our highest ever PAT of INR 505.29 crores, a growth of 30.52% over financial year '23. In line with our customer acquisition growth strategy, we added 5.15 lakh new customers during the year, a growth of around 14% over financial year '23. If you remember, this is above our guidance of 10% to 12% of new customer addition. Our active borrower count as of March '24 rose to 38.6 million, was highest in the sector. Our NIM expanded by 107 bps to 11.22% in spite of a tight liquidity environment, as we were able to keep our cost of borrowing in check to focus liability management. This was also aided by our rating upgrade to A+ in October 2023. Our healthy income growth led to cost-to-income ratio moderating to -- by 184 bps to 36.60%. We delivered healthy ROA and ROE of 4.78% and 19.55%, respectively, in spite of slightly elevated credit costs. Now I would like to talk about -- there are 3, 4 items before we dive into the performance of Q4, and for the slides, first, on Punjab. In financial year '24, our portfolio in Punjab was impacted for the reasons already covered in the previous calls. The share of Punjab in our overall AUM has come down to just 2.8%. The on-ground situation in Punjab has stabilized with the collection efficiency of 75% in Q4 financial year '24. We now hold sufficient provisions of Punjab portfolio and don't expect any further hit, subject to collection efficiency holding up. As highlighted in previous calls, we had stopped disbursement since December '23. In terms of our efforts on ground, we have increased customer touch points with entire hierarchy mandated to meet customers in both impacted and nonimpacted areas. We added to field collection force and tele-calling backup. We are keeping a close eye on the situation on the ground, and we'll take a call on fresh business post-election. Details on Punjab are covered in Slide 9 of our investor presentation. The second point I will talk about the credit cost. Our net credit cost for financial year '24 of 3.49% is in line with our guidance given in Q2 -- Q3 financial year '24. As mentioned, we do not expect any further hits from Punjab in financial year '25, subject to collection efficiency holding up. In financial year '25, we do not expect our net debt cost to exceed 3%. We are quite confident of raising ROAs in a guided range of 4.25% to 4.5%, and ROE of 18% to 20%. Now a few points on the regulatory landscape. Since the implementation of the liberalized pricing guidelines, we have been very thoughtful and measured in our pricing discussions. Also from the time of our IPO, we have been highlighting that we are very cognizant of the cost to customers. Currently, we are one of the lowest cost lenders to our borrowers. We have a very well-established risk-based pricing framework in line with RBI guidelines of March '22, and are very transparent in terms of our pricing disclosures. Now I would like to go to Slide #6, which covers some executive summary on our Q4 performance. Our disbursement grew 24.45% year-on-year to INR 2,953 crores. Our AUM grew 7.32% on quarter-on-quarter basis to INR 11,476 crores. We added close to 1 lakh customer in this quarter. Our yields remain steady adjusted for 1 day less in Q4 in February, with a drop in our average cost of fund and NIM expanded quarter-on-quarter by 5 bps to 11.59%, which was in line with our guidance. Our marginal cost of funds continued to trend lower with Q4 marginal cost to -- at 10.24%, which is a drop of over 20 bps over Q3. This gives us the visibility of further expansion NIM in the near term. Our PAT for the quarter came in at INR 132.69 crores, which is Q-on-Q growth of 4.93%. We are now present across 453 districts, which is one of the highest in the industry. Moving to Slide #9 on collection efficiency. Our Q4 collection efficiency, ex-Punjab, remained steady at around 98.3%. If you go to the Slide #20, we opened 211 branches in financial year '24 across our MFI and MSME verticals to take our total branch count to 1,297, which is a growth of approximately 19% over financial year '23. 75 -- 73% of the new MFI branches added are outside our top 5 states. We will maintain similar growth rate of branches in the coming year with approximately 66% of branches planned to be opened outside of our top 5 states. This, in our view, will aid in our diversification journey over the coming years. This year also marked our entry into AP and Telangana, which, along with our presence in Karnataka and Tamil Nadu, which is already among our top 5 states, will help us expand our presence in South India. Coming to Slide #22, which captures our key productive metrics. Our GLP per branch has been following a consistent trajectory and stands at INR 9.1 crore per branch as of financial year '24 versus INR 8.8 crores as of financial year '23. Clients per branch of 3,204 remains one of the best in the sector. GNP per RO is again hovering around INR 1.3 crores to INR 1.4 crores. We are also calibrating our average customers handled by our field officer by around 15%, looking at the dynamics in the field. Slide #23 captures our ATS, average ticket size, and average outstanding per borrower. Our Q4 '24 average ticket size has increased by 6% over Q4 financial year '23. In line with our guided strategy, we intend to maintain a healthy mix of growth between customer addition and average ticket size increase over the next year. We expect a 10% to 12% growth both in ATS and customer base in 2025. Our average outstanding per customer has grown by 11% year-on-year to 28,500, which still remains lowest among our comparable peers. Customers unique to Fusion are 31%, not much changed from the last numbers which we shared in September '23. Moving on to Slide #24 on branch vintage. We have a very good mix of seasoned and new branches, which provides a good visibility for future growth. 41 -- if you see in the slide, 41% of branches are less than 3 years old, which contributes just 26% to our AUM. This will improve as these branches scale up. Moving on to Slide #37 and #38 on key ratios. Our cost to income is steady on quarter-on-quarter basis, 36.8%. Our Q4 OpEx has slightly moved up. It is because of the network extension done in the last 2, 3 quarters, along with celebration of customers per RO, investment in technology. Out of this, 53 bps of the OpEx is contributed by MSME business, which is currently in a scale-up stage with planned investments in line. With our growth targets across both MFI and MSME, we will see some impact on the OpEx. However, over a period of time, we are certain that the same will stabilize. Cost-to-income ratio is a more consistent metric to track our operational efficiency. We expect it to range between 36% and 38%. Now in 2 successive years, we have delivered ROA in the range of 4.5% to 5% and ROEs of 19% to 22%. Coming to our MSME business in Slide #39 as of March '24, our MSME vertical has an AUM of INR 531 crores across 97 branches. Average outstanding per client is approximately 4 lakhs. It continues to scale up as planned. Huge focus on secured loans. We will give a more detailed update on this business in the investor meet, which is scheduled on 17th May 2024. We continue to maintain a healthy balance sheet with a capital adequacy of 27.53%, ECL coverage of 3.44% of our loan book, diversified liability mix with more than 50 lenders, ample liquidity and sanctions in hand. This gives us a strong foundation for future growth. On the back of a good growth in financial year '24, despite some challenges in Punjab, we remain confident of growing in the mid-20s in financial year '25 with healthy return ratio. I would like to reiterate that we remain steadfast in our efforts in building our business review on the long term to create sustainable shareholder value. Thank you very much. Over to Gaurav.

Thank you, Devesh. Good morning, everyone. I would like to speak out some of the key highlights in Q4 FY '24. The core interest income of the company grew by 6.67% on quarter-on-quarter basis and 27.80% on year-on-year basis. The total income has also increased to 10.09% on quarter-on-quarter basis and 29.66% on year-on-year basis. As mentioned by Devesh, our marginal cost of fund has further reduced by 20 bps on quarter-on-quarter basis and 44 bps on year-on-year basis, aided by our focused approach on optimizing the cost of fund. We will continue to work on optimizing our cost of fund in going future also. As a diversification strategy, we will tap ECBs and debt capital market in this year. Our NIM has increased by 5 bps to 11.59% from Q3 FY '24 of 11.54%, and increased by 102 bps on year-on-year basis. It is as per our guidance. We will continue to expect some more uptick in NIM in coming quarters before it gets stabilized. We will try to utilize this NIM expansion work creating overlays, keeping in mind consistent ROA and ROE. As on March 31, the pre-provision operating profit is INR 290 crores -- INR 290.68 crores, increased by 31.46% on year-on-year basis and 11.69% on quarter-on-quarter basis. Cost-to-income ratio remained steady at 36.84% in quarter 4 -- in comparison to quarter 4 of FY '24 of 36.80%. The operating cost increased by 27 bps on quarter-on-quarter basis. We have added a couple of employees in the coming -- in the last quarter, which is addition of branches. Apart from that, there are certain other additions, which we have given as a rationalization of our client per RO metrics, change in incentive structures, IT spend and implementation of some welfare measures at various levels. Operating cost of MFI business is 5.59%. MSME business contributed 0.53% for Q4. Coming to Slide 10 on Punjab impact. As it can be seen, with the uptick in Par 60, the slippage in Punjab portfolio in Q4 are within our expected range, which we have provided already in Q3 and rest of the pain has already been provided in Q4. The collection remains at 75%. The delinquencies in early buckets in Punjab has come down, and we expect minimum slippage from here on, subject to the collection efficiency. We are holding 25% of the provision of the INR 317 crores of book of Punjab as on 31st March 2024. In Q4, we have increased our management overlay by INR 18 crores to INR 59.5 crores for future unforeseen events. Our efforts are to keep increasing the same as mentioned earlier. Please refer to Slide #12. Company has provided impairment of INR 117.80 crores in Q4, which includes INR 18 crores of management overlay. The credit cost for the quarter is 0.93%. This is inclusive of 8 to 10 bps impact of Punjab in Q4. The net credit cost for FY '24, excluding management overlay, stands at 3.49%, which is within our guidance. We have done a write-off of INR 75.11 crores in Q4, which is 0.73% on the closing portfolio. We have derecognized the interest amounting to INR 15.22 crores. The ECL as on 31st March stands at INR 354.54 crores, which includes INR 59.50 crores as management overlay. Majorly, it is sitting in Stage 3. The overall coverage for Stage 3 assets stands at 119%. Historically, our write-off recovery is about 5% to 7%. In this financial year, we have received INR 26.81 crores against the write-off. We are anticipating similar recovery patterns in the coming quarters. In this quarter, we have done direct assignment to the tune of INR 509 crores. Sanction in hand as of 31st March 2024 is INR 2,736 crores. Thank you.

[Operator Instructions] First question is from the line of Gaurav Kochar from Mirae Assets.

A few questions, sir. You alluded to that incrementally you don't expect higher slippages in Punjab, subject to collections holding up. So just in that context, you've disclosed total Punjab portfolio of INR 317 crores. If you can quantify in terms of the troubled districts where the problem lies, what would be the size of the AUM out of this INR 317 crores. And if you can give that overall Punjab is at 75% in these trouble districts, what would be the collection efficiency?

Yes. Yes. So in Punjab, totally 35 branches are impacted, and they stand in about 16 districts for us. So yes, so this is largely around the -- started from the area around Amritsar, Gurdaspur, spread on to the lower districts. But what we've seen potentially has been that this has held up over the last 3, 4 months. We've not seen this impact spreading over to more branches of our trouble. We have total 55 branches in the state. So it will be confined in this particular span of districts and branches.

Sure. Sure. And out of this INR 317 crores, if you can quantify how much AUM or ballpark, whether it is half of the AUM, which is in these trouble districts? Or what would be the total size? And I'm just asking this because the collection of 75% may not be consistent across. There may be some branches...

Yes. Out of total 55 as I mentioned to you, 35 branches are impacted. So close to 20 are nonimpacted branches, right? And so on the AUM front out of INR 317 crores, the breakup is largely around 65-35 trend for breakup because bulk of the branches have been under this particular impact.

Got it. Got it. That's helpful. And secondly, sir, total 60-plus that you've disclosed as on March is 35.7%. I just wanted to understand how things have moved in April. Is it similar, stable, improved?

Similar. Right now, that's what we're saying. Otherwise, if you remember when the last call, because we saw some trends in the month of January and that's why we changed our stance on Punjab in the last call. But now when we speak, overall, this collection efficiency is holding up. So we have not seen any further deterioration in collection efficiency.

Got it. Got it. And sir, with respect to total net slippages, that's a calculated number of around INR 80 crores, which is total your gross slippage minus the recoveries and upgrades, that was INR 80 crores. So out of that, roughly what was the contribution from Punjab roughly during the quarter? Or you can give gross slippages from Punjab out of total slippages.

So the gross slippages to Punjab is between INR 18 crores to INR 20 crores in Q4. The rest is as business as usual from the rest of states.

Sure. Sure. Got it. That's helpful. And sir, the guidance that you've given of 3% credit cost for next year, does that include flow...

Less than 3%, less than 3%.

Sure. Sure. And that includes the overlay that you'll be creating incrementally also?

This is we're talking about net-net. So Gaurav, as mentioned in our commentary, because there is a NIM uptick, which is still there, we are looking in coming quarters. We are going to utilize that NIM uptick or maybe OpEx rationalization in the later half or the second part of the H1 -- sorry, in H2 of the coming year. We will utilize to create buffers in coming quarters.

Understood. So this includes buffer, the 3% that you're guiding?

No. This is basically net we're talking about.

Sorry, you're saying total credit cost...

Net credit cost we're talking about.

Okay. Okay. Total. All right.

Buffers will be over and above this.

Okay. Okay. Got it.

Net credit cost, we are saying that we would like to maintain -- we would like that it should come down to -- it should not exceed 3%. However, we will -- in H2 results, we'll give if there -- if you see how the trends are panning out, we'll further talk about it. But right now, looking at things, we are very confident that the credit cost will come down in the next quarters.

Sure, sure, sure. And sir, any incremental state or where the stress has elevated? Or is it just one state that is troubling for now?

No, no. There's no other state we are facing any issues. Most of the states are doing business as usual.

Sure. Great. And just last question, if I can squeeze in. This is with regards to the cost of fund. So if I look at the slide, the cost of fund, both on stock and marginal, it is broadly now -- the gap is hardly 6 basis points. Just wanted to understand, with the rating update that we got a couple of quarters back, whether the funding cost will start coming down now because it's a fixed -- most of your book is fixed or there is a reset period? So when do you start expecting the incremental cost of fund to trend lower from here?

So you will start looking at this coming in the first quarter onwards because whatever repricing which we need to do, we have already done that. And the incremental sanctions, as mentioned, that in a year, last week we have, where we have 2 rating upgrades. Our marginal cost has decreased by 44 bps. Now it will show some impact in Q1, Q2 going forward.

[Operator Instructions] The next question is from the line of Pranav Gupta from Aionios Alpha Investment Managers.

Congratulations on a good set of numbers. So just a clarification from one of the previous comments. You mentioned net credit costs would be less than 3% for FY '25, which is obviously lesser than what we reported this year. I sort of missed some part of that commentary. Did you mention that overlays will be over and above this guidance? Or will it include -- is that included in this guidance? That's the first clarification.

Overlays will be over and above. We are talking about net credit costs.

Okay. Okay. Sure. So the next question is, if I look at some of the metrics that you keep reporting on a quarter-on-quarter basis, if I look at number of customers per branch, customers per RO, the disbursement ticket size on a Q-o-Q basis, all of these have sort of gone down. Is it just because some of the branch openings were back-ended? Or is this something which you are consciously doing on a structural basis and this is going to continue going forward? How should one think about this?

So look, we have added 55 branches in this quarter, Q4. Otherwise, there's no -- only structural change, Pranav, which we are doing is that number of customers handled by the field officer is where we have done that [indiscernible] around 15% there. Looking at the field dynamics, we have done extensive study in the field, and looking at all the dynamics. Other than that, everything is because we added people. You will see -- if you see today, even the number of customers per branch, we are one of the best. We are hovering around 3,200. This will be around that range only. If you look at the outstanding per branches, again, has moved up. So I don't think there will be any structural change in any of these metrics. This is all business as usual because even in the Q1, you will see because we are front-loading a lot of branches in the first 2 quarters. So -- but there is no structural change. If you see -- if you look at our contribution of branches on -- as per the vintage more than 3 years, which we provide. So you see all those 60% of branches contribute to 74% of portfolio. All those metrics remain the same. Otherwise, we do not see any other change. Even the AUM handled by per RO, I think this is more or less similar. So there's no structural change here.

Right, right. No, sir. And just one last question on your cost and branch expansion. You mentioned that the branch expansion pace would remain similar in this year going ahead as well and a cost-to-income guidance of 36% to 38%. Is it fair to assume that most of the branches that we opened would probably be in newer states like AP and Telangana? Or do we still see some headroom for expansion in top 5 states? I know you mentioned that 60% to 70% of incremental branches will come from newer geographies, but just trying to understand on AP and Telangana specifically.

So top 5 states, branch openings will be only 17%. So ground -- last year, if you see, out of 181 branches, 32 branches came in top 5 state, which is around 18%. This year, around 50, which is again 17% of total branch network. Most of it -- so around -- the southern states will contribute around 31% to our branch network, others will be around 34%. So that's how it is. And we are going to split around 60 branches, which is around 20%, 25% of branches will get split where the portfolio has moved up. And these definitely are in some of the top states like we will -- in Bihar, in Uttar Pradesh. But overall, I think you might have seen that our top 5 states are still hovering around 70.4%, as we remain committed on diversification. If you see, we have the highest overall spread as far as district is concerned. So if you -- and not a single district where our portfolio -- the highest portfolio district is around 1.52%. So we are -- we remain committed on diversification. And you will see that this is panning out in this financial year also.

Good luck for the future quarters.

Thank you.

The next question is from the line of Rajiv Mehta from Yes Securities.

Congrats on stable performance. So I'm just -- many of my questions are answered. Just 2 questions. Firstly, the part that is being...

Rajiv, we can't hear you. Hello? Hello?

The line got disconnected. We will take the next. The next question is from the line of Renish from ICICI Securities.

Sir, just 2 questions. One, on the collection efficiency, which you talked about is 98.3%. But I'm assuming this is including arrears. Right, sir?

Yes.

So what is the ex-arrear collection for this quarter and Q3?

Yes. So this ex-arrears, for comparable numbers, is around 95%.

For Q4?

Yes, for Q4.

And what it was in Q3? I think it was 95.5%, if I remember correctly.

No, I think it was around, yes, 95.2% is what around we mentioned, like around the same number, around 95%, 95.2%. Yes.

Got it. Got it. So Tarun, just one follow-up on that. I mean let's say, when we look at the ex-Punjab collection efficiency, it is still lagging the industry trend. So is there any specific pockets which are causing this spread? Or this is the industry-level phenomena and maybe the same is reflecting in other numbers and maybe going ahead? I mean how one should look at this data point?

So I think, Renish, relevant observation. I think what we should do is as a comparison with our numbers quarter-on-quarter and like Gaurav mentioned earlier. So we have obviously about INR 317 crores of Punjab portfolio, and as I mentioned, that 65% of the branches are in impacted areas. So yes, that definitely -- but I think overall, other than Punjab, I think we have been able to stabilize and improve in some of the states, like we mentioned last time. But comparing it with sector, I think, there is no public information which is available, but the secondary information typically says that this is the same range, right? So 95% ex-arrears is largely around what we see -- what we gather from our information in the field. So that is what it is.

Got it. Got it. And Tarun, again on that only, so let's say, when we look at the -- our portfolio concentration, top 5 states at 20%, because it has been like since quite a long time. So is it right to assume that maybe outside top 5 states, the collection efficiency will be lower and hence, we would not want to go to those areas unless and until we...

No, no, no. I think, a, top 5 states are only because of a concentration standpoint. And I think it's more to do with the total demographics of the state, including the eligible population and the target segment. But I think there are states outside of top 5, which performed very well, right? And we are very, very positive on those states, and we will continue to grow there as well.