Fusion Micro Finance’s ₹1,100 cr IPO opens today; should you subscribe

The ₹1,104 crore initial public offering (IPO) of Fusion Micro Finance opens for subscription today. The public issue of the financial services company, with a price band of ₹350-368 a share, will close on November 4. The shares of the New Delhi-based company are expected to make debut on the domestic stock exchanges BSE and NSE on November 15, 2022.

Ahead of the IPO, the company has raised around ₹331 crore from 17 anchor investors by allotting 89,99,943 equity shares at ₹368 apiece, the upper end of price band. Nippon Life, Nomura Trust, ICICI Prudential, Aditya Birla Sun Life Trustee, Massachusetts Institute of Technology, HDFC Life Insurance Company, Motilal Oswal Mutual Fund, Kotak Mahindra Life Insurance, Bajaj Allianz Life Insurance Company, Edelweiss, Winro Commerical and BNP Paribas Arbitrage were among the list of anchor investors who subscribed the issue.

The public offer is a mix of fresh equity shares and an offer for sale (OFS) by existing shareholders. The IPO comprises fresh issue of equity shares worth up to ₹600 crore and OFS of up to 6.5 lakh equity shares by Devesh Sachdev (founder and chairman of the MFI); up to 1 lakh equity shares by Mini Sachdev (wife of Devesh Sachdev), and up to 14 lakh equity shares each by Honey Rose Investment and Creation Investments Fusion, LLC, owned by Warburg Pincus. Besides, the Dutch impact investor Oikocredit Ecumenical Development Co-operative Society, and Global Financial Inclusion Fund will also pare their stake in the company via OFS.

Formed in 2010, Fusion Micro Finance, which provides financial services to unserved and underserved women in rural and peri-rural areas across India, intends to use funds proceeds of the fresh issue to augment the capital base of the company. The company has achieved a significant footprint across India, where they have extended reach to 2.90 million active borrowers which are 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. The company's business runs on a joint liability group-lending model, wherein a small number of women form a group (typically comprising five to seven members) and guarantee one another's loans.

Key things to know about Fusion Micro Finance IPO:

• The three-day public offer opens today and closes on November 4, 2022.

• The company's shares are expected to list on stock exchanges BSE and NSE on November 15.

• The price band of the offer has been fixed at ₹350 to ₹368 per equity share of face value of ₹10 each. Bids can be made for a minimum of 40 equity shares and in multiples of 40 stocks thereafter.

• The offer comprises fresh issue of equity shares worth up to ₹600 crore and OFS of up to 13,695,466 equity shares.

• Net proceeds of the issue of equity shares will be used to boost the capital base of the microfinance firm.

• Half of the offer is reserved for qualified institutional buyers (QIBs), 15% for non-institutional investors, and the remaining 35% for retail investors.

• As of June 30, 2022, total AUM was at ₹7,389 crore, with strong growth at 53.8% CAGR in FY17-21.

• On the asset quality front, the gross non-performing asset (GNPA) ratio was at 3.6% at the end of June quarter of 2022, while net NPA stood at 1.3%. According to Crisil, the company had the sixth lowest gross NPA ratio among the top 10 NBFC-MFIs in India during FY22.

Should you subscribe to the Fusion Micro Finance IPO

The IPO of Fusion Micro Finance has received mixed reviews from market experts, with some analysts recommending “subscribe” while some have given “neutral” ratings to the issue. Analysts at Religare Broking, Capital Market, AngelOne have recommend a neutral rating to the IPO, while Swastika, Reliance Securities, Nirmal Bang have given subscribe ratings.

ICICI Direct

ICICI Direct has assigned “UNRATED” rating to the IPO, saying that Fusion Micro Finance is a strong player in a sustainably and well growing microfinance sector with healthy growth and operational performance. “At the upper end of the price band, the company is valued at around 1.8x Q1FY23 BV (post issue),” it said in a report.

As per the report, competition from other Microfinance institutions (MFIs), banks and financial institutions remain key concern for the company. Besides, increase in NPAs may adversely affect business and earnings.

Religare Broking

Religare Broking in its report said that Fusion MF is well placed to offer an increasing variety of financial products in areas where financial services penetration remains limited on the back of a long history of serving rural customers, its customer-centric model and strong distribution network. “On the financials front, the company has seen decent revenue growth of 28% CAGR over FY20-22 while profit de-grew by 44% CAGR between FY20-22 due to increase in expenses,” it said.

However, a high level of operational and credit risk as well as dependency on the five states for AUM and customers remain key risks for the company.

AngelOne

According to AngelOne, the company is well diversified and has extensive pan-india presence, and is well-positioned to capitalise on industry tailwinds. The technologically advanced operating model as well as stable and experienced management team supported by marquee investors also augurs well for the company.

The key investment concerns are a large portion of collections and disbursements from customers are in cash, which exposes the company to operational risks. Besides, any downturn in the economy can impact GNPA/NNPA ratios, whereas any disruption in sources of funding or increase in costs of funding could adversely affect liquidity and financial condition.