On Wednesday, ICICI Securities adjusted its stance on Fusion Micro Finance Ltd (FUSION:IN), downgrading the stock from a Hold rating to a Reduce rating. The firm also lowered the price target to INR 385 from INR 500. The downgrade follows Fusion Micro Finance's first-quarter earnings for the fiscal year 2025, which were significantly impacted by high credit costs.
The company reported a substantial increase in credit costs to INR 3.5 billion, up from INR 1.2 billion quarter-over-quarter. This rise was primarily due to the proactive reclassification of 55,000 customers, with a combined exposure of INR 2.21 billion, from stage-1/stage-2 to stage-3.
This reclassification resulted in an additional credit cost of INR 1.4 billion, with another INR 0.7 billion attributed to the tightening of the Expected Credit Loss (ECL) model.
The analyst noted that the incremental stress was particularly evident in five Indian states: Tamil Nadu, Madhya Pradesh, Odisha, Rajasthan, and Jharkhand.
These states, where 95% of the affected customers reside, contribute to 25-28% of the company's total Assets Under Management (AUM) as of June 2024.
The report further highlighted uncertainties surrounding the company's credit cost trajectory in the near term, especially given that approximately 24% of borrowers have exposure to more than four lenders. Additionally, over 30% of Fusion's customers have systemic exposure exceeding INR 0.1 million as of March 2024.
In light of these challenges, ICICI Securities has revised its earnings estimates for Fusion Micro Finance, anticipating a 46% reduction for the fiscal year 2025 and an 11% reduction for the fiscal year 2026.
The new price target reflects a valuation of 1.1 times the company's expected book value per share in September 2025, a decrease from the previous 1.3 times valuation.
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