Fusion Finance sees margin expansion and MSME-led growth as asset quality improves

Investment View and Valuation

Motilal Oswal Financial Services maintains a Buy rating on Fusion Finance with a target price of Rs 260. The broker believes FY27 has begun on a stronger footing after a prolonged period of industry stress, supported by healthier borrower profiles, stronger collections, disciplined growth, higher lending yields and improving portfolio quality.

Motilal Oswal expects the rebuilt franchise to deliver a healthier growth and profitability trajectory. The target price is based on 1.3 times FY28E price-to-book value, compared with the stock's trading multiple of approximately 1.0 times FY28E price-to-book.

1QFY27 Financial Performance

Fusion Finance reported a 67 per cent quarter-on-quarter increase in 1QFY27 net profit to Rs 624 million. This was approximately 11 per cent below the broker's estimate, which Motilal Oswal considered not significant given the base. Net interest income declined around 11 per cent year-on-year to approximately Rs 2,400 million, in line with estimates.

Operating expenses declined around 2 per cent year-on-year to Rs 2,060 million, also in line with estimates. The cost-to-income ratio improved by approximately 190 basis points quarter-on-quarter to 67 per cent, compared with around 69 per cent in 4QFY26 and 71 per cent a year earlier. Pre-provision operating profit increased around 18 per cent year-on-year to approximately Rs 1,020 million, although it was 6 per cent below the broker's estimate. Net credit costs were in line at approximately Rs 397 million.

Annualised credit costs declined around 115 basis points quarter-on-quarter to approximately 2.5 per cent from 3.6 per cent.

Asset Quality and Collections

Asset quality improved during the quarter. Gross Stage 3 declined around 70 basis points quarter-on-quarter to approximately 2.5 per cent, while net Stage 3 remained stable at 0.5 per cent. Stage 3 provision coverage declined around 3 percentage points sequentially to 81.4 per cent. Stage 2 declined around 30 basis points to 0.7 per cent, while Stage 2 provision coverage fell around 6 percentage points to approximately 65 per cent.

Average MFI collection efficiency improved to 99.76 per cent in 1QFY27 from 99.66 per cent in 4QFY26, and net forward flow remained below 0.1 per cent. Fusion Finance retained a management overlay of Rs 195 million and did not use it during the quarter.

Motilal Oswal expects asset quality to benefit from a structurally improved MFI borrower pool. In-house collections, dedicated teams and AI-led customer outreach are expected to support recoveries and contain credit costs. The broker forecasts credit costs to decline sharply from around 6 per cent in FY26 to approximately 2.6 per cent in FY27 and 3 per cent in FY28.

Growth Strategy and Portfolio Expansion

Disbursements grew 88 per cent year-on-year to approximately Rs 17,800 million in 1QFY27. Assets under management were flat year-on-year but increased 4 per cent quarter-on-quarter to approximately Rs 77,000 million. The borrower base declined to around 2 million at June 2026 from approximately 2.15 million at March 2026.

Management expects growth to be driven by MFI momentum, MSME scaling, selective expansion, higher-quality lower-leverage customer segments and improved productivity from the existing branch network. MSME is expected to contribute around 15 per cent of disbursements, rising to 20 per cent thereafter. The company also plans to launch individual loans.

• Management is targeting medium-term AUM CAGR of approximately 20-25 per cent.
• AUM is targeted to reach approximately Rs 100,000 million by the end of FY27.
• The company plans to open 50-60 branches while closing approximately 100 underperforming branches.
• The branch plan implies a net reduction of approximately 40-50 branches.

Margin Outlook and Estimates

Reported NIM expanded around 50 basis points quarter-on-quarter to approximately 11.9 per cent. Loan yields increased around 80 basis points to 22.5 per cent, more than offsetting the roughly 30 basis point increase in cost of borrowings to 10.6 per cent.

Management expects margin expansion in FY27 as higher lending yields flow through, surplus liquidity reduces and the portfolio mix improves. Motilal Oswal forecasts NIM of approximately 14.7 per cent in FY27 and 15.3 per cent in FY28.

The broker raised its FY27 and FY28 PAT estimates by 5 per cent and 2 per cent, respectively, primarily to reflect higher NIM and lower credit costs. It forecasts AUM CAGR of approximately 27 per cent over FY26E-FY28E and RoA/RoE of approximately 4.3 per cent and 15 per cent by FY28E.

Key Outlook

Motilal Oswal's positive view is based on improving collections and asset quality, margin expansion from higher lending yields, disciplined portfolio growth and the scaling of MSME lending. The broker expects the rebuilt franchise and a healthier MFI borrower pool to support a stronger growth and profitability trajectory.