Fusion Finance Ltd:Annual Report 2023-24 Analysis

Fusion Finance Ltd.: A Comprehensive Overview #

About the Company #

Company Vision and Mission #

Fusion Finance’s vision is to be a leading provider of innovative financial solutions, empowering individuals and businesses to achieve their financial goals. Their mission is to deliver exceptional value through customized services, built on trust and integrity.

Products #

Product Portfolio #

Fusion Finance offers a diverse range of financial products and services, categorized as follows:

• Loans:
  • Personal Loans
  • Business Loans
  • Home Loans
  • Vehicle Loans
  • Microfinance
• Investments:
  • Fixed Deposits
  • Mutual Funds
  • Bonds
• Insurance:
  • Life Insurance
  • Health Insurance
  • Property Insurance
• Advisory Services:
  • Financial Planning
  • Wealth Management
  • Investment Advisory

Primary Customers #

Target Industries and Sectors #

Fusion Finance primarily serves the following sectors:

• Small and Medium-sized Enterprises (SMEs)
• Retail Customers (individuals seeking personal finance)
• Agriculture
• Healthcare
• Education

Major Client Segments #

• Businesses needing capital for growth or operations.
• Individuals seeking loans for personal needs or home ownership.
• Farmers needing access to finance for agriculture activities.
• Individuals looking to invest in financial instruments for wealth building.

Future Outlook #

Expansion Plans or Growth Strategy #

Fusion Finance intends to expand its presence in rural and semi-urban areas, focusing on financial inclusion. They are investing in technology to improve accessibility and customer experience. Strategic partnerships with local businesses and community organizations are also part of their expansion plans.

Industry Trends Affecting Their Business #

Several industry trends are impacting Fusion Finance:

• Increasing adoption of digital financial services
• Growing demand for personalized financial solutions
• Regulatory changes and compliance requirements
• Rising competition from fintech companies
• Economic fluctuations affecting loan demand and investment returns.

Financial Analysis Report: Fusion Finance Limited (FY2024) #

Balance Sheet Analysis #

Comparative Analysis of Assets, Liabilities, and Equity (FY2024 vs FY2023) #

Full comparative financial statements for FY2022 are not available. The analysis focuses on FY2024 and FY2023.

Balance Sheet Summary #

(₹ in Crores)

Source: Audited Financial Statements FY2024.

Statement of Profit and Loss Summary #

(₹ in Crores)

Detailed Analysis #

Operating Performance #

Income Statement #

Revenue Analysis #

Fusion Finance Limited reported Total Income of ₹2,412.67 crores for FY2024, a significant increase of 34.01% from ₹1,800.35 crores in FY2023. Total Revenue from Operations grew by 33.00% YoY to ₹2,316.

Cash Flow and Liquidity Analysis #

Cash Flow Analysis (FY2024 vs FY2023, ₹ in Crores) #

Operating Cash Flow (OCF) #

• Net cash used from operating activities was ₹(1,868.02) Crores in FY2024, compared to ₹(1,895.08) Crores in FY2023.
• Profit before tax was ₹663.26 Crores in FY2024 (FY2023: ₹511.94 Crores).
• Key adjustments to reconcile PBT to net cash flows included:
  • Impairment on financial instruments (Loans): ₹364.86 Crores (FY2023: ₹200.37 Crores).
  • Depreciation and amortization: ₹28.07 Crores (FY2023: ₹22.32 Crores).
  • Effective interest rate adjustment for financial instruments: ₹(20.65) Crores (FY2023: ₹(14.00) Crores).
• Changes in operating assets and liabilities:
  • (Increase)/decrease in loans: ₹(2,757.64) Crores (FY2023: ₹(2,512.57) Crores), reflecting portfolio growth.
  • (Increase)/decrease in other financial assets: ₹(66.31) Crores (FY2023: ₹(19.94) Crores).
• Income tax paid was ₹143.73 Crores in FY2024 (FY2023: ₹116.04 Crores).

Investing Cash Flow (ICF) #

• Net cash flow from investing activities was ₹2.88 Crores in FY2024, compared to ₹(1.22) Crores in FY2023.
• Major components for FY2024:
  • Purchase of property, plant and equipment (PPE): ₹(22.50) Crores (FY2023: ₹(25.53) Crores).
  • Purchase of intangible assets: ₹(3.16) Crores (FY2023: ₹(2.17) Crores).
  • Purchase of investments: ₹(12,175.96) Crores (FY2023: ₹(7,811.35) Crores).
  • Proceeds from sale of investments: ₹12,205.33 Crores (FY2023: ₹7,837.76) Crores.
• Capital Expenditure (Capex) on PPE and Intangible Assets: ₹25.66 Crores in FY2024 (FY2023: ₹27.70 Crores).

Financing Cash Flow (FCF) #

• Net cash flow from financing activities was ₹1,951.15 Crores in FY2024, compared to ₹1,295.78 Crores in FY2023.
• Major components for FY2024:
  • Proceeds from borrowings (other than debt securities): ₹7,173.19 Crores (FY2023: ₹5,195.00 Crores).
  • Repayment of borrowings (other than debt securities): ₹(4,838.26) Crores (FY2023: ₹(3,742.21) Crores).
  • Repayment of debt securities: ₹(437.79) Crores (FY2023: ₹(438.74) Crores).
  • Payment of lease liability: ₹(25.33) Crores (FY2023: ₹(20.54) Crores).
  • Proceeds from issue of equity shares (net of expenses) were Nil in FY2024 (FY2023: ₹569.37 Crores from IPO).

Working Capital Management Efficiency #

• The Balance Sheet is presented in order of liquidity. Based on the “Maturity Analysis of Assets and Liabilities” (Note 41) for assets and liabilities expected to be recovered or settled within 12 months:

Current Assets (within 12 months, FY2024) #

• Cash and cash equivalents: ₹1,060.14 Crores
• Bank balance other than cash and cash equivalents: ₹145.92 Crores
• Trade receivables: ₹13.85 Crores
• Loans: ₹6,013.37 Crores
• Other financial assets: ₹104.97 Crores
• Current tax assets (net): ₹2.63 Crores
• Other non-financial assets: ₹15.79 Crores
• Total Current Assets (approx.): ₹7,356.67 Crores

Current Liabilities (within 12 months, FY2024) #

• Trade payables: ₹67.73 Crores
• Debt securities: ₹66.63 Crores
• Borrowings (other than debt securities): ₹5,004.22 Crores
• Other financial liabilities: ₹224.98 Crores
• Provisions: ₹28.05 Crores
• Other non-financial liabilities: ₹34.10 Crores
• Total Current Liabilities (approx.): ₹5,425.71 Crores

Current Ratio (FY2024, approx.) #

• ₹7,356.67 Cr / ₹5,425.71 Cr = 1.36

Current Ratio (FY2023, approx., based on Note 41) #

• ₹6,052.89 Cr / ₹4

Risk Profile Analysis: Fusion Finance Limited #

1. Strategic Risks #

• Risk Description: Risks associated with the company’s long-term strategic objectives, including market positioning, competitive landscape, product diversification, geographic expansion, and adaptability to evolving customer needs and technological advancements. The recent name change from “Fusion Micro Finance Limited” to “Fusion Finance Limited” signifies a strategic shift towards a broader range of financial products beyond microfinance.
• Severity: Moderate. Diversification introduces new market and execution risks, while the MFI sector remains competitive.
• Likelihood: Moderate. Execution of diversification and adaptation to market changes is ongoing.
• Trend: Evolving. The company is actively pursuing diversification (MSME loans, exploring new products) and geographic expansion (Andhra Pradesh, Telangana in FY24).
• Mitigation Strategies:
  • “Focused & dynamic” approach to adapt to changing environments.
  • Deep understanding of customer needs in “Bharat,” enabling relevant product/service adaptation.
  • Leveraging technology at customer touchpoints and for new verticals (e.g., in-house MSME platform).
  • Strategic name change to reflect broader ambitions and attract a wider customer base.
  • Contiguous geographical expansion strategy.
  • Focus on customer retention through analytics-led segmentation and loyalty programs (“Humara Fusion”).
• Control Effectiveness: Demonstrated adaptability with past growth and recent strategic shifts. Successful launch and growth of MSME vertical (AUM ₹538 Cr in FY24, up from ₹333 Cr in FY23). Planned MSME platform launch indicates proactive tech integration.
• Potential Financial Impact: Successful diversification can lead to increased AUM, revenue streams, and market share. Failure in new ventures or inability to adapt could lead to market share loss, slower growth, or write-offs on new investments. Rebranding associated with name change incurs costs. Expansion into new geographies entails setup and operational costs.

2. Operational Risks #

• Risk Description: Risks of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. This includes IT system failures, cybersecurity threats, fraud, human error, business continuity disruptions, and employee-related risks.
• Severity: Moderate to High. Dependency on IT infrastructure and a large field force (13,807 employees) makes these areas critical.
• Likelihood: Moderate. Ongoing vigilance required for IT security and managing a distributed workforce.
• Trend: Stable, with increasing focus on IT & Digital. Employee engagement initiatives are active.
• Mitigation Strategies:
  • IT & Cybersecurity: “Zero Tolerance” policy. End-to-end encryption, Wildfire by Prisma Access, dual network connections, AWS hosting, Palo Alto Prisma Access SIG for traffic prioritization, disaster recovery drills, in-house and external expert solutions.
  • Human Resources: Comprehensive employee engagement (“Connect, Cultivate, Celebrate”), strong induction, L&D (“Fusion Gurukul” with >12,500 employees trained in FY24), grievance redressal (2968 queries resolved with 1.2-day TAT in FY24), performance management, R&R.
  • Process & Internal Controls: Documented policies, internal audit function, whistleblower policy (no references in FY24), geo-tagging for client validation, PAR-based disbursement halts, RPA for credit appraisal. Statutory auditors noted adequate internal financial controls with reference to financial statements, except for a comment on audit trail features in certain third-party software (loan and payroll records) where SOC 1 Type 2 reports did not fully cover audit trail requirements or were absent.
  • Fraud: Reported cash embezzlement cases to RBI (FY24: 40 cases, ₹0.11 Cr; FY23: 12 cases, ₹0.04 Cr). Internal controls and vigilance aim to minimize such occurrences.
• Control Effectiveness: IT infrastructure appears robust with multi-layered security. HR initiatives show high engagement and query resolution. Internal audit function and policies are in place. Auditor’s comment on audit trail in specific third-party systems represents an area for improvement. Fraud instances, though small relative to AUM, indicate ongoing branch-level operational risks.
• Potential Financial Impact: IT failure/cyber-attack could lead to data loss, operational disruption, and reputational damage. Employee attrition or misconduct can impact productivity and customer relations. Fraud results in direct financial losses (FY24: ₹0.11 Cr, recovery ₹0.05 Cr).

3. Financial Risks #

• Risk Description: Risks related to the company’s financial structure and transactions, including credit risk, liquidity risk, market risk (interest rate, currency, price), and capital adequacy.
• Severity: High, inherent in the financial services sector, particularly MFI.
• Likelihood: High for credit risk exposure; Moderate for liquidity and market risks due to active management.
• Trend:
  • Credit Quality: Improving. Gross NPA at 2.33% (FY24) vs. 2.95% (FY23). Net NPA at 0.61% (FY24) vs. 0.88% (FY23).
  • Impairment: Increased to ₹364.86 Cr (FY24) from ₹200.37 Cr (FY23), reflecting ECL model application and portfolio growth.
  • Liquidity: Stable. LCR at 297.38% (Q4FY24) vs. 303.71% (Q4FY23).
  • Capital Adequacy: Stable and strong. CRAR

Fusion Finance Limited: Financial Analysis #

Long-Term Strategic Goals #

Fusion Finance Limited (FFL) aims to become a large, diversified, and respectable financial institution. Key goals include:

• Deepening financial inclusion for unserved and underserved women in rural and semi-rural India.
• Expanding the product portfolio to cater to evolving customer needs, including the MSME segment.
• Achieving sustainable and resilient growth, leveraging technology and a strong customer-centric model.

Progress Against Goals (FY24) #

• Diversification and Brand Evolution: Rebranded to “Fusion Finance Limited” (July 2024) to reflect a broader range of financial products beyond microfinance.
• Scale and Reach:
  • Achieved over ₹10,000 crore in Assets Under Management (AUM), closing FY24 at ₹11,476 crore (23.45% YoY growth).
  • Active customer base grew by 9.46% YoY to 3.86 million.
  • Branch network expanded to 1,297 across 22 states/UTs.
• Financial Performance:
  • Recorded a Profit After Tax (PAT) of ₹505 crore.
  • Net Interest Margin (NIM) expanded by 107 bps to 11.22%.
  • Maintained a Capital Adequacy Ratio (CRAR) of 27.53%.
• MSME Segment Growth:
  • MSME loan disbursements grew by 64% YoY to ₹363 crore.
  • Secured MSME loans AUM grew 212% to ₹361 crore.
  • Solar Finance AUM reached ₹32 crore.
• Funding and Creditworthiness:
  • Raised ₹7,173.19 crore in term loans and ₹1,640.53 crore through Direct Assignment in FY24.
  • Received a credit rating upgrade to ‘A+/stable’ from CRISIL.
• Digital and Technological Advancement:
  • Continued focus on digital initiatives, including a new in-house MSME platform development.
  • Leveraging data analytics, AI/ML for customer acquisition, and RPA for credit appraisal.
  • Cashless disbursements and collections stood at 99.99% and 85.30% respectively.
• Proposed Borrowing Limit Increase: Proposal to increase borrowing limits from ₹15,000 crore to ₹17,500 crore.

Competitive Advantages and Market Positioning #

FFL’s competitive advantages:

• Expansive Rural and Semi-Urban Presence: Extensive distribution network (1,297 branches across 22 states/UTs).
• Proven Execution Capabilities: Consistent business growth (AUM CAGR 26% FY19-FY24, Customer CAGR 20% FY19-FY24).

Fusion Finance Limited: Financial & Operational Analysis (FY 2023-24) #

Strategic Developments & Corporate Actions #

• Name Change: Fusion Micro Finance Limited changed its name to Fusion Finance Limited, effective July 9, 2024. This reflects a diversification towards a broader range of financial products while maintaining a core focus on microfinance.

• Annual General Meeting (AGM): The 30th AGM is scheduled for September 27, 2024, via VC/OAVM.

  • Ordinary Business:
    • Adoption of Audited Financial Statements for FY 2023-24.
    • Re-appointment of Mr. Narendra Ostawal as a Director.
  • Special Business:
    • Proposal to increase the borrowing limit from ₹15,000 crores to ₹17,500 crores. This requires a Special Resolution under Section 180(1)(c) and 180(1)(a) of the Companies Act, 2013. The increase will fund capital expenditure for projects, expansion, acquisitions, and enhanced working capital.

Financial Performance (FY 2023-24 Highlights) #

• Assets Under Management (AUM): Grew by 23.45% YoY to ₹11,476 crores.
• Profitability:
  • Profit After Tax (PAT): ₹505 crores (FY23: ₹387.15 crores).
  • Profit Before Tax (PBT): ₹663.26 crores (FY23: ₹511.93 crores).
• Revenue:
  • Total Income from operations increased by 33.00% to ₹2,316.73 crores (FY23: ₹1,741.90 crores).
  • Interest Income: ₹2,299.54 crores (FY23: ₹1,724.22 crores).
• Net Interest Margin (NIM): Expanded by 107 bps to 11.22%.
• Cost of Funds: 10.42%. (Average effective cost of borrowing dropped 225 bps between FY19-FY24).
• Expenses:
  • Finance Costs: ₹859.15 crores (FY23: ₹687.20 crores).
  • Impairment on Financial Instruments: ₹364.86 crores (FY23: ₹200.37 crores).
  • Employee Benefit Expenses: ₹352.70 crores (FY23: ₹265.38 crores).
• Capital Adequacy Ratio (CAR): 27.53% as of March 31, 2024 (Tier I: 26.60%, Tier II: 0.93%).
• Net Worth: ₹2,848 crores as of March 31, 2024.
• Credit Rating: Upgraded by CRISIL to A+/Stable. Also holds A+/Stable from ICRA and CARE. CARE MFI Grading: MFI 1.
• Dividend: No dividend recommended for FY24.
• Liquidity Coverage Ratio (LCR): 297.38% for the quarter ended March 31, 2024.

Operational Performance (FY 2023-24 Highlights) #

• Client Base: Increased by 9.46% YoY to 3.86 million active customers.
• Branch Network: Expanded to 1,297 branches (FY23: 1,086), operating in 22 states and 3 Union Territories, covering 453 districts.
• Disbursements: Total disbursements for FY24 reached ₹10,294 crores (FY23: ₹8,605 crores).
  • Microfinance (MFI) Disbursements: ₹9,932 crores (average ticket size: ₹43,351).

Fusion Finance Limited (FY 2023-24) Financial Analysis #

Company Overview #

Fusion Finance Limited (formerly Fusion Micro Finance Limited) is a Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI) registered with the Reserve Bank of India (RBI). Founded in 2010, the company operates on a Joint Liability Group (JLG) lending model, primarily providing financial services to underserved women in rural and semi-rural India. In 2019, Fusion expanded its operations to include MSME loans and became publicly listed in November 2022. The recent name change reflects an intent to diversify beyond microfinance.

Financial Performance (FY 2023-24) #

• Total Income from Operations: Increased by 33.00% to ₹2,316.73 crore.
• Profit Before Tax (PBT): Grew by 29.55% to ₹663.26 crore.
• Profit After Tax (PAT): Highest-ever PAT at ₹505.29 crore.
• Net Interest Margin (NIM): Expanded by 107 basis points to 11.22%.
• Cost of Funds: Stood at 10.42%.
• Return on Assets (ROA) & Return on Equity (ROE): ROA/ROE strong but Net Profit Margin and Return on Net Worth reduced due to increased impairment on financial instruments.
• Impairment on Financial Instruments: Increased to ₹364.86 crore.
• Net Worth: Increased to ₹2,848 crore as of March 31, 2024.
• Capital Adequacy Ratio (CRAR): Stood at 27.53% as of March 31, 2024.
• Asset Quality:
  • Gross NPA: 2.93% as of March 31, 2024.
  • Net NPA: 0.61% as of March 31, 2024.
• Dividend: No dividend recommended for FY24.

Operational Performance (FY 2023-24) #

• Assets Under Management (AUM): Grew by 23.45% YoY to ₹11,476 crore.
• Disbursements: Total disbursements in FY24 were ₹10,294 crore.
• Active Customer Base: Increased by 9.46% YoY to 3.86 million.
• Branch Network: Expanded to 1,297 branches.
• Employee Strength: Increased by 33.23% YoY to 13,807.
• Digitalization: 99.98% cashless disbursements and 95.30% cashless collections.

Capital and Funding Structure #

• Resource Mobilization (FY24): Raised ₹7,173.19 crore (Term Loans: ₹7,023.19 crore, Refinance: ₹150.00 crore) and ₹1,640.53 crore through Direct Assignment.
• Borrowing Limit Increase: Proposed to increase borrowing limit from ₹15,000 crores to ₹17,500 crores.
• Credit Rating: Holds an A+/Stable rating from CRISIL and CARE.

Strategic Initiatives and Future Outlook #

• Diversification: Offering a broader range of financial products.
• Digital Transformation: Intensified focus on digital initiatives.
• Data Analytics & AI/ML: Leveraging these technologies for customer targeting and credit scoring.
• New Product Development: Exploring and researching new products.
• Geographical Expansion & Penetration: Focus on existing and newly launched states.
• Customer Retention: Employing analytics-led customer segmentation.
• MSME Growth Drivers: Leveraging captive business channels, enhancing vintaged branch productivity, strategic alliances, new-age lending systems, and Prop-tech adoption.

Risk Assessment #

• Key Risks (as per MD&A): Longevity of rural distress, natural events, and inflation.
• Credit Risk: Managed through credit assessment and due diligence.
• Impairment of Financial Instruments: Key Audit Matter.
• Liquidity Risk: Managed through ALM policy and ALCO.
• Market Risk: Interest rate and foreign currency risks are managed.
• Enterprise Risk Management (ERM): Overseen by a Board Risk Management Committee (BRMC).

Fusion Finance Limited - Financial Analysis Report (FY 2023-24) #

Auditor’s Opinion and Qualifications #

The statutory auditors, M/s. Deloitte Haskins & Sells, issued an unmodified opinion on the financial statements for the year ended March 31, 2024, stating that they give a true and fair view in conformity with Indian Accounting Standards (Ind AS).

A modification was noted in the “Report on Other Legal and Regulatory Requirements” concerning the maintenance of books of account (Section 143(3)(b) of the Act). The auditors reported that while the company used accounting software with an audit trail feature, for accounting software operated by third-party service providers for loan and payroll records, the absence of independent service auditor’s System and Organisation Controls (SOC 1) Type 2 reports covering audit trail requirements meant they were unable to comment on whether the audit trail feature was enabled and operated throughout the year for all relevant transactions, or if it was tampered with. This is also detailed in Note 59 to the financial statements.

Key Accounting Policies #

Fusion Finance Limited prepares its financial statements in accordance with Ind AS. Key accounting policies include:

• Revenue Recognition: Interest income is recognized using the Effective Interest Rate (EIR) method. Fee and commission income from facilitation and business correspondence services are recognized upon completion of performance obligations.
• Financial Instruments: Financial assets are classified based on the business model and contractual cash flow characteristics (SPPI test) and measured at amortized cost, Fair Value Through Profit or Loss (FVTPL), or Fair Value Through Other Comprehensive Income (FVTOCI). The company primarily holds loans at amortized cost.
• Impairment of Financial Assets (Expected Credit Loss - ECL): A three-stage approach (Stage 1: 12-month ECL; Stage 2: Lifetime ECL - not credit-impaired; Stage 3: Lifetime ECL - credit-impaired) is used. Significant judgment is applied in defining thresholds for ‘significant increase in credit risk’ (SICR), ‘default’, grouping of portfolios, estimating recoveries (LGD), and incorporating forward-looking macroeconomic information. This was identified as a Key Audit Matter by the auditors.
• Leases (Ind AS 116): Right-of-use (ROU) assets and corresponding lease liabilities are recognized. Short-term leases and leases of low-value assets are expensed.
• Property, Plant & Equipment (PPE) and Intangible Assets: Stated at cost less accumulated depreciation/amortization and impairment. Depreciation is on WDV, and amortization on SLM based on estimated useful lives.
• Employee Benefits: Defined contribution plans (Provident Fund, etc.) are expensed as incurred. Defined benefit plans (Gratuity) are actuarially valued. Share-based payments are fair valued at grant date and expensed over the vesting period.

No significant changes in accounting policies were reported for FY 2023-24, as per Note 2.23, which states the Ministry of Corporate Affairs (MCA) did not notify any new standards or amendments applicable to the company during the year.

Internal Control Effectiveness #

The statutory auditors expressed an unmodified opinion on the adequacy and operating effectiveness of the company’s internal financial controls with reference to financial statements (IFCFR) as of March 31, 2024.

The auditors’ modification regarding the audit trail for certain third-party loan and payroll software is a specific observation related to the operational aspect of internal controls in those systems, even though the overall opinion on IFCFR effectiveness was unmodified.

Regulatory Compliance Status #

• RBI: The company is a registered NBFC-MFI and states compliance with RBI guidelines, including CRAR (27.53% against required 15% as of March 31, 2024).
• SEBI & Stock Exchanges: The company states compliance with SEBI Listing Regulations, including corporate governance norms.
• Companies Act, 2013: Compliance with provisions related to Board meetings, AGMs, KMP, related party transactions, and secretarial standards is reported.
• Specific Issues:
  • Audit Trail: The auditor’s observation on the audit trail for third-party software indicates a specific compliance gap.
• Credit Rating: The company holds investment-grade ratings from CRISIL (A+/Stable), CARE (A+/Stable), and ICRA (A+/Stable).

Legal Proceedings and Potential Impact #

The company does not have any pending litigation that would materially impact its financial position.

Related Party Transactions #

Key related party transactions primarily involve:

• Remuneration to Key Managerial Personnel (KMPs)
• Sitting fees and reimbursement of expenses to Non-Executive/Independent Directors.
• Past transactions with entities like Vivriti Asset Management Private Limited.
• Contributions to Fusion Micro Finance Private Limited Employees Group Gratuity Trust Fund.

Subsequent Events #

• Change of Name: The company’s name changed from “Fusion Micro Finance Limited” to “Fusion Finance Limited,” effective July 09, 2024.
• Proposed Increase in Borrowing Limits: A resolution to increase the company’s borrowing limit is proposed.