Fusion Micro Finance IPO : 7 things to know about

Fusion Micro Finance Ltd, a microfinance institution lending to the unbanked sections of the Indian market is planning to tap the IPO market. Fusion Micro Finance Ltd has the backing of PE firm Warburg Pincus. The company had filed its draft red herring prospectus (DRHP) in mid-August 2021 and has already got approval from SEBI in mid-November.

However, post the markets peaking in late October 2021, the IPO markets have also not seen too much enthusiasm and this was later followed by challenges like global hawkishness, surge in inflation, pressure on OPMs etc. 

Lending businesses are never too attractive when the monetary outlook is hawkish and that has impelled the company to wait for some more time before announcing its IPO.
 

7 important things to know about Fusion Microfinance IPO

1) Fusion Microfinance is into the business of giving out small ticket loans to borrowers in the rural and semi-urban areas. In short, the company largely operates in providing resources to the unbanked sections of the population.

Some of its key competitors in this industry include names like Ujjivan Small Finance Bank, Equitas SFB, Suryoday Small Finance Bank, Bandhan Bank etc. All these names are already listed on the stock exchanges in India. 

2) Fusion Microfinance is backed by Creation Investments and Honey Rose Investment. Now, Honey Rose Investments is the arm of global PE giant Warburg Pincus, which has deep interests in India start-up ecosystem.

The Fusion Microfinance IPO will comprise of a fresh issue of Rs.600 crore and an offer for sale (OFS) of 2,19,66,841 equity shares. The eventual size of the offer will depend on the eventual price band of the IPO. The eventual issue size is expected to be more than Rs.1,000 crore for which the company needs conducive market conditions.

3) Let us focus on the OFS component first. Out of 2,19,66,841 shares that are being offered in the OFS, the two promoters Devesh Sachdev and Mini Sachdev between them will offer 13 lakh shares and 2 lakh shares respectively.

In addition, among the early investors in Fusion Microfinance, Creation Investment will offer 40 lakh shares while Honey Rose Investment will offer 63.21 lakh shares in the OFS. Apart from these names, Oikocredit, Ecumenical Development and Global Financial Inclusion Fund will also be selling in the OFS.

The OFS portion will not result in any fresh fund infusion into the company. However, it will lead to shift in ownership and since stake moves to the public, the free float will improve in the market.

4) The fresh issue portion of the IPO of Rs.600 crore will be used by Fusion Microfinance to enhance its equity capital buffer and improve upon its capital adequacy. This is essential to boost the asset book, which needs continuous infusion of Tier-1 capital.

The fresh portion will be capital dilutive and also EPS dilutive. Currently, the promoter group of Fusion Microfinance owns 85.5% stake in the Fusion Microfinance while the other two selling shareholders jointly hold 12.03% in the company. This is likely to change post the IPO completion as the capital structure and ownership structure will change.

5) Fusion Microfinance may also consider a pre-IPO placement of Rs.120 crore and if the pre-IPO placement is successful, then the company plans to reduce the fresh issue component proportionately. This is distinct from the Anchor placement, which will be taken up by the issuer just a day before the opening of the IPO.

Unlike the anchor placement, the pre-IPO placement gives greater pricing leeway to the issuers and the merchant bankers but the lock in period is also longer.

6) For FY21, the last reported full year data, Fusion Microfinance reported total revenues of Rs.873 crore and net profits of Rs.43.9 crore. That translates into net profit margins of just about 5%, but there has bene pressure on the business in the latest fiscal year due to the lag effect of the pandemic.

Also, asset quality has come under pressure during the last one year as the lending portfolio was tilted towards the most vulnerable sections and in many cases the financial crunch was genuine.

7) The issue of Fusion Microfinance will be lead managed by ICICI Securities, CLSA India, IIFL Securities and JM Financial who will act as the book running lead managers or BRLMs to the issue. The retail allocation in the IPO would be 35% and QIB at 50%, while the non-institutional investors (NII) portion is fixed at 15%.

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