Shares of Fusion Finance tumbled by over 10% on September 23, hitting a 52-week low of ₹274 per share. This drop followed a downgrade by Investec, which revised its rating from 'hold' to 'sell' and significantly reduced the target price to ₹300 from ₹500.
The downgrade was triggered by Fusion Finance’s announcement of a higher-than-expected estimated credit loss (ECL) provisioning for Q2 FY25, surpassing the figure from Q1. This development has raised concerns for those looking to invest in stocks, particularly in the financial sector.
Profit warning raises concerns for investors
Investec analysts issued a profit warning, indicating deeper underlying issues within Fusion Finance. They cautioned that this could lead to further complications such as credit downgrades, difficulties in securing funding, and a shrinking loan book.
These factors are significant for anyone looking to invest in stocks and emphasise the need to carefully assess the financial stability of companies before making investment decisions.
Management and capital changes are urgently needed
The brokerage firm suggested that Fusion Finance requires immediate management restructuring and a capital infusion to stabilise its operations. Investec also slashed its profit estimates for FY25 and FY26 by 102% and 22%, respectively.
These figures highlight the extent of the challenges facing the company, further complicating the outlook for those who invest in stocks within this sector.
Increased credit loss provisions weigh on financials
In a recent filing, Fusion Finance revealed plans to set aside up to ₹550 crore for credit loss provisions in Q2 FY25, a significant increase from ₹348 crore in the previous quarter. The final figure is expected to be confirmed once the Q2 FY25 results are audited. For individuals who invest in stocks, this signals a cautious approach, as higher provisions may indicate potential future losses.
Disappointing q1 performance highlights ongoing struggles
Fusion Finance’s Q1 results painted a bleak picture, with the company reporting a net loss of ₹36 crore compared to a profit of ₹120 crore during the same period last year. The poor performance was largely due to its microfinance (MFI) segment, which serves 24% of its borrower base.
Factors such as customer over-leveraging, low attendance at centre meetings, and staff attrition were cited as contributors to the downturn. This situation serves as a cautionary tale for those considering investing in stock strategy, as external factors can significantly impact financial performance.
Rising non-performing assets (NPAs) add to the pressure
Asset quality further deteriorated during the quarter, with Gross Non-Performing Assets (NPAs) rising to 5.46%, up from 2.89% in March, while Net NPAs increased to 1.25% from 0.6%. This decline in asset quality is another red flag for anyone looking to invest in stocks, especially in companies with growing credit risk exposure.
Previous downgrade by Motilal Oswal
This is not the first time Fusion Finance has been downgraded. Earlier, Motilal Oswal also downgraded the stock to 'neutral' with a price target of ₹440 per share. Such downgrades from multiple brokerage firms underscore the heightened risks associated with the stock, urging potential investors to carefully reconsider before they invest in stocks.
Fusion finance underperforms in 2024
As of now, Fusion Finance's stock has plummeted over 46% in 2024, dramatically underperforming compared to the Nifty 50, which saw a 16% rise. For those who invest in stocks, particularly in the financial sector, Fusion Finance's performance serves as a stark reminder of the importance of due diligence and diversification in investment strategies.
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