Microfinance

SKS Microfinance IPO – Summary of Research Reports

Various broking houses have come up with different research reports recommending different strategies for Retail Investors with regard to SKS Microfinance. To help investors make the right decision on SKS Microfinance’s IPO, some research reports from various brokers is presented below along with their summaries.sks ipo

SKS Microfinance IPO – Research Report by Angel Broking – Buy

Prosperity to the Masses

SKS Microfinance (SKSMF) offers a high quality play on India’s vast Rs2.7 lakh cr microfinance opportunity. SKSMF’s core strength lies in effective risk management and governance, advanced technology, wide product portfolio, diversified sources of capital and strong pan-India distribution network, all of which have brought down the cost of credit to the poorest to amongst the lowest in the world, unlocking tremendous latent demand. We recommend a Subscribe to the issue.

Huge Business Opportunity:
India’s estimated demand for micro-credit was Rs2,40,000cr in 2008 (Intellecap). By FY2010, Self Help Groups and MFIs had outstanding portfolio of just Rs45,200cr, indicating more than 80% unmet demand. SKS Microfinance is India’s largest MFI, having increased marketshare from 2% to 10% over FY2007-10. In an industry growing at 30%+, we expect larger MFIs like SKS Microfinance to further gain marketshare on the back of scalable best practices and cheap capital(at 70% CAGR over FY2011-12E, SKSMF’s marketshare would stand at 14.3%).

Low lending rates for bottom of the pyramid:

SKS Microfinance lends exclusively to Joint Liability Groups of women from low-income households for income generating assets. This capitalizes on social collateral (pioneered by Grameen Bank), restricting provisioning to just 1.5% of average assets (FY2010). Further, the extensive use of technology has restricted opex to 9.9% of average assets (FY2010) in spite of low ticket size, enabling SKS Microfinance to bring down lending rates to just about 25% (much lower than domestic moneylenders and even organized MFIs globally).

High Valuations underpinned by huge growth potential and profitability:
Valuations underpinned by huge growth potential and profitability.Global peers are trading at 3.7x trailing P/BV and 19.1x P/E (Closest peer Compartamos is trading at 8.0x and 21.7x respectively). At the upper end of the price band, SKS Microfinance will be valued at P/BV multiples of 6.6x FY2010 and 3.1x FY2012E.

Although valuations are on the higher side, looking at the strong and sustainable growth and RoE prospects for the company, we recommend a Subscribe to the issue.we recommend a Subscribe to the issue. we recommend a Subscribe to the issue.

Download Angel Broking report on SKS Microfinance IPO  at link below

SKS Microfinance IPO Angel Broking Equity Report -PDF-16-Pages-440KB

SKS Microfinance IPO – Way2Wealth Research Report – Buy

Investment Argument

1.SKS is the largest MFI in India with a total outstanding loan book of ~`43.0 bn (including assigned loans). Without assigned loans, this stood at ~`29.4 bn.

2. SKS has a diversified product basket. Apart from providing direct loans for IGL, they also provide other services like home loan (in tie-up with HDFC); insurance (in tie-up with Bajaj Allianz); innovative loans (tie-up with NOKIA for loans against purchase of mobile phones & tie-up with Metro Cash & Carry & Future Agrovet Ltd for providing goods on credit to kirana stores); agent for distribution of mutual funds.

3. SKS’s asset quality is one of the best seen in the industry with GNPA of 0.33% & NNPA of 0.16% for FY10. This has been mainly on account of the joint group lending business model that they follow, good presence across the country, technology-driven solutions & good risk mitigating techniques.

4. The opportunity for players like SKS in India is immense given the demand-supply gap. Demand for microfinance in FY08 stood at $51.4 bn & supply at $4.3bn. The demand is expected to go up to $72 bn by FY11.

5. SKS grew at a CAGR of 214.2% in topline, 211.9% in net interest income & 221% in its PAT between FY06 – FY10. On a y-o-y basis, the bank has grown by 72.6% in its topline, 87.8% in NII & 119.4% in its PAT from FY09 to FY10.

Investment Concerns
1. Any downgrading of the credit ratings of the firm will increase pressure on borrowing capacity at cheaper rates for the firm.

2. The political unrest surrounding a particular state may hamper the profitability of the firm (as this was evident from KGF issue in Karnataka last year).

Download Angel Broking report on SKS Microfinance IPO at the link below

SKS Microfinance IPO Report – Way2Wealth -pdf-4pages-340KB

SKS Microfinance IPO – Research report by India Infoline – Buy

SKS Microfinance (SKSMF) is the largest microfinance company in India with loan portfolio of ~US$1bn, 2,000+ branches spread across 19 states and 6.8mn members. Its strengths include pan-India presence, scalable operating model, diversified product revenues and access to various sources of capital.

Lending primarily to poor women, the business model involves village centered group lending, thereby ensuring a check on asset quality. The hugedemand-supply credit gap and inability of banks to penetrate into unbanked areas have driven the growth of microfinance industry. While valuations appear expensive, the scalable business model, market leadership position and high earnings growth provide comfort. Recommend

Rural centric business model
The success of SKSMF has evolved around five key elements: a) village selection, b) focus towards women, c) member training, d) group lending and e) village level lending and collection. With lending primarily to poor women, the company has expanded its reach to 2,029 branches spread across 19 states and over 6.8mn members. The pan-India presence has further helped mitigate the risk towards local economic slowdowns and disruption. Through systems and solutions in place, it has developed a scalable 3C’s model – Capital, capacity and cost reduction, which in turn has helped reach rural masses in large.

Diversified sources of revenue and capital
In addition to core business towards providing traditional loan products, the company has started offering productivity loans directly linked to business. This involves strategic alliances with Nokia, Airtel, Bajaj Allianz, HDFC, METRO and FAL. Despite being NBFC-ND, the company has benefited from benign interest rate regime and enhanced sovereign ratings.

Historically, it has raised funds via alternate channels including – equity and debt issuance, loans with various maturities raised from domestic and international banks, and the securitization of components of loan portfolio.

Limited concerns over asset quality
The village centered, group lending model has ensured SKSMF an adequate check on asset quality. Innovative product structuring, focus on income generating loans and primary focus at women have enabled the company to maintain its GNPA and NNPA at low 0.33% and 0.16% respectively. In case of default by an existing member, the group is required to typically make the payment on behalf of a defaulting member. Any negligence towards payment bars the group from further borrowing.

Download India Infoline Research Report on SKS Microfinance IPO at the link below.

SKS Microfinance IPO India Infoline Research Report-pdf-6pages-112KB

SKS Microfinance IPO – Research report by HDFC Securities – Buy

Brief Summary

SKS Microfinance is one of the largest players in the Indian micro finance industry having pan India operations with a well-diversified portfolio. It has a track record of the promoters, experienced board of directors and strong management profile.

The core business of the company is microfinance lending.It is planning to leverage the large distribution network to diversify its revenue streams in future. It has strategic alliance with Nokia, Bajaj Allianz, HDFC Ltd, METRO cash & carry, Future Agrovet Ltd and others to provide various offerings, which could increase its revenues going forward.

SKS Microfinance has issued shares in the past 15 months to private equity investors at Rs.300 per share. The current issue is priced a bit on the expensive side (31.4-36.3 times its FY10 EPS and 5.77-6.68 times its BV for FY10). Its smaller peer SE Investments has also risen 200% over the past 4-5 months aided by Bonus and split announcements.

On a comparative basis with its peer, SKSML does not seem too expensive. However compared to Banks and Finance companies, it seems expensive based on P/E, dividend yield and P/BV basis. On a post issue basis, however the P/BV could come down, mainly due to the premium collected in the issue. Given its size, the present institutional investors, the recent growth and prospects going forward and the fancy towards the sector, the issue could still give some listing gains.

Download HDFC Securities Research Report on SKS Microfinance IPO at the link below.
SKS Microfinance IPO- Equity Research Report- HDFC Securities – pdf – 8pages-80KB

SKS Microfinance IPO report by Edelweiss Capital – Buy

Edelweiss has advised investors to subscribe to the initial public offering of SKS Microfinance.

“We believe the SKS’s asset growth will be driven by increase in its membership base, rise in average ticket size and expanded product offerings (including housing loans, business loans, insurance loans, etc). Assuming 60% growth in earnings over FY10-12E, we expect it to deliver RoEs of 20% by FY12.

At the upper price band of Rs 985, it is available at 2.9x FY12E book and 16x earnings. We believe SKS should command a premium considering its market leadership and unique positioning in the MFI industry and recommend‘SUBSCRIBE’,” the report said.

Abhay N

Author : 

Abhay is the founder and managing editor of India Microfinance. He is passionate about microfinance, financial inclusion and social entrepreneurship in India.

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1 Comment

1 Comment

  1. DILIP PACHANGRE

    August 6, 2010 at 5:07 am

    good study of co………………………

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