Microfinance

SKS Microfinance IPO Valuation – Too High but Justified in the Long-term

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SKS IPO Valuation – Too High but Justified in the Long-term, Analysts say

Arjun Kashyap
When SKS Microfinance announced the launch of its IPO in late March, the BSE Sensex, India’s bellwether market index stood at just above 17,600. Today, it is hovering around the 18,000 mark – up by almost 2,000 points, or 12.5%, from its recent low of 16,022 in May.

Meanwhile, the low end of the price range that SKS’ share is expected to fetch, is more than 20% above the price that was talked about when the company filed its draft prospectus.

If the share price holds true to the current price band, SKS’ post-issue market capitalization would range between INR61bn to INR71bn and its fully diluted issued capital would stand at 71.9 million shares. Now, considering that SKS made a net profit of INR1.75bn for the year ended March 2010, the Price Earnings (PE) Multiple would range between 35 to 40 times that of historical earnings.

This effectively means that SKS’ PE multiples are far ahead of mainstream banks and financial services companies. While SKS’ valuations are based on its high historical growth – the company’s net profit has grown at a CAGR of 223% over the past four years – it has to be recognized that this has come about during a period of high evolution for the sector, and may not be sustainable over the long term, according to a New Issue Monitor report.

So, how realistic are these valuations ?

“These valuations are extremely high considering the valuations at which banks and other NBFCs (Non-banking Financial Companies) are traded,” according to the report.

The same sentiment is echoed by Abbas Merchant, Senior Assistant Vice President of Research at Jaypee Capital Services, which has been in the news for putting out an “Avoid” recommendation on the SKS stock.

However, Abbas is quick to note: “Actually, we like their business model and we like what they are doing. But the stock is very steeply priced, which is the only reason for our ‘avoid’ rating.”

“Probably they are trying to price it higher because there is no near comparison in the listed space,” he adds.

Another senior equity analyst, who wished to remain anonymous, believes that the valuation “seems a bit stretched” in the near-term, considering that SKS is a company providing unsecured loans to poor people. There are good NBFCs and banks that give out secured loans, also with good NPA (non-performing asset) levels, and they are quoting at far lower levels, he says.

Read the rest of the article on the Microfinance Insights Website

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