By K.A Prasanna, firstchoiceipoanalysis.com
1. Malegam Committee Report on MFIs has imposed cap on interest rate, margins, total indebtedness and tenure of loans.
The committee has put a cap on margins @12%.The operating cost for SKS Microfinance is around 10%, thus leaving a net margin of 2%. From this, the company has to make provisions for bad debts and unforeseen circumstances like natural calamities, which is very common in states where it operates. Even if SKS is going to have CAGR in excess of 40% in the coming years, that will not be sufficient create value for share holders. Operating cost may move up further, since the tenure of loans has been extended to 24 months, which will results in higher collection costs.
2. Trying to Sail in two boats at the same time, which are moving in opposite directions.
The ultimate goal of microfinance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare, at affordable cost
Value for share holders can be created by earning more profits, paying higher dividends, professionally managing the company, among others. At whose cost the company wants to reward the share holders? There is a clash of interest. You cannot enrich the share holders at the cost of the poorest of the poor.
3. Corporate governance issues. Loan to promoters at 0%, poor borrowers @ 26% p.a.
The CEO was sacked immediately after the IPO, in an unprofessional manner. The company secretary has resigned since then. There is an exodus of staff at SKS. In the IPO year the promoter Vikram Akula was provided the loans @ 0 % for purchase of the company shares, where as loans provided to borrowers carry an interest rate of 26% p.a. The transaction may be legally valid but it tells lot about the real concerns of the promoters for the poor. If one looks at the salary and ESOP’s given to the top management team you will understand their mind set and their commitment to their declared cause.
4. Look at the insider trading data.
SKS Microfinance has created a kind of a record for any listed company in the history of Indian stock exchanges. No need to explain.
5. A microfinance bank may short circuit SKS growth story.
A consortium of PSU banks and AP government will start a microfinance bank shortly, which will short circuit SKS growth story. The bank will offer loans @ 12% or less. There are discussions in other states to start to similar banks to help the poor. The business model of MFIs will go for a six when that happens.
6. Narayana Murthy of Infosys is the chairman of business ethics and corporate governance in SKS Microfinance.
First Choice IPO Analysis had sent an e-mail to SKS Microfinance 3 weeks ago to ascertain how many times the committee has met. So far no reply has been received. It appears that committee has not met so far, other wise there would have been news reports on the same. In one full year, if there is no meeting on corporate governance then it tells it’s own story.
7. Venture Capitalists have suffered huge losses, waiting to exit in the near future by booking their losses.
Many venture funds have invested money in SKS Microfinance before and during it’s IPO. They have waited long enough and the funds may quit any time booking losses. SKS Microfinance will witness selling pressure every time it’s share price rises, this will further drive down it’s stock price.