SKS Microfinance IPO – Research report by HDFC Securities

HDFC Securities, a financial service provider promoted by HDFC Bank and JP Morgan Partners and one of India’s leading stock brokers has released a research report on SKS Microfinance IPO suggesting that Investors could make listing gains on SKS Microfinance.

The report also compares SKS Microfinance’s valuations with a listed microfinance company SE Investments( SEIL Microfin.) which is listed on the Bombay Stock Exchange.

sks equity research

Download HDFC Securities Research Report on SKS Microfinance IPO at the link below.

SKS Microfinance IPO- Equity Research Report- HDFC Securities – pdf – 8pages-80KB

Brief Summary of HDFC Securities report on SKS Microfinance IPO

SKSML 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 company has the strong financial position with health margins including good asset quality, comfortable capital adequacy ratio, comfortable liquidity position and access to diverse sources of institutional funding. It has the strong industry growth in recent period with good prospects for future growth on account of large unmet potential demand.

The company is sensitive to operational risk on account of large volume of cash transaction & decentralized operations spread across the country. Any adverse change in government policies, low seasoning of the industry portfolio and asset quality risks on account of political/religious intervention is some key risks that it faces. However some of these risks are mitigated due to the high diversification of SKSML’s asset portfolio. The salary costs of SKSML are high given its business model. Further dependence on improvement in rural conditions is high as any setback in terms of monsoon failure or floods etc could jack up the NPA rates. Possibility of some sort of regulation on the interest rates charged going into future is another concern.

The microfinance industry has large portfolio concentration in southern states of India. SKSML’s has good geographical diversification with a large coverage in eastern and western states along with the southern states (55.8% of its loan portfolio as on Mar 31, 2010 comes from AP, West Bengal and Karnataka. Also the vast, rural level loan distribution and collection network of the company provides an opportunity to diversify into other products by leveraging this network.

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.

SKSML has issued shares in the past 15 months to private equity investors @ 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.

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