Monday, August 2, 2010

The Era of Microfinance....SKS Microfinance

Friends, I Simply cant stop myself on the HOT TOPIC these days... and that is Microfinance.... What microfinance means.. It means lending very small money to needy people on a high interest rates..... this field is catching up in india now..... I have written many times that i am very very bullish on the Education space , likewise on Microfinance too......

There are few listed companies of Microfinance... One such company related to microfinance is SE Investment and it has already become a multibagger.......

I am pasting the exact article from capitalmarket.com on SKS Microfinance.... Read it carefully...

SKS Microfinance, promoted by Dr. Vikram Akula, was originally founded as Swayam Krishi Sangam or SKS Society in 1997 and functioned as a non-governmental organization (NGO) that provided microfinance in Andhra Pradesh. SKS Society transferred its business and operations to SKS Microfinance as a newly incorporated private limited company in India in 2003. SKS Microfinance is the largest Microfinance Institution (MFI) in India in terms of total value of loans outstanding, number of borrowers (called members) and number of branches.

SKS Microfinance is a non-deposit taking non-banking finance company (NBFC-ND), registered with and regulated by the Reserve Bank of India (RBI). It is engaged in providing microfinance services to individuals from poor segments of rural India.

The company’s core business is providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption.

The Company utilizes a village centered, group lending model to provide unsecured loans to its members. This model ensures credit discipline through mutual support and peer pressure within the group to ensure that individual members are prudent in conducting their financial affairs and are prompt in repaying their loans. Failure by an individual member to make timely loan payments will prevent other group members from being able to borrow from it in the future; therefore the group typically make the payment on behalf of a defaulting member or, in the case of willful default, use peer pressure to encourage the delinquent member to make timely payments, effectively providing an informal joint guarantee on the member’s loan.

The company also uses its distribution channel to provide other services and goods that it founds that its members need. For instance, it also distributes and administers life insurance policy products for its members and has pilot programs to provide loans to its members to purchase select consumer products that increase their productivity.

The company is coming with an IPO to raise around Rs 1427 crore at the lower band of Rs 850 per share (Rs 633 crore from fresh issue) and Rs 1654 crore at the upper band of Rs 985 per share (Rs 733 crore from fresh issue) consisting of a fresh issue of 7,445,323 equity shares and an offer for sale of 9,346,256 equity shares by Sequoia Capital India II LLC, SKS Mutual Benefit Trust - Narayankhed, SKS Mutual Benefit Trust - Jogipet, SKS Mutual Benefit Trust - Medak, SKS Mutual Benefit Trust - Sadasivapet, SKS Mutual Benefit Trust - Sangareddy, Kismet Microfinance and Mauritius Unitus Corporation.

The company intends to utilize the net proceeds to augment its capital base to meet its future capital requirements arising out of growth in the business and to achieve the benefits of listing on the stock exchanges.


Strengths

Huge gap in Microfinance demand and supply: According to the 2008 Inverting the Pyramid Report by Intellecap, an independent industry research firm, the total estimated demand for micro-credit in India was approximately Rs. 2,39,935 crore with estimated total loan disbursements at approximately Rs. 20,072 crore.

As of March 31, 2010, the company had 2,029 branches in 19 states across India with no state accounting for more than 28.8% of its outstanding loan portfolio.

Capital adequacy ratio as of March 2010 stands at comfortable 28.3% compared to the EBI mandated minimum of 12% as of March 2010 and 15% as of March 2011.

Gross NPA and Net NPA are just 0.33% and 0.16% respectively at the end of FY’10.

The company lends to micro enterprises who earn returns in the range of 29% to 246% mainly due to use of family labours, low infrastructure costs and no taxes or legal costs. This helps SKS Microfinance to charge higher interest rate from its customers.

Weaknesses

Currently there is no interest rate cap on the lending by the microfinance institutions. MFIs typically charge high interest rate to its customers ranging between 26% to as high as 31%. There is risk perception that regulator may pitch in and put a cap on interest rate charged and regulate the sector. As the costs and risks in this business are also high, any unreasonable cap will severely impair the business prospects.

Microfinance as a business is still in the evolution stage.

Due to the unsecured nature of advances and very low income earning capacity of the borrowers with little savings, the default risk in this business is high.

Natural calamities like floods etc, political instability, social strife in certain areas can severely impair the borrowers’ ability to pay and lead to mass defaults in particular areas/states.

Due to the nature of operations, large amount of cash is handled with attendant risks of theft, fraud, misappropriation, violent crimes against its employees etc.

Microfinance has been traditionally met through informal sources including non-government organizations, or NGOs; cooperatives; community-based development institutions like Self Help Groups, or SHGs, and credit unions. Better flow of funds to these institutions, or more involvement of banks in direct financing of small borrowers or government sponsored schemes for facilitating flow of funds at lower cost to the poor segments of the society can pose stiff competition to the company as it charges comparatively high interest rates.


Valuation

SKS Microfinance’s EPS for FY’10 on post-issue equity works out to Rs 24.3. At the price band of Rs 850 to Rs 985 (without considering discount of Rs 50 to retail Investors) P/E works out to 35.0 to 40.5 times. Considering discount of Rs 50 to retail investors P/E works out at 32.9-38.5.

Post-issue Book Value comes out to Rs 218 and Rs 232 at issue price of Rs 850 and Rs 985 respectively (and also considering discount of Rs 50 to retail investor for 30% of issue size). P/BV at both the bands works out to be 3.9 and 4.2 times, respectively.

Pre-issue Book Value is Rs 147.3. P/BV at lower band of Rs 850 works out to be Rs 5.8 while at higher band of Rs 985 works out at Rs 6.7.

The only comparable listed entity in microfinance is SE Investments with sales of Rs 88.36 crore and net profit of Rs 26.34 crore in FY’10 almost one-tenth of size of SKS Microfinance. It is currently trading at P/BV of 3.4. These valuations are extremely high considering the valuations at which banks and other NBFCs are traded. However, Gross revenue of the SKS Microfinance has grown at a CAGR of 176% in last 4 years ended March 2010 while net profit has grown at a CAGR of 223% over the same period. The high asking valuations are based on this high growth rates. However these growth rates are in a stage where the segment is just evolving and can not be sustained over a medium-to-long term.


My Comments....

Issue seems to be be overvalued if you compare it with banks and its other peers... but this is what market is going to believe....... Issue Price is high keeping in mind its recent exponential growth.... and it ia a long term play from here itself..... this company is the market leader in its space... absolutly no comparison in size and business turnover.... It has strong retrn ratio's and superior asset quality.....

Many Other companies are going in Microfinance business..... I know many companies in this space... but readers has to find out by themselves.... According to me SKS finance is a good long term bet.....


1 comment:

  1. Hey, thanks for the information. your posts are informative and useful. I am regularly following your posts.
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