Visit http://indiaer.blogspot.com/ for complete details SKS Microfinance Underweight
SKSM.BO, SKSM IN
Regulatory uncertainty increases, Maintain UW
• Maintain Underweight: SKS reported a strong 2Q11 but regulatory
uncertainty has increased which could adversely impact growth, margins
and asset quality of Microfinance companies.
• 2Q11 results highlights: SKS reported a strong 2Q11 with net profit of
Rs0.8bn up 21% q/q. AUM growth was strong in the qtr at ~19% q/q
growth. Margins (on AUMs) were up in 2Q11 due to the impact of the
free funds from the IPO, full impact of which would come only in 3Q11.
Member base and branches increased by ~50% y/y in 2Q11.
• MFIN agrees to restructuring: According to media reports (Business
Standard) MFIN, the industry body of large micro finance institutions,
has agreed to restructure microfinance loans if the clients are facing
repayment problems. It has been proposed to increase the tenure from 50
weeks to 75 or 100 weeks without any additional interest burden. Also it
is proposed that weekly installments could be converted into monthly
installments. We believe allowing such restructuring would induce even
regular clients to default and substantially impact future credit behavior.
• Regulatory uncertainty: The Andhra Pradesh law, as it stands, is
restrictive: onerous registration requirements, vulnerability to mid-cycle
cancellations and onus on MFIs to dedupe the borrower list. It raises the
risk of the Andhra Pradesh book significantly contracting – the worst
case scenario (low probability) is large write-offs if the government
prevents field officers from resuming duties.
• Our UW is underpinned by our concerns on scalability with quality –
the strong quarter does not change that. This regulatory uncertainty is an
additional concern and we will assess risks (if any) after the earnings call
and final High Court judgement; both expected Monday. Our rating and
PT stay unchanged.
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