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The sharp de‐rating of SKSM over the past six months has reflected the
concerns of the political clampdown on microfinance institutions in
Andhra Pradesh and corporate governance issues. The Malegam
Committee recommendations, if implemented, would address the key
concerns on asset quality. However, while the Andhra Pradesh MFI Act
stays in force, loan‐loss provisions could creep in. Even as the dust
settles down in AP, the core strength of the business model (joint
liability group) remains intact. Despite these issues, we believe SKSM is
attractively valued, given its growth outlook and profitability. Even
after factoring in margin caps and higher credit costs, RoAs are likely to
stabilize near 3.8%. The risk‐reward appears favorable. We initiate
coverage with an Add rating and a Mar12 price target of INR602.
Growth to moderate; funding stays a challenge
The extent of financial exclusion in India remains high with enough scope for
geographic diversification and significant demand for micro credit. The average
ticket size per borrower is likely to increase with the rising persistency of the
customer base. SKSM has made early efforts to diversify its branch network
and loan portfolio – to reduce its concentration towards Southern states.
Increase in the average ticket size and market share gains are likely to drive a
CAGR of 38% in the loan book over FY11f‐FY14f. However, availability of
adequate capital to fund this growth is a key challenge.
Regulation a key challenge; nevertheless, a sound business model
The Andhra Pradesh crisis assumes significance as penetration rates here are
far higher than that in any other Indian state, with c30% of the outstanding
microfinance institution (MFI) portfolio originating from the state. Given the
nature of the customer base of MFIs, politics is likely to play a major role in
defining the future of the industry. Nevertheless, the basic tenets of the
business model remain strong. Bigger players that are well‐capitalized are likely
to emerge stronger from the crisis, once the dust settles down.
RoAs to remain stable, despite margin caps and higher credit costs
We forecast SKSM to register a CAGR of 34% in net interest income for the
three years ending Mar14, driven by strong loan growth. The cap on margins
and lending yields is likely to have minimal impact on the lender. With
operational leverage kicking in, RoAs are likely to stabilize at 3.8% for the threeyear
period ending Mar14f, despite higher credit costs and margin caps.
Risk‐reward appears favorable; initiate with Add, Mar12 TP of INR602
SKSM’s sharp de‐rating provides an entry point, considering that the viability of
the business model remains strong. Our price target is based on the DCF, P/E
and P/B methods. The Mar12 target of INR602 values the stock at 17.5x and
2.1x one‐year forward P/E and P/B, respectively. We initiate coverage on the
stock with an Add rating.
Investment Summary
SKSM’s sharp de‐rating over the past six months has reflected the concerns of political clampdown on microfinance
institutions in Andhra Pradesh and corporate governance issues. The Malegam Committee recommendations, if
implemented, address the key concerns on asset quality. However, while the Andhra Pradesh MFI Act stays in force,
loan‐loss provisions could creep in. Even as the dust settles down in Andhra Pradesh, the core strength of the business
model remains intact. Despite these issues, we believe SKSM is attractively valued given its growth outlook and
profitability. A key risk to growth is resumption of the funding constraints currently experienced by the industry. That
said, SKSM is better positioned than its peers due to its higher capital base and a more diverse loan book. The riskreward
appears favorable. We initiate coverage with an Add rating and a Mar12 price target of INR602.
Growth to moderate; funding stays a challenge
The extent of financial exclusion in India remains high with enough scope for geographic diversification
and significant demand for micro credit. With the seasoning of the loan book and rising branch
maturity, the average ticket size is likely to increase, except in certain pockets, which have high
penetration levels. SKS Microfinance (SKSM) added c70% of its branches over the past two years. With
a rise in the average ticket size per borrower and market share gains, we estimate SKSM’s loan
portfolio to register a CAGR of 38% for the three‐year period ending Mar14f. However, unavailability of
adequate capital to fund this growth is a key risk to our assumption.
Regulation can be potentially game changing
The stringent regulations of the Andhra Pradesh MFI Act contributed to a general environment where
MFI ground‐level operations were impeded and loan collections for MFIs in Andhra Pradesh dropped
dramatically. SKSM too saw higher defaults and a virtual halt of incremental disbursals in the state. The
Andhra Pradesh MFI Act continues to remain in force, despite the Malegam Committee advocating its
removal. Any delay in resolution of the MFI dispute in Andhra Pradesh and restoration of normal
business conditions is likely to pose a risk of significant NPLs. The competitive intensity is likely to
decline, as the stringent regulations imposed by the Andhra Pradesh MFI Act are likely to impact
smaller MFIs. However, bigger players that are well‐capitalized and diversified are better‐equipped to
withstand the crisis.
Better‐placed among peers
SKSM has grown at a rapid pace after having converted to a for‐profit model. Despite its aggressive
growth, the lender has not compromised on the basic tenets of the joint liability group (JLG) model.
SKSM remains focused only on women (generally considered a less risky asset class than men) and
lending is strictly for productive use, which is considered relatively safer in terms of asset quality. The
end loan usage is monitored strictly, with most loans only given for productive uses rather than for
consumption. We believe SKSM’s leadership position is likely to give it a distinct advantage to acquire
clients over the long term.
Profitability likely to remain strong, despite pressure
Supported by a CAGR of 38% in the gross loan portfolio, we estimate SKSM to register a CAGR of 34% in
net interest income during FY11f‐FY14f, despite declining spreads. Fee income growth is likely to
remain strong due to higher volumes, even as fee income as a proportion of total loans is likely to
decline to 1% from 2%‐3% earlier. We estimate SKSM to write off 10% of its loan book in Andhra
Pradesh during FY11f due to rising defaults, as repayment levels continue to remain low. We
conservatively build in loan‐loss provisions (including write‐offs) at 5% of the gross loan portfolio in
FY11f and, thereafter, at an average of 4.2% over FY12f‐FY14f. We estimate a CAGR of 34% in net profit
during FY11f‐FY14f.
Initiate coverage with Add and Mar12 target of INR602
Our target is based on the DCF, P/E and P/B methods. Our DCF‐based fair value stands at INR592,
where we assume cost of equity of 14% and semi‐explicit and fade period growth of 25% and 3%,
respectively. Our Mar12 target price of INR602 values the stock at 17.5x and 2.1x one‐year forward P/E
and P/B, respectively. We initiate coverage with an Add rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The sharp de‐rating of SKSM over the past six months has reflected the
concerns of the political clampdown on microfinance institutions in
Andhra Pradesh and corporate governance issues. The Malegam
Committee recommendations, if implemented, would address the key
concerns on asset quality. However, while the Andhra Pradesh MFI Act
stays in force, loan‐loss provisions could creep in. Even as the dust
settles down in AP, the core strength of the business model (joint
liability group) remains intact. Despite these issues, we believe SKSM is
attractively valued, given its growth outlook and profitability. Even
after factoring in margin caps and higher credit costs, RoAs are likely to
stabilize near 3.8%. The risk‐reward appears favorable. We initiate
coverage with an Add rating and a Mar12 price target of INR602.
Growth to moderate; funding stays a challenge
The extent of financial exclusion in India remains high with enough scope for
geographic diversification and significant demand for micro credit. The average
ticket size per borrower is likely to increase with the rising persistency of the
customer base. SKSM has made early efforts to diversify its branch network
and loan portfolio – to reduce its concentration towards Southern states.
Increase in the average ticket size and market share gains are likely to drive a
CAGR of 38% in the loan book over FY11f‐FY14f. However, availability of
adequate capital to fund this growth is a key challenge.
Regulation a key challenge; nevertheless, a sound business model
The Andhra Pradesh crisis assumes significance as penetration rates here are
far higher than that in any other Indian state, with c30% of the outstanding
microfinance institution (MFI) portfolio originating from the state. Given the
nature of the customer base of MFIs, politics is likely to play a major role in
defining the future of the industry. Nevertheless, the basic tenets of the
business model remain strong. Bigger players that are well‐capitalized are likely
to emerge stronger from the crisis, once the dust settles down.
RoAs to remain stable, despite margin caps and higher credit costs
We forecast SKSM to register a CAGR of 34% in net interest income for the
three years ending Mar14, driven by strong loan growth. The cap on margins
and lending yields is likely to have minimal impact on the lender. With
operational leverage kicking in, RoAs are likely to stabilize at 3.8% for the threeyear
period ending Mar14f, despite higher credit costs and margin caps.
Risk‐reward appears favorable; initiate with Add, Mar12 TP of INR602
SKSM’s sharp de‐rating provides an entry point, considering that the viability of
the business model remains strong. Our price target is based on the DCF, P/E
and P/B methods. The Mar12 target of INR602 values the stock at 17.5x and
2.1x one‐year forward P/E and P/B, respectively. We initiate coverage on the
stock with an Add rating.
Investment Summary
SKSM’s sharp de‐rating over the past six months has reflected the concerns of political clampdown on microfinance
institutions in Andhra Pradesh and corporate governance issues. The Malegam Committee recommendations, if
implemented, address the key concerns on asset quality. However, while the Andhra Pradesh MFI Act stays in force,
loan‐loss provisions could creep in. Even as the dust settles down in Andhra Pradesh, the core strength of the business
model remains intact. Despite these issues, we believe SKSM is attractively valued given its growth outlook and
profitability. A key risk to growth is resumption of the funding constraints currently experienced by the industry. That
said, SKSM is better positioned than its peers due to its higher capital base and a more diverse loan book. The riskreward
appears favorable. We initiate coverage with an Add rating and a Mar12 price target of INR602.
Growth to moderate; funding stays a challenge
The extent of financial exclusion in India remains high with enough scope for geographic diversification
and significant demand for micro credit. With the seasoning of the loan book and rising branch
maturity, the average ticket size is likely to increase, except in certain pockets, which have high
penetration levels. SKS Microfinance (SKSM) added c70% of its branches over the past two years. With
a rise in the average ticket size per borrower and market share gains, we estimate SKSM’s loan
portfolio to register a CAGR of 38% for the three‐year period ending Mar14f. However, unavailability of
adequate capital to fund this growth is a key risk to our assumption.
Regulation can be potentially game changing
The stringent regulations of the Andhra Pradesh MFI Act contributed to a general environment where
MFI ground‐level operations were impeded and loan collections for MFIs in Andhra Pradesh dropped
dramatically. SKSM too saw higher defaults and a virtual halt of incremental disbursals in the state. The
Andhra Pradesh MFI Act continues to remain in force, despite the Malegam Committee advocating its
removal. Any delay in resolution of the MFI dispute in Andhra Pradesh and restoration of normal
business conditions is likely to pose a risk of significant NPLs. The competitive intensity is likely to
decline, as the stringent regulations imposed by the Andhra Pradesh MFI Act are likely to impact
smaller MFIs. However, bigger players that are well‐capitalized and diversified are better‐equipped to
withstand the crisis.
Better‐placed among peers
SKSM has grown at a rapid pace after having converted to a for‐profit model. Despite its aggressive
growth, the lender has not compromised on the basic tenets of the joint liability group (JLG) model.
SKSM remains focused only on women (generally considered a less risky asset class than men) and
lending is strictly for productive use, which is considered relatively safer in terms of asset quality. The
end loan usage is monitored strictly, with most loans only given for productive uses rather than for
consumption. We believe SKSM’s leadership position is likely to give it a distinct advantage to acquire
clients over the long term.
Profitability likely to remain strong, despite pressure
Supported by a CAGR of 38% in the gross loan portfolio, we estimate SKSM to register a CAGR of 34% in
net interest income during FY11f‐FY14f, despite declining spreads. Fee income growth is likely to
remain strong due to higher volumes, even as fee income as a proportion of total loans is likely to
decline to 1% from 2%‐3% earlier. We estimate SKSM to write off 10% of its loan book in Andhra
Pradesh during FY11f due to rising defaults, as repayment levels continue to remain low. We
conservatively build in loan‐loss provisions (including write‐offs) at 5% of the gross loan portfolio in
FY11f and, thereafter, at an average of 4.2% over FY12f‐FY14f. We estimate a CAGR of 34% in net profit
during FY11f‐FY14f.
Initiate coverage with Add and Mar12 target of INR602
Our target is based on the DCF, P/E and P/B methods. Our DCF‐based fair value stands at INR592,
where we assume cost of equity of 14% and semi‐explicit and fade period growth of 25% and 3%,
respectively. Our Mar12 target price of INR602 values the stock at 17.5x and 2.1x one‐year forward P/E
and P/B, respectively. We initiate coverage with an Add rating.
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