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SKS Microfinance ------------------------------------------------ Downgrade to UNDERPERFORM
Weak 4Q results
● SKS’ 4Q performance (Rs0.7 bn loss) was weaker than expected as
collections in Andhra Pradesh (AP) and the rest of India was lower,
and the loan book contracted sharper than expected by 18% QoQ.
● We see little likelihood of AP book recovery now and expect 90% of it
to turn to NPL in FY12. To protect its capital base SKS has relaxed
its provisioning policy to two years for a full write-off and despite the
sharp rise in NPLs may not raise capital. On an economic value
basis, we estimate AP losses have eroded 48% of its book.
● The recent RBI policy initiatives while positive are not adequate to
fortify its business model from local level disruptions, and we
expect more regulatory support for the MFI industry.
● We forecast FY12-13 losses of Rs3.1 bn, mainly on high loan loss
provisions (expect non-AP book to stay flat and AP book to be
largely written-off over the next two years). With medium-term
pain and continued uncertainty on MFI business model, we
downgrade the stock to UNDERPERFORM (from Outperform).
Our target price reduces to Rs323 (based on 2.0x FY13 book).
Weaker than expected 4Q11 results
SKS reported weaker-than-expected 4Q11 results (loss of Rs0.7 bn)
on lower-than-expected collections. Andhra Pradesh (Rs14 bn; 30%
of the gross loans) collections were only 10% during the quarter
(versus 43% in 3Q11). Non-AP (Rs27 bn) collections were at 98%,
except in West Bengal (90% collections, Rs5.6 bn book – 14% of
gross loans).
Net interest income was down 69% QoQ (down 52% YoY) with on
balance sheet loan book declining 27% QoQ and reversal of Rs0.8 bn
of interest income. Gross loan book declined 18% QoQ (down 5%
YoY) to Rs41 bn and disbursements were down 66% YoY (US$175
mn). Credit costs (as percentage of average gross loans) were at 9%.
Operating costs were down 25% QoQ. Capital adequacy was healthy
(45%) and cash was at Rs5.6 bn (15% of loans).
Provisioning policy relaxed for AP loans
Management has relaxed the provisioning policy norms for AP loans
(to be recognised as NPLs after six months versus 8 weeks earlier
and loss assets after two years versus 25 weeks earlier) which shall
allow the company to take the provisions for the non-performing AP
loans over a period of two years. We forecast loan loss provisions of
Rs6.6-6.7 bn over FY12-13 (~Rs10.5 bn for the AP portfolio).
Economic capital is 48% lower than current book value
Assuming 90% of AP and 5% of non-AP loans going bad, economic
capital comes at Rs9.3 bn (48% lower than current book value of
Rs17.8 bn).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SKS Microfinance ------------------------------------------------ Downgrade to UNDERPERFORM
Weak 4Q results
● SKS’ 4Q performance (Rs0.7 bn loss) was weaker than expected as
collections in Andhra Pradesh (AP) and the rest of India was lower,
and the loan book contracted sharper than expected by 18% QoQ.
● We see little likelihood of AP book recovery now and expect 90% of it
to turn to NPL in FY12. To protect its capital base SKS has relaxed
its provisioning policy to two years for a full write-off and despite the
sharp rise in NPLs may not raise capital. On an economic value
basis, we estimate AP losses have eroded 48% of its book.
● The recent RBI policy initiatives while positive are not adequate to
fortify its business model from local level disruptions, and we
expect more regulatory support for the MFI industry.
● We forecast FY12-13 losses of Rs3.1 bn, mainly on high loan loss
provisions (expect non-AP book to stay flat and AP book to be
largely written-off over the next two years). With medium-term
pain and continued uncertainty on MFI business model, we
downgrade the stock to UNDERPERFORM (from Outperform).
Our target price reduces to Rs323 (based on 2.0x FY13 book).
Weaker than expected 4Q11 results
SKS reported weaker-than-expected 4Q11 results (loss of Rs0.7 bn)
on lower-than-expected collections. Andhra Pradesh (Rs14 bn; 30%
of the gross loans) collections were only 10% during the quarter
(versus 43% in 3Q11). Non-AP (Rs27 bn) collections were at 98%,
except in West Bengal (90% collections, Rs5.6 bn book – 14% of
gross loans).
Net interest income was down 69% QoQ (down 52% YoY) with on
balance sheet loan book declining 27% QoQ and reversal of Rs0.8 bn
of interest income. Gross loan book declined 18% QoQ (down 5%
YoY) to Rs41 bn and disbursements were down 66% YoY (US$175
mn). Credit costs (as percentage of average gross loans) were at 9%.
Operating costs were down 25% QoQ. Capital adequacy was healthy
(45%) and cash was at Rs5.6 bn (15% of loans).
Provisioning policy relaxed for AP loans
Management has relaxed the provisioning policy norms for AP loans
(to be recognised as NPLs after six months versus 8 weeks earlier
and loss assets after two years versus 25 weeks earlier) which shall
allow the company to take the provisions for the non-performing AP
loans over a period of two years. We forecast loan loss provisions of
Rs6.6-6.7 bn over FY12-13 (~Rs10.5 bn for the AP portfolio).
Economic capital is 48% lower than current book value
Assuming 90% of AP and 5% of non-AP loans going bad, economic
capital comes at Rs9.3 bn (48% lower than current book value of
Rs17.8 bn).
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