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SKS Microfinance
Underweight
SKSM.BO, SKSM IN
Risk-reward still unfavorable; maintain Underweight
• We stay Underweight on SKS as the outlook on asset quality and
growth remains weak, in our view, even outside AP. We believe the
risk-reward ratio is still unfavorable, given the high uncertainty of
near-term profits and an expected decline in longer-term sustainable
ROE to ~15%.
• AP Book: Provisioning policy could delay NPA recognition: AP
collections dipped to ~10%, below our 25% estimate. Our estimate of
AP credit charges at ~Rs8.2B in FY12 could change if RBI notifies
liberal provisioning policies, but the underlying economics will not
change, in our view. We expect loss given default in AP at 100%.
• Some pressures ex-AP as well: Asset quality outside AP also stuttered,
mainly in Bengal (see Figure 2 on page 3). This was probably due to the
~23% q/q contraction in the ex-AP loan book and a ~50% q/q
contraction in disbursements. Management expects this to turn around
with ~50% y/y growth ex-AP (JPMe - 15%), led by optimism that bank
funding will return.
• Diversification plans still in early stages: Management plans to
diversify into financing mobile handset and gold jewelry. Limited
expertise and regulatory constraints (85% of the book needs to be MFI
loans) are likely to limit upside from these new ventures.
• Maintain Underweight: We remain UW on SKS in spite of the recent
correction. SKS trades at 45% MCap/assets (~65% ex-AP) – what we
believe to be an undeserved premium to 30-50% for other NBFCs, given
the structural pressures on the business model.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SKS Microfinance
Underweight
SKSM.BO, SKSM IN
Risk-reward still unfavorable; maintain Underweight
• We stay Underweight on SKS as the outlook on asset quality and
growth remains weak, in our view, even outside AP. We believe the
risk-reward ratio is still unfavorable, given the high uncertainty of
near-term profits and an expected decline in longer-term sustainable
ROE to ~15%.
• AP Book: Provisioning policy could delay NPA recognition: AP
collections dipped to ~10%, below our 25% estimate. Our estimate of
AP credit charges at ~Rs8.2B in FY12 could change if RBI notifies
liberal provisioning policies, but the underlying economics will not
change, in our view. We expect loss given default in AP at 100%.
• Some pressures ex-AP as well: Asset quality outside AP also stuttered,
mainly in Bengal (see Figure 2 on page 3). This was probably due to the
~23% q/q contraction in the ex-AP loan book and a ~50% q/q
contraction in disbursements. Management expects this to turn around
with ~50% y/y growth ex-AP (JPMe - 15%), led by optimism that bank
funding will return.
• Diversification plans still in early stages: Management plans to
diversify into financing mobile handset and gold jewelry. Limited
expertise and regulatory constraints (85% of the book needs to be MFI
loans) are likely to limit upside from these new ventures.
• Maintain Underweight: We remain UW on SKS in spite of the recent
correction. SKS trades at 45% MCap/assets (~65% ex-AP) – what we
believe to be an undeserved premium to 30-50% for other NBFCs, given
the structural pressures on the business model.
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