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We stay with our UW recommendation and PT of Rs200 (46% downside
potential) on SKSM, despite it being up 12% in the last three months. We are
unconvinced by the incremental positives – a trickle of bank funding and the
new draft MFI bill – as we are skeptical of the core business model. We
believe SKS’ premium valuations have no real fundamental support and we
recommend investors switch to safer private banks like IndusInd.
Some positives coming through. The big positive, in recent weeks, is that
banks seem to be more willing to lend to MFIs. The draft MFI bill, despite
the minor positive of overruling the restrictive AP Microfinance Act, is not
a magic wand. It may help SKS re-enter AP, but we do not think it will help
improve the estimated 75% losses in the AP back-book, especially as the
formal passage of the bill could take ~6 months. We also note that the new
RBI norms are restrictive.
Model is flawed. We think the excessive focus on the AP government
action masks fundamental flaws in the core business model. The size of the
market is overestimated; the companies are underinvested in systems and
processes; the “Hotel California” effect (repayments depend on fresh loans)
is strong and a wholesale-funded, unsecured lending model is inherently
unstable.
No support for premium valuations. About 35% of SKS’ loan book is
stressed, its BV and earnings are inflated by in our opinion optimistic
accounting. We believe growth and ROE prospects remain threatened. At
the same time, SKS trades at ~80% market cap/assets, vs. 30-45% for other
NBFCs – we think such a premium is unjustified.
Exit into the rally. We see the recent rally as an opportunity to exit –
continued asset quality issues are a strong negative trigger. We think it’s
better to stay away from NBFCs in the current economic environment (rising
rates, slowing growth). Switch to IIB.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We stay with our UW recommendation and PT of Rs200 (46% downside
potential) on SKSM, despite it being up 12% in the last three months. We are
unconvinced by the incremental positives – a trickle of bank funding and the
new draft MFI bill – as we are skeptical of the core business model. We
believe SKS’ premium valuations have no real fundamental support and we
recommend investors switch to safer private banks like IndusInd.
Some positives coming through. The big positive, in recent weeks, is that
banks seem to be more willing to lend to MFIs. The draft MFI bill, despite
the minor positive of overruling the restrictive AP Microfinance Act, is not
a magic wand. It may help SKS re-enter AP, but we do not think it will help
improve the estimated 75% losses in the AP back-book, especially as the
formal passage of the bill could take ~6 months. We also note that the new
RBI norms are restrictive.
Model is flawed. We think the excessive focus on the AP government
action masks fundamental flaws in the core business model. The size of the
market is overestimated; the companies are underinvested in systems and
processes; the “Hotel California” effect (repayments depend on fresh loans)
is strong and a wholesale-funded, unsecured lending model is inherently
unstable.
No support for premium valuations. About 35% of SKS’ loan book is
stressed, its BV and earnings are inflated by in our opinion optimistic
accounting. We believe growth and ROE prospects remain threatened. At
the same time, SKS trades at ~80% market cap/assets, vs. 30-45% for other
NBFCs – we think such a premium is unjustified.
Exit into the rally. We see the recent rally as an opportunity to exit –
continued asset quality issues are a strong negative trigger. We think it’s
better to stay away from NBFCs in the current economic environment (rising
rates, slowing growth). Switch to IIB.
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