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Erosion in price exceeds worst case in non‐AP loans
The excessive price correction for SKSM over the past six months has
been driven by accelerated write offs in AP, lower disbursals in the
non‐AP portfolio and higher slippages in the non‐AP book. The erosion
in market price far exceeds the worst case in growth for the non‐AP
book. We value the AP and non‐AP books independently. Growth
outside AP remains the key driver of profitability. We forecast non‐AP
loans to grow at a CAGR of 37% over FY11‐FY14. Current capitalization
levels and the ROA cap of 3% do not present a hurdle to growth once
credit availability improves. We lower our earnings, driven by
accelerated write‐offs in AP and lower disbursals in the non‐AP
portfolio. The loss per share in the AP book when adjusted with the
fair value of the non‐AP book results in a Dec12 TP of INR137. We
maintain our Buy rating.
Underperformance driven by accelerated write offs
The excessive price correction for SKSM over the past six months has been
driven by accelerated write‐offs in Andhra Pradesh (AP), lower disbursals in the
non‐AP portfolio and creeping up of NPLs in West Bengal and Gujarat. The
lender wrote off INR3.5bn during the quarter ended Sep11, thus, lowering the
outstanding AP loan book to INR8bn.
Potential upside may be high, once growth outside AP picks up
Our assessment indicates a potential upside of 37% from the current price. We
value the AP and the non‐AP businesses independently. Growth outside AP
remains the key driver of profitability. We forecast non‐AP loans to grow at a
CAGR of 37% over FY11‐FY14. The loss per share in the AP book when adjusted
with the fair value of the non‐AP book results in a Dec12 TP of INR137.
Current valuation implies distress case scenario in non‐AP loans
Our base case assumes non‐AP loans to decline by 5% in FY12 and thereafter
rebound, to translate into a CAGR of 37% over FY11‐FY14. Sensitivity to growth
in the non‐AP book indicates the worst case being priced in.
Exhibit 25: Sensitivity of fair value to growth in the Non‐AP book
Scenario 1(Base case) Scenario 2 Scenario 3
Loan growth CAGR (FY12‐FY14) 37% 32% 42%
DCF based value for Non‐AP book 221 207 237
Loss per share in AP ‐84 ‐84 ‐84
Fair Value of Non‐AP book 137 123 153
ROA cap and current capitalization not a hurdle
Our assessment indicates capital adequacy would continue to stay above
prescribed levels, even in case of a delay in raising fresh capital. The proposed
ROA cap too is unlikely to hamper operations, once credit availability to the
microfinance industry improves. Recent developments indicate this is under way.
Maintain Buy; roll over TP to Dec12
We lower our earnings, driven by accelerated write‐offs in AP and lower
disbursals in the non‐AP portfolio. We maintain Buy with a revised Dec12 TP of
INR137. Lower growth in the non‐AP book remains the key risk factor
Link to main report and other companies
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Erosion in price exceeds worst case in non‐AP loans
The excessive price correction for SKSM over the past six months has
been driven by accelerated write offs in AP, lower disbursals in the
non‐AP portfolio and higher slippages in the non‐AP book. The erosion
in market price far exceeds the worst case in growth for the non‐AP
book. We value the AP and non‐AP books independently. Growth
outside AP remains the key driver of profitability. We forecast non‐AP
loans to grow at a CAGR of 37% over FY11‐FY14. Current capitalization
levels and the ROA cap of 3% do not present a hurdle to growth once
credit availability improves. We lower our earnings, driven by
accelerated write‐offs in AP and lower disbursals in the non‐AP
portfolio. The loss per share in the AP book when adjusted with the
fair value of the non‐AP book results in a Dec12 TP of INR137. We
maintain our Buy rating.
Underperformance driven by accelerated write offs
The excessive price correction for SKSM over the past six months has been
driven by accelerated write‐offs in Andhra Pradesh (AP), lower disbursals in the
non‐AP portfolio and creeping up of NPLs in West Bengal and Gujarat. The
lender wrote off INR3.5bn during the quarter ended Sep11, thus, lowering the
outstanding AP loan book to INR8bn.
Potential upside may be high, once growth outside AP picks up
Our assessment indicates a potential upside of 37% from the current price. We
value the AP and the non‐AP businesses independently. Growth outside AP
remains the key driver of profitability. We forecast non‐AP loans to grow at a
CAGR of 37% over FY11‐FY14. The loss per share in the AP book when adjusted
with the fair value of the non‐AP book results in a Dec12 TP of INR137.
Current valuation implies distress case scenario in non‐AP loans
Our base case assumes non‐AP loans to decline by 5% in FY12 and thereafter
rebound, to translate into a CAGR of 37% over FY11‐FY14. Sensitivity to growth
in the non‐AP book indicates the worst case being priced in.
Exhibit 25: Sensitivity of fair value to growth in the Non‐AP book
Scenario 1(Base case) Scenario 2 Scenario 3
Loan growth CAGR (FY12‐FY14) 37% 32% 42%
DCF based value for Non‐AP book 221 207 237
Loss per share in AP ‐84 ‐84 ‐84
Fair Value of Non‐AP book 137 123 153
ROA cap and current capitalization not a hurdle
Our assessment indicates capital adequacy would continue to stay above
prescribed levels, even in case of a delay in raising fresh capital. The proposed
ROA cap too is unlikely to hamper operations, once credit availability to the
microfinance industry improves. Recent developments indicate this is under way.
Maintain Buy; roll over TP to Dec12
We lower our earnings, driven by accelerated write‐offs in AP and lower
disbursals in the non‐AP portfolio. We maintain Buy with a revised Dec12 TP of
INR137. Lower growth in the non‐AP book remains the key risk factor
Link to main report and other companies
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