JP Morgan: SKS Microfinance - 3Q FY11: PAT plunges; maintain Underweight

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SKS Microfinance 
Underweight 
SKSM.BO, SKSM IN 
3Q FY11: PAT plunges; maintain Underweight

• 3Q11 PAT down 58%: SKS reported 3Q11 PAT of Rs342MM, down 

58% q/q and much lower than our estimate of Rs571MM. Provisions 

were higher than expected as SKS took a ~Rs570MM write-off for its 

AP book.

• Provisions increase 7.5x q/q; large-scale NPA recognition expected 

in 4Q: Provisions increased to ~Rs1.0B (~8% of loans annualized) from 

Rs173MM in 2Q FY11 as SKS provided Rs270MM for higher 

provisions on loans as recommended by the Malegam committee, and 

wrote off Rs570MM from the AP Book. SKS has moved to a longer 

cycle of recognizing NPAs as it has migrated to monthly collections, 

from weekly earlier. We expect large NPAs to be recognized from the 

AP book and higher credit charges in 4Q FY11. 

• AUMs down q/q:  AUMs also contracted 7% q/q as no incremental 

disbursements were made in AP. Given large funding constraints, 

disbursements have been slow in other states also. We see risks to our 

growth estimates of 16%/29% for FY12/FY13 as tighter funding and 

slower disbursements in non-AP states impact growth. 

• Significant to risks to earnings, maintain Underweight:  3Q FY11 

highlights the large-scale write-off and credit costs that can come 

through for the AP book. We see significant risks to our estimates on 

most parameters, including credit costs/margins, and will review our 

numbers after the management call. The Malegam committee report 

provides a ray of hope, but poses stringent conditions that are likely to 

depress ROE to mid-teens. We believe current valuations at 2.5x FY12E 

are still very expensive; maintain Underweight.