SKS Microfinance - Weak 1Q results as expected:: Credit Suisse,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


SKS Microfinance -------------------------------------------------------- Maintain UNDERPERFORM
Weak 1Q results as expected


● SKS’ 1Q12 performance (Rs2.2 bn loss) was weak as expected
driven by continued low collection levels (12% in 1Q) in Andhra
Pradesh (AP) and further decline in the loan book (-16% QoQ; -25%
YoY). Gross NPLs jumped to 39%, or Rs11.8 bn (versus 2.5% in
4Q), with AP loans turning to sub-standard, and SKS made 10%
provisions on them in 1Q.
● We are factoring further provisions of Rs11 bn (mainly AP losses)
over the next two years and estimate current book to be eroded by
28% by FY13. While reported Tier 1 is high at 46%, it has taken
board approval to raise additional equity of up to US$200 mn.
● The recent MFI Bill (which gives complete autonomy to Central
Bank) is a positive for future business prospects of the MFI industry.
However, recoveries from the existing business continue to be slim,
and there are execution challenges and we believe the recent sharp
move upwards (+49% over past 1 month) is unwarranted.
● Given the medium-term pain, MFI bill execution challenges and
expensive valuations (3.2x FY13bv), retain UNDERPERFORM
(target price of Rs323, based on 2.0x FY13 bv).
Weak 1Q12 results as expected
SKS reported weak 1Q12 results as expected (loss of Rs2.2 bn),
driven by continued low collections. Andhra Pradesh (Rs13 bn; 39%
of the gross loans) collections were only 12% during the quarter
(versus 10% in 4Q11). Non-AP (Rs21 bn) collections were at 98%,
except in West Bengal (88% collections in 1Q versus 90% in 4Q,
Rs4.3 bn book – 13% of gross loans). Net interest income was down
13% QoQ, with on b/s loan book declining 12% QoQ. Gross loan book
declined 16% QoQ (down 25% YoY) to Rs34 bn and disbursements
were down 61% YoY (US$1200 mn). Pre-provision profit was only at
Rs6 mn (versus Rs15 mn in 4Q). Credit costs (as a percentage of
average gross loans) were at 19%. If SKS had followed provision
norms similar to banks, provisioning would have been higher by Rs1.6
bn. Operating costs were up 7% QoQ, despite an 8% QoQ drop in the
employees. Capital adequacy was healthy (46%) and cash was at
Rs2.8 bn (9% of loans)


MFI Bill – positive for the future business prospects
The Ministry of Finance has recently cleared the Micro Finance Bill
draft, the key feature of which is that it gives complete autonomy to
RBI to regulate MFIs. It provides RBI the authority to decide on ceiling,
tenure, quantum of maximum interest and fees charged on MFI loans.
Once approved by the cabinet and passed by the Parliament, this will
centralise the regulatory and supervisory structure for the microfinance
industry and reduce the risk of individual state governments
attempting to control the industry. However, it remains unclear how
the AP state government (that had introduced a very restrictive
legislation last year at the state level to control the MFI industry) will
react to this move, and if it will agree to the central government
directive to have RBI as the sole regulator for the sector.
Moreover, we believe, at best, these new regulations improve future
business prospects for the micro-finance players but are unlikely to
improve the recovery prospects for the current loan book in AP.