Smart Investor: SKS Microfinance

Showing posts with label SKS Microfinance. Show all posts

Sunday, December 25, 2011

Losers 2011 - Avoid for 2012

India's largest microfinance company, a leading private sector power producer and the world's leading exporter of cut roses share a common trait. These were some of the companies that saw their stock prices pummelled by 80-85 per cent in 2011.

The top losers of 2011 show that it wasn't sector or market cap preferences that swayed stocks. Instead, instances such as SKS Microfinance, Lanco Infratech and Karuturi Global showcase how unforgiving markets have been with companies with high debt, regulatory hurdles or even a whiff of ‘governance issues'. The 10 biggest losers in the CNX 500 index lost a whopping 79-92 per cent in value while the index shed 24 per cent.

De rated

A dispute within its top management and tighter regulation flagged off the de-rating of SKS Microfinance that saw its price-earnings multiple fall from 20 times to barely 7 times over a year.

A lawsuit impacting its Australian acquisition, interrupted gas supply for a project and debt worries proved to be the undoing of Lanco Infratech, now trading below its book value.

In the case of Karuturi Global, ambitious plans to diversify into Ethiopia ran into rough weather. Stocks of DB Realty and Unitech shed 70-75 per cent, as promoter group companies faced investigations related to the 2G scam.

As interest rates climbed steadily upward, companies with high debt on their books such as GTL and GTL Infra, 3i Infotech and Patel Engineering lost 75-92 per cent.

No Hope

With stock prices of these companies taking such a big tumble, should investors average their positions at these prices? They shouldn't, say market participants. In fact, they hold the view that some of the worst performers this year may have suffered a permanent de-rating.

Retail investors, feels Mr Chokkalingam, Group CIO, Centrum Wealth Management, usually do not have required courage to book losses. But he advises shifting to stocks of companies which are cash-rich, offering good dividend yields and earnings record.

Mr Rikesh Parikh, Vice-President – Equities at Motilal Oswal Securities, says that even if broader markets do recover and move to higher levels, these stocks may not get back to their highs.

Our Recommendation :

Avoid these stocks for 2012 as the out look for many of these scrips is pretty negative. Any decent spike in these should be utilized as a shorting oppurtinity with strict Stop Loss.

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Friday, December 31, 2010

SKS Microfinance - Sell

SKS - Exit

Regulatory action has damped its price and investors should refrain from getting in till sector rules are clearer, feel analysts.

Amidst growing uncertainty on the regulations governing the operations of microfinance institutions (MFIs), shares of SKS Microfinance, the only listed MFI in India, have taken a beating of 50 per cent since October.

Brokerages expect SKS to show earnings per share (EPS) of Rs 39 for 2010-11, versus Rs 49.7 estimated earlier, due to reduced lending rates, higher funding costs, lower loan growth and increasing non-performing loans. The loan growth is seen at 30-40 per cent over the next two-three quarters, say analysts at Citigroup.

While the new Andhra microfinance law continues to impact the business of SKS significantly, experts believe the worst is not over for the stock. And, that investors should consider exiting it, due to greater downside risks. Clarity on the regulatory framework will provide cushion to the stock's southward trip and till such time, investors should refrain from making fresh investments despite the fall. However, a geographically diverse loan portfolio, with Andhra Pradesh (AP) contributing about 28 per cent of its loan book and lower leverage (total assets/equity) of 3.2x (September) gives SKS an edge over its peers, which it can capitalise once the current uncertainty dies.

SLOWING DOWN
In Rs crore	FY09	FY10	FY11E
Total Income	359	670.50	967
Net interest income	312	596.40	865.70
Net interest margin (%)	15.40	17.30	19.20
Net profit	80.20	174.80	209.60
P/ABV (x)	5.10	4.90	2.80
E: Estimated ABV: adjusted book value Source: Citigroup report

Impact
The Andhra Pradesh Microfinance Institutions Bill, 2010, passed by the State Assembly recently, places restrictions on recovery practices and limits collections of debt to once-a-month from once-a-week earlier. If implemented (the parties concerned have challenged it in the high court), the provisions would adversely impact MFI operations.

SKS recently reduced its effective lending rate by two per cent. This, coupled with higher funding costs (due to banks reducing exposure to MFIs), will squeeze the net interest margin of the company. Loan spreads can fall by at least two to three per cent (from 15 per cent), believe analysts.

Loan growth has moderated due to a freeze on fresh loans by MFIs in AP and slowing disbursements in other states. Collections for MFIs in AP have dropped to 15-20 per cent from the erstwhile levels of 99 per cent, hitting asset quality. The Act intends to limit an individual to loans from one self-help group (SHG) and one MFI only at a time. This will further dent loan growth, as multiple MFIs usually lend to individual borrowers. Also, since borrowers earn daily or weekly income, a monthly collection cycle will impact the repayment efficiency.

Ahead
Quick resolution of this situation could curb losses. However, clarity is expected only after RBI creates a regulatory framework for MFIs by March 2011, based on the recommendations of the Y H Malegam committee on the sector.

Further, the central government is looking at introducing a Bill over the next five months and this is likely to override the Andhra one. Experts believe the MFI business will attain normalcy only by the April-June 2011 quarter.

Despite the current turmoil, MFIs have a strong presence in India, due to the strong underlying business economics (and demand). Their distribution reach is very large and this is a major positive, as this aligns well with the government's aim of financial inclusion. MFIs need to modify business models towards asset-light lending and broadening the product base, to continue being classified as priority sector lending.

Source : BS

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Ingenious Investor

Equity Research Division

Ravina Consulting

Pattamal Plaza

3rd Cross Kamanahalli

BANGALORE 560084

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sowmya@ravinaconsulting.com

Talk / SMS 08105737966

Read - www.ingeniousinvestor.blogspot.com

Wednesday, October 27, 2010

SKS Microfinance Sell on rallies

MUMBAI: Shares SKS Microfinance fell below their issue price on Monday, weighed down by concerns of regulatory restrictions in the near future. The stock crashed to an intra-day low of . 894.70 — . 91 below the issue price of . 985 — before narrowing the losses to close at Rs 1,005, down 4% over its previous close.

Brokers are advising clients against buying shares of the company till there is clarity on microfinance regulations. According to them, rising regulatory interference , lending controls and the threat of rising non-performing loans could hurt the company’s financial health. “The basic business model itself is under pressure,” said Sanjeev Patni , head-institutional equities, Centrum Broking.

“There will be curbs on lending limits and interest rates (charged on borrowers) once a new regulator is appointed. Microfinance companies won’t be able to use aggressive means (like coercion) to collect money from borrowers. All these factors will impact earnings,” he said. Brokers tracking the stock say that current valuations can be justified only if there is strong credit growth, stable return on assets and very low default level, which can’t be more than 2%. However, investment advisors are of the opinion that SKS will not be able to maintain its growth if lending rates are capped and collection process relaxed.

“Capping of lending rates will result in yields on advances declining by 2%, from 26% to about 24%. Restrictions on aggressive collection methods will result in NPAs moving up. These factors will bring down returns on assets, which, in turn, will have an impact on returns on investments,” said Manish Sonthalia, senior VP-fund manager, Motilal Oswal Securities .

According to Mr Sonthalia, investors can consider buying the stock if it falls by another . 300 from current levels. Hyderabadbased SKS Microfinance found itself under the media glare after its board terminated the services of its CEO Suresh Gurumani without giving adequate reasons.

The matter snowballed into a major crisis after Sebi sought an explanation from the MFI for the reasons behind sacking Suresh Gurumani. Amidst reports of rampant mismanagement , partial disclosures at the time IPOs and low CSR quotient , the finance ministry announced its plans appoint a microfinance regulator and curb practices like overcharging borrowers and forceful collection of borrowed money, across industry.

Source ET