Buy SKS Microfinance - Fairwealth Institutional Research

SKS Microfinance Limited (SKSM) is the largest micro finance institution (MFI) in India in terms of total value of loans outstanding, borrowers and number of branches. SKS is a nondeposit accepting non-banking financial company (NBFC-ND) and is registered and regulated by the Reserve Bank of India (RBI). They are engaged in providing microfinance services to women in the lower income segment predominantly located in rural areas in India.

Investment Thesis:

- The worst seems to be over for SKS as it has been able to write down almost 85% of the loans from Andhra Pradesh region that troubled the business in the past. SKS has been able to keep non-AP operations unaffected from problems in AP.

- The company's revival is largely owed to clearer environment that has emerged after the formulation of regulations for micro financial institutions by RBI. The new moves will favour MFI as priority sector, securitization guidelines are in place and ambiguity is sorted out.

- RBI, in its regulations in Aug has eased operational flexibility and allowed the MFI to charge on loans at interest rate exceeding the earlier cap of 26 per cent. RBI has also allowed the provisioning of Andhra Pradesh portfolio to be reckoned as part of Net- owned Fund (NOF) for MFIs.

- Loan recovery is better rationalized after the norms. 95% of recovery rate in non-AP states was recorded in Q4FY12. NBFC-MFI bill will clear the few remaining hurdles that are left.

- Recent infusion of equity like the one of Rs. 230 cr through QIP route shows the optimistic attitude of investors towards microfinance institutions in India. Asset book has started to expand at a rapid pace. On 4th Sep, SKS said that it has securitized Rs. 354 cr from 18 states, except AP. Capital raising spree through QIP route and two back to back securitizations reflects the worst is far behind now.

- Q2FY13 Analysis: Results in past quarter were not very encouraging. As the AP operation's share will reduce, subsequently the book quality will improve. In 2nd quarter of FY13, SKS reported net loss of Rs 262 cr as compared to a loss of Rs 385 cr in the second quarter last fiscal. Its standalone income grew 7% to Rs 78 cr on qoq basis while provisioning mounted to Rs 234 cr.

Valuation: With the most recent guideline from RBI raising the cap on interest rates and provisioning of AP portfolio as part of NOF, SKS Microfinance will get benefitted. Also the troubles owed to operations in AP will be substantially reduced in the future as company has trimmed its exposure in AP. At CMP of Rs. 112, we recommend a BUY rating for the stock with a target price of Rs. 145 implying an upside of 29%.

Source : Equity Bulls

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