SKS Microfinance Limited - Ready for second innings - Antique

SKS Microfinance has many firsts to its credit, including being the only Andhra Pradesh-based MFI to survive and emerge stronger and the only large pan-Indian MFI. After seven quarters of losses, the company turned profitable in 3QFY13 and is expected to deliver strong earnings growth over FY13-16e. Its recent success with large securitisation transactions and securing credit ratings of 'A' on INR20bn borrowing facility signals improved funding access. Strong disbursement growth will pave the way for operating leverage and drive earnings CAGR of 67% over FY14-16e. We value SKS Microfinance at 2.5x FY15e adjusted book or INR230 per share.

The only large pan-India player, stage set for strong growth

Most Andhra Pradesh-based players are under corporate debt restructuring and stare at the possibility running down their profitable non-AP portfolio to honour their CDR obligations while large non-AP MFIs either have a sizable single-state concentration or operate as urban MFIs. Thus, SKS Microfinance is the only pan India player in the true sense, with presence in over 15 states. Cost economics in the new regulatory framework will ensure limited competition for it, and disbursement CAGR of 39% over FY13-16e will drive AUM CAGR of 36%.

Multiple levels of de-risking post the Andhra Pradesh crisis, specific risks far lower

SKS Microfinance de-risked its operations at multiple levels: 1) Strict norms for geographic concentration; 2) Process improvements to ensure better loan origination, cash management, and cost optimisation; and 3) Regular audits and compliance activities. For instance, every loan application passes through a credit bureau check. All branches have internet connectivity and 92% of branches have CMS. Specific risks to SKS Microfinance have significantly subsided.

Efficiency gains to drive profitability over FY13-16e

The orderly scaling down of the non-Andhra Pradesh book ensured that SKS Microfinance had maintained connect with its borrowers across most districts, albeit at very low disbursement levels. We expect the funding environment for SKS Microfinance to remain benign and enable it to reconnect with more borrowers, thus bringing in growth at negligible incremental cost. We expect efficiency gains to accrue over FY14-16e and cost-to-AUMs to decline from 13% in FY13 to 8.3% in FY16e.

Sustainable RoEs of over 20% likely, initiate with Buy

We expect earnings CAGR of 67% over FY14-16e, driven by robust AUM growth, gains from operating efficiency, and low tax rates. With INR5.5bn in deferred tax assets, tax rates will remain low up to FY21e. Minimum alternate tax at 21% will kick in from 2016, post which SKS Microfinance would generate RoAUMs of ~4% and RoEs of ~24% on a long-term basis. We maintain our Buy rating and assign P/B-based price target of INR230 per share (2.5x FY15e adjusted book). Severe funding constraints, excessive competition, and repeat of an Andhra Pradesh-like event are the key risks to our call.

Source : Equity Bulls

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