Buy SKS Microfinance - Anand Rathi Research

SKS Microfinance Ltd (SKS) is witnessing the benefits of an improved funding environment. Healthy disbursement coupled with activation of inactive members across the country will pave way for AUM growth at a CAGR of ~46% between FY15-FY18e. SKS had been consolidating its branch network and employee strength; the operating leverage benefits will accrue as we expect growth to drive earnings in the next couple of years. Looking at the growth coupled with improvement in return ratios, we believe that the stock is currently at attractive valuations.

Long Term Loan (LTL) aiding growth. The LTL portfolio forms ~24% of the AUM. The increase in LTLs has led to an increase in the AUM growth-to-disbursement ratio from -1.7% in Q1 FY15 to 26.3% . Across the NBFC peers, barring Shriram City Union Finance (SCUF), the duration of the loan book with the likes of Shriram Transport Finance (SHTF), Cholamandalam (CHOLA), Magma Fincorp (MAGMA), etc., has fallen on account of an increase in lending towards shorter-tenure assets; while SKS has been increasing the asset tenure of its book through LTLs.

Huge gap in customer base to aid growth. From FY14 to FY15, the MFI client base (non-AP, industry) has increased ~30%, to 31m. At its peak, SKS had 5.6m customers (non-AP book), now come down to 3.6m. The reduction was primarily due to SKS's lower capital base after the crisis and the consolidation phase of the balance sheet. However, SKS still has a 2m customer gap, which provides a cushion for it to grow the book. With the current favourable funding environment, we believe that growth wouldn't be a concern for SKS.

Valuations. At the current market price of Rs.477, the stock trades at a P/BV of 2.7x FY18e. At our target price, it would trade at a P/BV of 4.15x FY18e (rolled over from FY17 to FY18). We have valued the core business at Rs 716 (P/BV of 4x FY16e) and the deferred tax assets at Rs 27 a share.

Shares of SKS MICROFINANCE LTD. was last trading in BSE at Rs.465 as compared to the previous close of Rs. 476.55. The total number of shares traded during the day was 154150 in over 4315 trades.

The stock hit an intraday high of Rs. 486.85 and intraday low of 460.15. The net turnover during the day was Rs. 73361364.

Source : Equity Bulls

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