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Showing posts with label NBFC. Show all posts
Showing posts with label NBFC. Show all posts

Saturday, July 23, 2016

CAPITAL FIRST LTD : THE NEXT BIG NBFC !!!

Scrip Code: 532938 CAPF
CMP:  Rs. 675.45; Market Cap: Rs. 6,162.65 Cr; 52 Week High/Low: Rs. 694 / Rs. 321.00
Total Shares: 9,12,37,744 shares; Promoters : 5,94,85,602 shares – 65.20 %; Total Public holding : 3,17,52,142 shares – 34.80 %; Book Value: Rs. 172.13; Face Value: Rs. 10.00; EPS: Rs. 18.17; Dividend: 24.00 % ; P/E: 37.09 times; Ind. P/E: 27.26; EV/EBITDA: 14.95 times. Total Debt: Rs. 11,587.16 Cr; Enterprise Value: Rs. 16,806.55 Cr.
   
CAPITAL FIRST LTD: The Company was founded incorporated on October 18, 2005, and is based in Mumbai, India. It was formerly known as Future Capital Holdings Limited ("FCH") the then financial services arm of the Future Group which was a business group focusing on consumption-led businesses in India. FCH was promoted by Pantaloons Retail (India) Ltd ("PRIL"), the flagship company of the Future Group. Later the Future Group no longer remained as promoter of this company changed The company changed its name from Future Capital Holdings Ltd to Capital First Ltd in 2012. The company came with an IPO on January 11, 2008 with an offer of 64,22,800 equity shares of Rs. 10 each at Rs. 765.00 per share, raising Rs. 491.34 Cr. It got listed on February 1, 2008 at Rs. 1,044 and made high of Rs. 1,100 with a low of Rs. 826.10 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges & to raise capital for expansion of their retail financial services business, in particular, to meet the expenses of the Issue; to meet the long term working capital requirements of the Company and for the other corporate purposes. The company has not given any bonus or splits in its shares. Capital First was formed in 2012 as a result of a management buyout of an existing NBFC. The promoter of the company is the highly reputed Global Private Equity Fund, Warburg Pincus, United States of America, with Capital of USD 45 billion (Rs. 2,49,819 Crores). In September 2012, Warburg Pincus acquired 70 % stake in the company for Rs. 810 Crores, including fresh investment of Rs. 100 Crores into the company which was the largest FDI in India in financial services in 2012-13. Warburg Pincus is a leading and highly reputed global private equity firm. Founded in 1966, Warburg Pincus in India has supported and built large and reputed corporations like HDFC Limited, Kotak Mahindra Bank Limited, Bharti Tele-ventures Limited and Ambuja Cements Ltd. Warburg Pincus further infused an additional equity of Rs. 128 Crores of Tier I capital in March 2014, additionally to this, in March 2014, HDFC Standard Life insurance Company Limited from the HDFC group, infused Rs. 50 Crores which again contributed to the Tier-I capital of CAPITAL FIRST. HDFC Life is a leading life insurance company in India, HDFC Limited, which owns 72.37 % of HDFC Standard Life Insurance Company ltd, is a leading and reputed Housing finance institution in India. During May 2013, Capital First Home Finance Pvt. Limited (CFHFPL), a wholly owned subsidiary of Capital First Limited (CFL), received the Housing Finance Company (“HFC”) License from National Housing Bank (“NHB”). CFHFPL is now operating as an HFC and growing its housing Finance assets gradually. In September 2013, CFL decided to close its broking business including securities broking, commodities broking and property services to focus on the core lending business focusing on the retail finance. The Company has completed the winding up of the operations related to the broking business and is in the process of surrendering its broking licenses. During FY13 and FY14, the Company scaled up all the MSME and retail finance businesses and the Asset Under Management (“AUM”) cross Rs. 10,000 Cr in the first quarter of FY15. The no of customers Financed since Inception also crossed the figure of 1.0 million during this time. CAPITAL FIRST Ltd is locally compared with Bajaj Finance Ltd, Shriram Transport Finance Ltd, Mahindra & Mahindra Financial Services Ltd, Sundaram Finance Ltd, Cholamadalum Investment & Finance Ltd, L&T Finance Holdings Ltd , Shriram City Union Ltd, Muthoot Finance, Reliance Capital, Bharat Financial Inclusion Ltd, Indiabulls Financial Services, IDFC, Edelweiss Financial, Mannapuram Finance and Globally with Ally Bank of USA, Wells Fargo of USA, Chase of USA, Toyota Capital , Capital One of USA, TD Auto of USA, Americredit of USA, American Express of USA, ICBC Leasing of China, Huarong Leasing of  China, Orix Leasing of China, Herlad Leasing of China, Societe Generale Leasing Solution of France, BNP Paribas Solution of France, De Lage Landen International B.V of Netherlands, Unicredit leasing of Italy, Deutsche Leasing of Germany, Nordea Finance of Sweden, TransFin-M of Russia, Gazprombank Leasing of Russia, Santander Espana of Spain, Banco Espirito Santo of Portugal, Asset Advantage Group Ltd of UK, Bank of America of UK, Caterpillar Financial Services of Switzerland.

Investment Rationale:
Capital First Ltd is a provider of financial service across consumer and wholesale businesses, with aspirations to grow into a significant financial conglomerate. Capital First Ltd. is an NBFC with record of consistent growth & profitability. Capital First Ltd has a comprehensive product suite to meet multiple financial needs of customers including Consumer Lending, Corporate Lending. It offers products like Loan against Property, Two-Wheeler Loan, and Durable Loan, Business Loan, Insurance, Corporate Loan. Its Investment Advisory offers its advisory services to various segments such as private equity, real estate and research. In equity segment, company advises investment manager. In real estate segment, company provides range of advisory services in area of project evaluation, land acquisition, project conceptualization and design, leasing, property management and investment exits. In Retail Financial Services, company has introduced “Future Money” which is provides financial products and services. Since inception in 2007, Future Money has expanded to 145 points spread across 30 cities. Future Money offer consumers a range of products and services such as credit, life insurance and general insurance products and Future Card. In Wholesale Credit, the company provides due diligence in various asset class such as private equity, real estate and special situations. This segment of the company focuses on the area of project and acquisition financing, and other special situations related financing and also acts a promoter. Micro, Small and Medium enterprises form a large part of the Indian Economy. They generate employment and act as a catalyst for socio-economic transformation in India. There are more than 5.77 Cr MSME enterprises across India employing more than 6.9 Cr people. MSME sector, especially the unorganized micro and small enterprises, lack in the support from the existing ecosystem, and owing to their small scale which in turn is an impediment to their growth. India has a diversified financial sector, which is undergoing rapid expansion. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The financial sector in India is predominantly a banking sector with commercial banks accounting for more than 60 % of the total assets held by the financial system. India's services sector has always served the country’s economy well, accounting for about 57 % of the gross domestic product (GDP). In this regard, the financial services sector has been an important contributor. India’s gross domestic savings (GDS) as a percentage of gross domestic products (GDP) has mostly remained above 30 % since 2004 and stood at 34.2 % in FY15. It is expected that the domestic savings in India will reach US$ 1,272 billion by 2019 from US$ 683 billion in 2013. The financial services sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs). The asset management industry in India is among the fastest growing in the world. Total asset under management (AUM) of the mutual fund industry clocked a compound annual growth rate (CAGR) of 15.9 % over FY07-15 to reach US$ 150 billion.  India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMGCII. The report also expects bank credit to grow at a compound annual growth rate (CAGR) of 17 % in the medium term leading to better credit penetration. There is a lot of scope for growth in the financial services sector with the total wealth holdings by High Net worth Individuals (HNWI) in India, which is estimated at US$ 584.5 billion, projected to reach US$ 3 trillion by 2020. Also, there is potential in the rural credit sector which can be tapped by ensuring timely loans that are critical to the agricultural industry. The total viable and addressable debt within the MSME sector is Rs. 26 lakh Cr, of which immediately addressable demand is Rs. 9.9 lakh Cr. Of this, the banking system is likely meet upto Rs. 6.4 Lakh Cr demand and balance i.e., Rs. 3.5 Lakh Cr, will need to be met by other channels such as NBFCs, etc. Over the past 2-3 years, secured SME loan or loan against property (LAP) has gained flavor and has been hard sold by banks as well as NBFCs. With banks’ corporate portfolios facing asset quality issues, they have been incrementally focusing on gaining traction in their retail portfolios. This traction was partially achieved by focusing on lending towards SME / LAP segment. NBFCs’ penetration in SME / LAP financing too is on the rise which they offer as a primary product. Apart from this, other parameters such as giving fillip to NBFC’s SME financing book are Given funding cost disadvantage and huge untapped business potential, NBFCs/HFCs have ventured into high-yield asset class such as LAP to maintain profitability; Compared to < 40 % market share in mortgages, NBFCs/HFCs account for more than 52 % of SME / LAP market; Self-employed customers account for almost 85 % of LAP disbursements, of which 75 % are non-professionals and 10 % professionals. Salaried class account for only 15 %; and Businesses’ increasing funding requirement and accessibility to financiers have prompted more customers to opt for LAP / SME financing. With an increasing awareness amongst borrowers, the secured SME / LAP segment has posted strong growth over FY12-15. Having said this, with deeper penetration and rising customer awareness, CRISIL believes that LAP / SME financing has further legs to continue to grow at 20 % over FY16-18E. People with negligible credit history faced a dearth of financing avenues since banks shied away from lending to them. It was NBFCs which stepped in and created a niche by lending to such customer segments. Further, with a strong link to the grassroots, expertise in specific asset classes and deeper penetration in rural & unbanked markets render NBFCs a critical cog in catering to this segment’s requirements. Over time and as NBFCs developed customised products and brand identity, even customer segments with credit histories like SMEs, partnership firms, etc have been shifting from banks to NBFCs. Even CRISIL in its LAP / SME report has acknowledged the rising proportion of NBFCs/HFCs within the LAP / SME financing segment’s share has jumped to 51 % in FY15 from 47 % in FY13. With an increasing pie of LAP market and rising share of NBFCs, overall latter’s share is estimated to Rs. 1.8 lakh Cr in FY17E from Rs. 1.1bn in FY15, > 25 % AUM CAGR. CAPITAL FIRST LTD, under the current management’s aegis, has structurally transformed its business model. The company has trained an unwavering focus on rationalising its wholesale financing book through selective lending, curtailing its proportion to as low as < 15 % in FY16 from 70 % plus in FY11. Leveraging on management’s DNA, CAFL, from FY11, has sharpened focus on the retail financing segment and has seamlessly emerged much stronger and dominant player and in retail portfolio clocked > 40 % CAGR over FY12-16 to Rs. 13,700 Cr. CAFL has been generating sub 10 % in ROE’s over past 5 years but it is unwarranted as return ratios are bound to be depressed at a time when the company is investing in people, processes and technology for retail transition. The company’s RoE has remained sub-optimal owing to 2 primary reasons: relatively lower NIMs; and higher cost income ratio. India’s consumption story is undisputedly one of the strongest in the world. Within that, the consumer durable story is a burgeoning opportunity with market size which is expected to catapult to Rs. 2.02 lakh Cr by FY2020E from Rs. 1.01 Lakh Cr in FY16. Such strong growth potential will be led by not only rise in per capital incomes, but also shift from unorganised to organised market, urbanisation, increase in the standard of living and reduction of replacement cycle. This analysis is also well corroborated with increasing proportion of consumer expenditure towards consumer durables (durables plus semi-durables) to 11.5 % in FY15 from 10.8 % in FY13. With rising urbanisation and break down of joint families into nuclear families, the proportion of consumer durables bought under financing arrangements is bound to surge. Such financing arrangements are offered by banks through their debit card or credit card model as well as NBFCs through additional credit. However, the latter, primarily Bajaj Finance and Capital First, have made their mark by penetrating deeper and tying up with manufacturers as well as dealers, making it almost an oligopolistic market. This is also reflected in slower growth in banks’ lending to the consumer durable segment. Recently, the company has approved fund raising via issue of rated, listed, secured, non-convertible securities in the nature of debentures (NCD’s) to the tune of Rs. 100,00,00,000 plus green shoe option of Rs. 100,00,00,000 on private placement basis. This security will be listed on wholesale debt segment of National Stock Exchange of India. The future of CAPITAL First Ltd looks promising considering limited market participants and there will be increasing room for niche NBFC’s which are fuelled with capital, deeper penetration, and technologies in place, to capture the increasing overall consumer durable financing pie. This sector enjoys oligopoly situation. While CAFL has also been focussing on building a granular LAP / SME financing book, with deepening penetration in rural areas, the company has immense potential to achieve 20 % to 25 % growth over the next 2-3 years while maintaining its asset quality at its best.  

Outlook and Valuation:
Capital First Ltd. is a systemically important NBFC with record of consistent growth & profitability. Capital First Ltd has a comprehensive product suite to meet multiple financial needs of customers including Consumer Lending, Corporate Lending. It was earlier know as Future Capital promoted by Biyani group. In 2012, Warburg Pincus acquired majority stake and infused additional capital in the company. It is managed by Mr.V.Vaidyanathan (ex ICICI) and also has 14 % stake (including options) in the company. It has a total AUM of Rs. 13,600 Cr with strong distribution network across India spanning over 222 towns and has employee strength of 1,249. It has transformed its focus from corporate to retail over last 5 years. Retail composition has increased from 10 % in FY10 to 86 % currently. It offers complete product suite to meet the financing needs of primarily its MSME customers. It also provides loans to salaried employees, professionals and corporate. Within retail it offers loans against property, consumer durable and two-wheeler financing. It has a healthy rating of AA+ for long term and A+1 for short term which along with a trustworthy promoter enables the company to raise funds at competitive rates. Company aims to increase its AUM to Rs. 25,000 Cr to Rs. 30,000 Cr in medium term with continued focus on retail loans which should also keep the spreads benign. It targets ROA of 2-2.5% and ROE of 18% in medium term. CAPF operates in a niche and less competitive SME finance market with 61 % of its AUM in SME, Two Wheeler loans is about 8 % to 9 % of its AUM and Consumer Durable Finance is about 10 % of its AUM, which together comprise 80 % of its overall loan book. CAPF provides financing for purchase of consumer durable goods like refrigerators, televisions, air- conditioners, laptops, smart phones, printers, washing machines etc. These loans are offered to salaried and self-employed Customers as well as to small business persons. The Company has spent a lot on technology and developed a credit scoring system. It collects Customer data on parameters like age, whether self-employed or salaried, type of industry one works for, number of dependents, married or unmarried, has a credit card or not, has a home loan or not etc. The score card engine, after doing thousands of combinations and permutations, provides ample judgmental score-card which enables the company to take a Credit decision within 15 minutes of a customer approaching a dealer or a store. Quick turnaround time and credit decision is biggest USP of the Company. The experience which the company has garnered cannot be easily replicated. This is a fast growing segment posting a 142 % CAGR over the past three years with a ticket size of Rs. 30,000, average loan duration of eight months and average LTV (loan to value) of 76 %. The company has tied up with leading consumer durable manufacturers and dealers including large retail value Chains across India to promote further growth in this segment. CAPF also provides financing to retail consumers for the purchase of new two-wheelers. These loans are generally availed by micro-entrepreneurs and salaried employees. It is also a fast growing segment, posting a 146 % CAGR over the past three years with a ticket size of Rs. 44,000, average duration of two years and average LTV of 70 %. The company has extensively tied up with over 900 two-wheeler dealers across Tier-1 and Tier-2 cities in India who help the company to source borrowers of such loans. This segment is expected to remain strong and expect to grow 50 % CAGR over FY15-FY18E. As a part of its strategy to exit unfocused and unviable businesses, CAPF has exited gold loan business in FY15 because of business non-viability and regulatory restrictions. Gold loan portfolio will get completely off the company’s books by the end of FY16. CAPF follows a conservative and prudent policy of matched funding for assets. It is one of the very few companies in India to follow such matched funding which gives it great asset liability stability. As a key strategy to manage healthy cash flows, the company borrows for a longer tenure than actuarial maturity period of its assets. Hence, total inflows in each maturity bucket are higher than total outflows in respective buckets, which provides the company adequate liquidity at all times. The strong ALM strategy is one of the key pillars of strength of the company on a structural basis. Floating rate loans are funded by floating rate liabilities to cover interest rate risk. Adapting a well-matched ALM also protects the NIM at a desirable level. Despite difficult macro-economic conditions, CAPF has been able to manage asset quality at a superior level, thanks to the company’s strategy of moving towards granular retail loan segment with adequate collateral as against corporate lending earlier. It has framed detailed procedures and policies for underwriting across various product categories based on credit profile of the customer. As of September 2015-end, its GNPA as well as NNPA ratio stood at 0.86 % and 0.48 %, respectively. The increase in GNPAs in 1QFY16 is because it moved to 150-day NPA recognition norm from 180-day norm earlier. The company provides for assets on a 90-day basis. If GNPAs are recognised on a 90-day basis, they will increase to 1.5 %. As per regulations, the company has to gradually move to GNPA recognition on a 90-day basis in the next two years and therefore we have factored in the increase in GNPAs accordingly. If NBFC are allowed to access SARFEASI, they will be eligible to acquire property which can enhance recovery process. CAPF’s credit process is decentralised with segregation of authority and responsibility across functions to ensure inherent checks and balances for effective risk management. To avoid any conflict of interest, the company has segregated credit policy division, origination team, credit underwriting, operations, and collection vertical. Also the loan portfolio has shifted to relatively safer segments like LAP, mortgage, two-wheelers and consumer durables as against risky developer loans earlier. CAPF follows a highly stringent underwriting process. In mortgage business, only 37 % of total applications reach the disbursement stage after passing through several levels of checks, mainly centred on cash flow evaluation, CIBIL check. Insufficient cash flow or improper documentation remains the main reason for loan rejection and accounts for 39 % of rejection of total cases assessed for sanctioning loans. With strong underwriting processes and procedures, asset quality of the company is healthy. As per regulations, the company have to gradually move to a 90-day GNPA norm in the next two years, whereas it already provides for assets on a 90-day basis. Its provisioning is far stringent than what is required by the Reserve Bank of India. It writes off two-wheeler loan or consumer durable loan if it is due for more than five months and four months, respectively. Similarly, it writes off MSME loan if it is due for more than 360 days. The company has also opted for early phased compliance of RBI regulations on higher standard asset provisioning. It has done standard asset provisioning of 0.3 % in FY15 as against regulatory requirement in FY16. Credit costs increased in 1HFY16 as the company provided an additional Rs. 9.3 Cr for writing off mortgage loans due in 360 days as against 720 days earlier. Return ratios of the company were subdued in the past on account of a change in the accounting policy and significant spending on technology. From FY13, it started amortising processing fees over the tenure of the loan as against its earlier policy of booking it upfront. After this, fee income, as a percentage of advances, dipped to 0.4 % in FY13 from 1.8 % in FY12. With normalisation of previous year amortisation, fee income, as a percentage of advances, improved to 1.3 % in FY15, which is expected to improve further. Also, the company’s policy on stringent provisioning is likely to put less strain on future profitability. With spending on technology complete, operating leverage is expected to kick in, RoA improved from 0.6 % in FY14 to 1.1 % in FY15. Similarly, RoE improved from 4.9 % in FY14 to 8.3 % in FY15. And it is expected that RoA & RoE to improve to 1.8 % & 15.9 %, respectively, by FY18E. The management has given RoA & RoE guidance of +2 % & 18 % by FY19E. Apart from the strong underwritng standards, CAFL has set its LTV on a very conservative basis—LTV is decided by the lower of the cash flow assessed eligibility or property value based eligibility—resulting in LTV of 42 % against industry norm of 60 % to 70 %. Capital is never a problem for the company as it has a backing of its strong promoter Warburg Pincus. As of September 2015-end, the company’s total CRAR stood at 20.1 % (against the RBI’s requirement of 15.0%) The Management has given guidance of no equity dilution for the next two years as the current capital is adequate for planned growth. Going forward, CAPF should continue with a strong operating performance. Being a niche player in SME and retail loans (consumer durables, two-wheelers etc), and its asset growth momentum should continue due to a favourable base effect and strong asset quality. Also, the 10 year government bonds, which are a proxy for borrowing costs for NBFC's have come down by 1.50 % from 2014, this has helped in major re rating in terms of Price to Book by up to 1 % in NBFC so lower interest rate cycle would help the company to lower its borrowing cost, which is positive for margins. 
At the current market price of Rs. 675.45, the stock is trading at a PE of 25.87 x FY17E and 19.08 x FY18E respectively. The company can post Earning per share (EPS) of Rs. 26.10 for FY17E and Rs. 35.40 for FY18E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs) 536.00971.901,411.401,849.90
NET PROFIT (₹ Cr)114.00156.90237.90323.40
EPS () 12.6017.2026.1035.40
PE (x)43.2035.6023.5017.30
P/BV (x)3.103.503.102.80
EV/EBITDA (x)14.1013.8011.7010.70
ROE (%) 8.30 9.8013.5016.30
ROCE (%)1.101.401.581.74

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Tuesday, May 3, 2016

SKS MICROFINANCE LIMITED: ADD CORE VALUE TO PORTFOLIO !!!

Scrip Code: 533228 SKSMICRO
CMP:  Rs. 616.00; Market Cap: Rs. 7,842.36 Cr; 52 Week High/Low: Rs. 607 / Rs. 360.60.
Total Shares: 12,73,11,106 shares; Promoters : 33,77,333 shares –2.65 %; Total Public holding : 12,39,33,773 shares – 97.34 %; Book Value: Rs. 82.27; Face Value: Rs. 10.00; EPS: Rs. 20.35; Dividend: 00.00 %; P/E: 30.27 times; Ind. P/E: 25.00; EV/EBITDA: 12.53 times.
Total Debt: Rs. 3,279.84 Cr; Enterprise Value: Rs. 9,684.74 Cr.

SKS MICROFINANCE LTD: SKS Microfinance Limited was incorporated in 1997 and is based in Andra Pradesh, India. SKS Micro is a non-banking financial company – micro finance institution, provides micro finance services to women in the rural areas in India who are enrolled as members and organized as joint liability groups. It offers income generation and mid-term loans to self-employed women to support their business enterprises, such as raising livestock, running local retail shops, tailoring, and other assorted trades and services. The company also provides mobile loans for financing mobile phones and telephone services; housing loans for the construction of new houses, or improvement and extension of existing houses; and gold loans secured by gold jewellry to meet short term liquidity requirements. In addition, it provides life insurance products. The company came with an IPO on July 28, 2010 with issue of 1,67,91,579 equity shares of Rs. 10 each issued at Rs. 985 per share raising Rs.  1653.97 Cr. A discount of Rs. 50 per share on Issue Price of Rs. 985 was given to Retail Individuals making their issue at Rs. 935 per share. The object of the issue was to meet future capital requirements arising out of growth in business and to achieve the benefits of listing on the Stock Exchanges. The shares got listed on August 16, 2010 at Rs. 1,040.00 making an intraday high of Rs. 1,162.00 and intraday low of Rs. 1,040.00. SKS Microfinance is among the Largest microfinance companies in India with presence across 16 states covering 1,00,000 villages. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about $30-$180) to poor women so they can start and expand simple businesses and increase their incomes. The Company’s products are categorized into proprietary products and distributor products which include; Income Generation Loans (IGL) – Aarambh, Mid-Term Loan (MTL) – Vriddhi, Long Term Loan (LTL), Solar Loan, Mobile Loans, Housing Loans, Swarna - pushpam Gold Loan, and Life Insurance. SKS Microfinance Ltd is locally compared with L& T Finance Holding ltd, Sahara Housingfinance ltd, IIFL Holdings Ltd, Shalibhadra Finance Ltd, Rajath Finance Ltd, Indiabulls Housing finance ltd, Vardhman Holdings Limited, SRG Securities Finance ltd, Equitas Holdings ltd, Ujjivan  Financial ltd, Capital First Ltd, IFCI Ltd.  

Investment Rationale:
SKS Microfinance was incorporated in 1997, it was named as "Swayam Krishi Sangham" or SKS. SKS Microfinance Ltd is the largest MFI in India in terms of total value of loans outstanding, number of borrowers, who they call members, and number of branches. SKS Microfinance is a non-banking finance company, or NBFC, registered with and regulated by the Reserve Bank of India (RBI). They are engaged in providing microfinance services to individuals from poor segments of rural India. Company's core business is providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption. These individuals often have no, or very limited, access to loans from other sources other than private money lenders that they believe typically charge very high rates of interest. SKS uses the group lending model where poor women guarantee each other’s loans. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans. SKS microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. SKS distributes small loans to poor women so they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on our collateral-free loans are more than 99 % because of this systematic process. The company offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty. It is committed to creating a distribution network across underserved sections of society in order to provide easy access to the full portfolio of microfinance products and services. It also looks at using this network to add value to the lives of its members by providing quality goods and services that our members need at less than market rates. India’s gross domestic savings (GDS) as a percentage of gross domestic products (GDP) has mostly remained around 35 % in FY15. It is expected that the domestic savings in India will reach US$ 1,272 billion by 2019 from US$ 683 billion in 2013. The financial services sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs) and bits of microfinance institutions and companies. A major portion of India’s poor population has no access to banking channels on account of lack of documentation. As a result, demand for microfinance remains strong. As per World Bank statistics, 23.6 % of the country’s population earns less than US$ 1.25 a day, whereas 59.2 % of the population earns less than US$ 2 a day. Mean household size is 4.8 members per household based on 2005-06 National Family Health survey, this is translating into 15 Cr household below the poverty line which are necessarily demand generators for microfinance sector. Assuming the average credit requirement is Rs. 15,000 to Rs. 20,000 per house-holds, it translates into overall potential industry size of Rs. 2.25 trillion to Rs. 3.00 trillion. In India, microcredit is provided by two types of institutions - one is by bank-sponsored Self-help Groups (SHGs) and other is through Microfinance Institutions (MFIs). The SHG bank-linkage model has reached out to around 9.7 Cr households through 74 lakh SHGs with gross loan outstanding of Rs. 43,000 Cr. Microcredit services provided by MFIs in a tailor-made fashion reached out to 3.3 Cr individuals with an outstanding loan portfolio of Rs. 33,500 Cr. However, the demand-supply gap remains huge. On the one hand, it requires an enabling and supportive policy and regulatory environment. On the other hand, the MFI industry has to be responsive, responsible, sustainable and scalable. MFIs have grown very rapidly at a 59 % CAGR over FY07-FY15, whereas SHGs managed only a 26 % CAGR. As a result, MFIs’ market share in microcredit went up from 22 % in FY07 to 43 % in FY15. The Operating environment deteriorated for MFIs post AP government’s ordinance impacting loan origination and collection efficiency. Some of the large MFI players in AP viz. Spandana, Share, BSFL and Asmita had to restructure their debt with banks. SKS was the only large player which was able to service its debt on time without any need for corporate debt restructuring or CDR. After the AP crisis, the Reserve Bank of India or RBI set up Malegam Committee to probe the activities and impact of MFIs across the country and to make recommendations regarding improvement in their functioning. After the Malegam Committee submitted its report in January 2011, the RBI issued a set of guidelines to cover the operations of non-banking financial companies or NBFCs functioning as microfinance institutions or MFIs in March 2012. These guidelines created a new category of NBFCs called NBFCs-MFIs and specified that all NBFCs undertaking microfinance business, having capitalisation of Rs. 5 Cr and having over 85 % or more of their exposure in ’qualifying assets’ (microfinance portfolio) should apply for an NBFC-MFI licence accordingly. Now the GNP as of non-AP MFI portfolio at less than 1% is far superior to SHGs’ GNPAs of 6.8 %. Now the Branches were brought down by 21 % in FY15 from their peak in FY11. Similarly, the number of employees was brought down by 31 % during the same period. Post FY13, branches have increased 19 % and employee count was increased by 35 %. Considering the fact that the sector’s dynamics have stabilised post regulations issued by the RBI, consolidation phase is still behind. SKS was able to survive the AP crisis as it had started early in diversifying its portfolio outside the state and raised capital through an initial public offer (IPO) just months before the AP ordinance, and also qualified institutional placement (QIP) of shares in July 2012. SKS successfully managed its debt obligations without taking recourse to the CDR route and controlled costs through downsizing. It raised equity capital several months before the IPO. Post issuance, SKS completely wrote off its AP loan book and had the necessary capital to restart growth. It again raised Rs. 400 Cr in May 2014 to support future growth. Loan growth should also be supported by higher ticket sizes and so the average outstanding loan in non-AP markets has been rising consistently over FY11-FY15, yet significantly lower at Rs. 11,434 as against maximum borrower indebtedness of Rs. 100,000 allowed for NBFC-MFIs. The Average AUM per borrower for the industry is Rs. 13,160. This limit was recently increased by the RBI, which indicates the regulator is comfortable with the rise in ticket size. The disbursement per client is also lower at Rs. 15,869 as against industry average of Rs. 16,327. It can be expected that growth in ticket size could be in CAGR of 11 % over FY15-FY18E to Rs. 12,618, as the management is targeting higher growth in long-term loans having a higher ticket size of Rs. 28,691. The proportion of long-term loans increased to 16 % in FY15 against 2 % in FY14. The proportion of long-term loans is likely to increase further with a disbursement cap of 25 % on overall disbursement. Although there are more than 45 players in the domestic MFI industry, it is dominated by top 5 players with a combined market share of over 60 % in gross loan portfolio (GLP) and disbursement. Post imposition of stringent regulations, top 5 players further strengthened their operations. Two of the top 5 players viz. Bandhan and Equitas, are concentrating on West Bengal and Tamil Nadu. Two of the other top 5 players viz, Janalakshmi and Ujjivan are urban MFIs. Thus, SKS is the only MFI with an efficient geographical diversification which has a huge network comprising 1,268 branches and 227,125 centres through which it distributes micro loans. Taking advantage of its network, it distributes those products which enhance income-generating activity of the members. Such products and services offering fee income enhance its overall RoA. SKS posted a sharp decline in AUM after the AP crisis, as it had to write down its loan portfolio in the state and higher credit losses eroded its net worth and the ability to lend in other states. While loan growth and collection in AP remains subdued, the crisis did not spread to other states. With balance sheet clean-up now over as its AP portfolio is entirely written off and access to funds both equity and debt are now improving, SKS reported strong AUM growth of 32 % in FY14 and 34 % in FY15. Its non-AP portfolio reported AUM growth of 40 % in FY14 and 47 % in FY15. Given the low penetration and strong underlying demand, it can be expected that in FY15-FY18E, disbursement and AUM CAGR could be at 33% and 40%, respectively. The company firmly believes that Technology is one of its biggest differentiator in the industry. It has designed and deployed a web-based Business Intelligence portal using state-of-art technology and a highly flexible and scalable platform to support the business growth and operations and has also built an integrated and encrypted MPLS communication network encompassing a world class Data Centre delivering mission critical services and enhancing collaboration across the organization.  

Outlook and Valuation: 
SKS Microfinance Limited is an India-based financing company. The Company is engaged primarily in providing microfinance services to women in the rural areas of India who are enrolled as members and organized as Joint Liability Groups (JLG). The Company has its operation spread across 15 states. The Company’s segment includes lending to members. SKS Microfinance is the largest microfinance company in India in terms of gross loan portfolio. Its core business is providing small value loans and other basic financial services to its customers, who are predominantly located in rural areas. The company extends loans to them mainly for use in small businesses or for other income generating activities and not for personal consumption. India is home to 21 % of the world's unbanked adults and about two-thirds of South Asia's. 
Indian microfinance industry is dominated by NBFCs-MFI with an 88 % share of the market. Though Indias account penetration increased from 35 % to 53 % between the year 2011 and 2014, it is still low when compared to other BRICS countries. RBI guidelines in 2011 stipulate that all for profit microfinance institutions in India should operate as NBFC-MFIs. Not for profit institutions can operate as trusts or Section 25 companies. The microfinance sector in India witnessed rapid growth in the value of outstanding loans post 2000-01 once RBI granted priority sector status to bank loans advanced to MFIs. In Union Budget 2016, the government announced setting up Micro Units Development and Refinance Agency (MUDRA), which will act as regulator for MFIs and also provide them refinancing services. MUDRA will have a corpus of Rs 200 billion and serve as a regulator for MFIs and provide them refinancing services. It will be financing cooperative banks, MFIs, regional rural banks, etc., at cheaper cost than bank funding. Incorporation of MUDRA is expected to be a major growth driver for the industry as it will bring the much needed uniformity in regulations and provide the required funding support at cheaper cost as currently MFIs are heavily dependent on higher cost funds from banks. Government of India, the Reserve Bank of India (RBI) and banking system are striving to further the financial inclusion agenda. The RBI has identified that the strategy to realise this goal will comprise of a mix of conducive policy environment, use of innovative channels-technology and optimal utilisation of the BC model. Financing needs in India have risen with the notable growth recorded by the economy over the past decade. Along with Banks and Financial institutions, NBFCs play a major role in meeting the need for financing needs of entities across the segments. To their credit, NBFCs help fill the gaps in availability of financial services with respect to products as well as customer and geographical segments. A strong linkage at the grassroots level makes them a critical cog in catering to the unbanked masses in rural and semi-urban reaches, thereby enabling the government and regulators to achieve the mission of financial inclusion. The RBI guidelines have been instrumental in restoring confidence in lenders and investors, improving the inflow of both equity and debt to the sector. MFI’s has strong moat due to stringent regulations by the Reserve Bank of India (RBI), which has improved transparency and mitigated political risk. Further, the setting up of credit bureaus and geographical diversification of its loan portfolio has kept credit risk under check. JLG model has tremendous strength of its own, with peer pressure acting as a biggest deterrent for group members to default. Despite pruning its non-AP loan portfolio, collection efficiency in those markets was at 97 %, dispelling ever-greening myth. Currently, the spread is capped at 10 % and operating expenses are very high and, therefore, larger and established companies have an advantage over new entrants, given their scale of operations. With the restriction on lending - like not more than two MFIs can lend to the same borrower - new players will find it difficult if the new territories are dominated by two or more strong players. Also there’s an entry barrier to as the spread is capped at 10 %, it is crucial for microfinance players to contain their operating expenses in order to enjoy decent RoA. Microfinance is a manpower-intensive business involving cash disbursement and collection, and frequent interaction with customers. Given the higher operating expenses involved in loan origination and collection, larger and established companies have an advantage over new entrants; given their operating scale and being adequately capitalised SKS has been able to raise equity capital in a timely manner. Also not more than two MFIs can lend to the same borrower, so the Players intending to enter unrepresented geographies will find it tough to get ample borrowers if new territories are dominated by two or more strong players. As a result large players like SKS with a strong presence across states with a reasonable vintage branch will significantly benefit over smaller players. Even without utilising the forbearance given by the RBI for its AP loan portfolio, its capital adequacy ratio has always been higher than the minimum regulatory requirement of 15 %. RBI has recently increased disbursement and intentness limit, which indicates the regulator is comfortable with the rise in ticket size - for disbursement cap in first cycle earlier cap was Rs. 35,000 now it is Rs. 60,000; for Disbursement Cap in Second cycle first the cap was Rs. 50,000 now it is Rs. 1,00,000; Indebtedness of borrower was Rs. 50,000 earlier now it is Rs. 1,00,000; Annual Income of rural household cap earlier was Rs. 60,000 now it is Rs. 1,00,000 ; Annual Income of urban household ca earlier was Rs. 1,20,000 now it is Rs. 1,60,000; Loan for income generating purpose cap earlier was 70 % now it is 50 %. SKS Micro follows very stringent norms laid by RBI NBFC-MFI which classifies assets as Standard asset for 0 to 90 days whereas SKS compliance standard asset it at 0-60 days; for substandard asset -  RBI lays 91-180 days whereas SKS has 61-180 days;  for Loss Asset- more than 180 days whereas SKS also has same more than 180 days. For provisioning the norms by RBI for standard asset is 1 % of overall portfolio reduced by provision for NPA (if provision for NPA < 1 % of overall portfolio) whereas SKS has 0.25 % to 1.00 % depending on NPA, or as stipulated by RBI whichever is higher; for Substandard asset RBI has 50 % of instalments overdue whereas SKS has 50 % of outstanding principal; for loss asset RBI has 100 % of instalments overdue which also SKS follows as 100 % of outstanding principle-write off. So being much capitalised and RBI compliant, SKS looks forward for small bank licence, after the final guidelines released by the RBI for small-finance banks, SKS is one of the applicants for getting a licence for small-finance bank under section 22 of Banking Regulation Act, 1949. Given the regulatory requirement that a minimum of 75 % of loans disbursed of a total small bank’s loan portfolio must be priority sector loans, SKS is the ideal candidate for a small bank licence as 100 % of its portfolio complies for priority sector. SKS will benefit in various ways. It can leverage its network and raise deposits, thereby lowering its funding costs and also enable the company to diversify its funding structure. It will also help the company in mitigating political risk by eliminating state government intervention. For SKS rate cuts have been supported by a declining cost of borrowing; the marginal cost of borrowing on balance sheet, including processing fee was 10.9 % as of Q3FY16, a 0.60 % lower than the weighted average cost of borrowing. The drop in lending rates has enhanced the company’s competitiveness vis-à-vis other players. The Fee income from cross-selling and business correspondence grew 8 % q-o-q and 65 % y-o-y. So looking forward SKS Microfinance could have AUM growth over 40 %, and can easily command price to book of 3.5x on book value of Rs. 184 FY18. With successful listing of Equitas Holding Ltd and with forthcoming of another MFI Ujjivan financial services would freshen up the interest in already listed and best performing SKS Microfinance Ltd. Ujjivan financial services Ltd is asking for PE of 19.80 times on FY15 profits, and Ujjivan’s diluted EPS for 9 month FY16 was Rs. 13.37 which takes its annualized EPS to Rs. 17.80 and at offer price of Rs. 210 this translates into PE of 11.80 times. But when we look at the exposure Ujjivan has 28 % rural exposure and 72 % in Urban while SKS Microfinance has 80 % of rural and 20 % Urban, so better rainfall could benefit SKS more. As for Collection Ujjivan does this on monthly basis and for SKS Micro does it on weekly basis, the lending rates is 23 % by Ujjivan and SKS Micro has 20 %. The average ticket size for Ujjivan is Rs. 19,884 while for SKS Micro its Rs. 15,869. At the current market price of Rs. 616.00, the stock is trading at a PE of 26.55 x FY16E and 17.80 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 23.20 in FY16E and Rs. 34.60 in FY17E. The company plans to change its name from SKS Microfinance Ltd to "Bharat Financial Inclusion Ltd", the company's core business has gone into a transformation and the new name will reflect thie new change complementing the role in fulfilling the national priority of financial inclusion, the new name is subect to regulatory approvals.It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs) 524.00802.701,166.101,525.40
NET PROFIT (₹ Cr)187.80295.00439.00564.90
EPS () 14.9023.2034.6044.50
PE (x)38.0024.4016.4012.70
P/BV (x)6.805.404.003.10
EV/EBITDA (x)16.57 11.97 10.24 9.08
ROE (%) 24.90 24.7028.1027.40
ROCE (%)3.904.304.604.20

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*As the author of this blog I disclose that I do not hold  SKS MICROFINANCE LTD in my any of the portfolios.


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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  
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