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Tuesday, May 3, 2016


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. 

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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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.  




  1. A very detailed and in-depth post! Highly informative.
    Thanks for sharing Bhavikk Ji. Wish u a great week ahead. :)

  2. Every time you post something is very long but totally profit having ............

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  3. yes sir...keep posting ... thanks

  4. Interesting to know about the MFI & SKS, thanks Bhavikk :-)

  5. Delighted to see such a detailed analysis about SKS Microfinance stock. I am holding minimal quantity of this stock and will like to add more, especially after reading the information that you have shared about the company. It really helps to make informed investments and I would like to thank you for the same. Also, visited your other post on Info-Edge, and now both these stocks are on my radar as well. I would be frank to you, that I didn't think there was any other blog that offered such detailed analysis other than But, I was wrong and I am glad to have found this blog in addition and now I can learn and earn from two different blogs. Thanks once again!

  6. your analysis and tips are looking really good keep up the good work it helps investors in making their decision

  7. Really very handy information a profit can be made in equity market by this ......

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  8. Micro finance is a booming sector in India. It is a very good source of funds for small scale business. Even RBI supports these NBFC's. A very useful information is posted here. I am using stock tips of epic research from long time. It has always benefited me with profit.


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