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Friday, May 13, 2016

EVEREADY INDUSTRIES INDIA LTD : CHARGE UP YOUR PORTFOLIO !!!

Scrip Code: 531508 EVEREADY
CMP:  Rs. 239.95; Market Cap: Rs. 1,744.13 Cr; 52 Week High/Low: Rs. 375.00 / Rs. 192.25.
Total Shares: 7,26,87,260 shares; Promoters : 3,19,90,995 shares – 44.01 %; Total Public holding : 4,06,96,265 shares – 55.99 %; Book Value: Rs. 85.95; Face Value: Rs. 5.00; EPS: Rs. 7.17; Dividend: 00.00 %; P/E: 33.46 times; Ind. P/E: 23.85; EV/EBITDA: 15.15 times.
Total Debt: Rs. 207.27 Cr; Enterprise Value: Rs. 1,949.22 Cr.

EVEREADY INDUSTRIES INDIA LTD: The Eveready Industries India Ltd (EIIL) was incorporated in 1934, but its journey started in 1905 in India, whiles the company and became a part of the Williamson Magor Group in 1993. In 1994 the Williamson Magor Group through McLeod Russel (India) Limited bought 51 % of the equity shareholding of Union Carbide India Limited. The company was renamed Eveready Industries India Limited in 1995. The company manufactures and sells dry batteries and allied products, flashlights cases and parts, zinc alloys, strips & plates, Stellite super alloys, cinema arc carbons, carbon electrodes & electrolytic manganese dioxide and cultivation, manufacturing and selling of tea. The company came with an IPO of 32,94,500 equity shares issued at a premium of Rs. 6 per share in 1978. The company till have has declared bonus in the year 1980 in the ratio of 1 new share for every 2 held. The tea division McLeod Russel India Limited was merged with Eveready Industries India Limited to form a new company with two Divisions—the Bulk Tea Division (which managed the tea estates of McLeod Russel) and the Battery Division (which produced and marketed the popular Eveready batteries and flashlights). In April 2004 Eveready Industries de-merged the two divisions into McLeod Russel India Limited (Bulk Tea business) and Eveready Industries India Limited (Dry Battery business). The company launched lanterns with portable rechargeable products in 2012 and in 2015 it launched India’s brightest ever 8W LED bulb. EVEREADY INDUSTRIES is locally compared with Indo National Ltd, Panasonic Energy India Co Ltd, Khaitan Electricals Ltd, High Energy Batteries India Ltd, Exide Industries Ltd, HBL Power Systems Ltd and globally compared with Duracell Inc of USA, Hitachi Maxwell Ltd of Japan, EuroForce Battery Co. Ltd of China, Panasonic Corporation of USA, Cell-Con Inc of USA, China Nice-Power Group of China, Chung Pak Battery Works Ltd of Hong Kong, Sharp Corporation of Japan, Sony Corp, Eurobatt Sp Zo.o. of Poland, GBT German battery Trading GmbH of Germany, Energizer Holdings of USA, Leclanche S. A. of Switzerland.     

Investment Rationale:
Eveready Industries India Ltd. is an India-based company engaged in the business of marketing dry cell batteries, rechargeable batteries, flashlights, packet tea and general lighting products. The Company offers products, including dry cell batteries, flashlight (torches), and lighting and electrical products. The Company's products are available under the brand name EVEREADY. The Company offers alkaline batteries, EVEREADY ULTIMA; rechargeable batteries, EVEREADY RECHARGE; brass torches, EVEREADY JEEVAN-SATHI; light-emitting diode (LED) flash lights, EVEREADY DigiLED, and packaged tea, including EVEREADY PREMIUM GOLD, JAAGO and TEZ. The Company has distribution network all over India with around 15 branches. The Company's manufacturing units are located in Kolkata, Noida, Uttaranchal, Chennai, Lucknow and Maddur. The Company also has its own flashlight design and development unit. It has packaging unit for packet tea at Chuapara tea estate. Eveready currently has six manufacturing plants across India with 15 sales offices. Distribution footprint includes 4,000+ distribution pints and a reach of 32 lakhs outlets. Its Brand power clubbed with vast distribution network gives Eveready a leadership in market despite it charging 5 % to 20 % premium in battery business. Eveready’s market share continues to be the highest at 52 % in the organized dry battery industry due to its strong brand recall. Company’s consistent investment of 5 % of sales in advertisement campaigns during the last 10 years has created a strong brand recall for itself. Further, its vast network of 32 lakh outlets across the country covers almost 45 % of the FMCG distribution universe and 70 % of the battery outlet universe. Post completion of transition from D-Size to AA-Size, the company has led the price increase in the battery business, with 23 % realization improvement over FY13-15 and a recent hike of 5 % in September 2015 improved its EBITDA margins from 3.9 % in FY12 to 9.7 % in FY15. Digitization will drive its volume growth in battery business. The India’s per capita consumption of batteries is very low a mere 2 units p.a as against 10 units p.a. of China’s. Indian dry cell batteries market is estimated at 280 Cr pieces in volume and Rs. 1,600 Cr in value. As per the digitization plan, sales of set top boxes are expected to be 12.4 Cr in FY17 and around 15.1 Cr in FY18; this shall lead to strong demand for AA batteries. The TV remote segment is the biggest consumer segment which accounts for 40 % of the total consumption of batteries; growing at 20 % p.a on the back of digitization followed by flashlights which has 25 % share. In the case of LED flashlights, the trend is moving from 0.1W to 0.5W and 1W LED lights as a result, replacement cycle has reduced from 100hrs to 30-40hrs; this will lead to increased demand for batteries. Wall clock has a 25 % share, which is growing at slow pace. The last category includes toys and games, which is a very nascent category at 3-4 % of the share. Compared with China’s per capita consumption of 10 batteries per year, India’s per capita consumption is a mere 2 batteries. Thus, there is considerable scope for growth in the battery market. In recent years low-priced Chinese batteries have been taking away larger pie of this opportunity in the primary sales, but demand for Eveready continues to remain strong in replacement market, where it has maintained its market share. The LED-based lighting industry is expected to grow at 36 % CAGR to Rs. 21,600 Cr over 2014-2020, as per a report by ELCOMA. The growth in LED is on the back of shift from CFL and incandescent bulb towards LED due to energy efficiency and cost savings. Eveready  is well placed to capitalize on the LED opportunity on account of increasing its presence in electrical outlets from 30,000 to 60,000 outlets, tie-ups with online players, dedicated 70 % of total advertisement spends on LED, set up of own manufacturing facility which shall help to save Cost of Goods Sold of 5 % and participate in government tenders. The industry is characterized by high competitive intensity, with new entrants like Syska which has the market share of 21 %, established players like Phillips which has little lower share than Syska, while Bajaj, Havells and Eveready share would be 7 % each and many unorganized players in LED market. Flashlight is the second biggest contributor to Eveready’s revenue at 19 % in FY15. The company has leveraged the ‘Eveready’ brand to build its flashlight business and now enjoys 70 % market share in the organized flashlight market. The company has a wide product portfolio in the segment, catering to almost all price points and market segments. Another key advantage that Eveready enjoys is that it has been an early innovator and first mover in several key products. The company was an early mover in the LED torch segment, and introduced Digi LED technology in torches. Recently, Eveready announced the launch of economy range of flashlights which is estimated to be Rs. 250 Cr to Rs. 300 Cr market. The total Indian dry battery is estimated at 280 Cr pcs and has grown at 4 % CAGR over FY11-15. In FY15, the organised players constituted about 91 % and unorganized players mainly low priced imports from China constituted around 9 % of the total market. The Indian dry battery market is mainly dominated by three players, led by Eveready Industries Ltd which has a market share of 52 % in volume terms, also it’s the highest in the segment under its strong brand name ‘Eveready’ and Powercell’, followed by Indo National under the brand ‘Nippo’ and Panasonic Energy under the brand ‘Panasonic’. Chinese batteries are available at 1/5th the price of Indian batteries i.e. Rs. 2 pc as against Rs. 10 to 4 pc. The share of unorganized players was negligible during the period 2002 to end of 2013 as anti-dumping duty was applicable on Chinese import. Post removal of the anti-dumping duty the share of unorganized players has gradually increased to 9 %. The Carbon zinc is the dominating category in India’s dry battery business about 97 % share, followed by alkaline about 2 % and rechargeable about 1 %. The key difference between Carbon Zinc and Alkaline battery is the type of electrolyte used due to which the Capacity of alkaline battery is higher compared to carbon zinc and the shelf life is also higher. In a price-sensitive market like India, carbon zinc batteries are generally preferred for low-drain items like remote controls, clocks, flashlights and low-end toys whereas alkaline batteries are preferred for high-drain items like gaming consoles, digital cameras, MP3, radio, wireless mouse and high-end toys. However, in practice in India, carbon zinc batteries are used even in high-drain items owing to the prohibitive cost of alkaline batteries which is an AA alkaline battery costing Rs. 35 pc compared with Rs. 10 to Rs.14 pc for an AA carbon zinc battery. Eveready is present in all the three battery segments, reflecting the same pattern of mix as the industry. The company’s ‘Give Me Red’ campaign in the early 90s caught the imagination of people and irreversibly powered the brand into the consciousness of Indian audience, who came to associate the company’s batteries with Red colour. The campaign received a new fillip when Eveready signed the famous Bollywood action hero Mr. Akshay Kumar as its brand ambassador to promote the company’s LED business. Eveready has been regularly invested in advertising and sales promotion to maintain its brand strength. Eveready is amongst the best quality product in the market at the most in-expensive pricing which has also been well captured in its advertising communication and this will give the company an edge over the competitors. Company has been fairly pro-active in terms of building up the distribution network for the business and has been working hard to establish a pan-India presence in the electrical outlet channel in the coming years. It has already established a direct reach of 30,000 outlets and aims to cover the entire universe of 90,000 outlets soon. This will enable the company to reach out to more consumers, giving the brand more visibility and help to boost the growth. Eveready’s marketing strategy is targeted towards leveraging the mega brand “Eveready” which already has a strong consumer connect in the lighting, flashlights and batteries space and this will provide the company an advantage over its competitors. “Everyready” is one of the most best and cost effective in its products. Its 100 lumens per watt costs Rs. 449 whereas for Phillips its Rs. 599 for 86 lumens watt; for Syska it is Rs. 599 for 93 Lumens per watt; for Bajaj it is Rs. 485 for 86 Lumens per watt; for Halonix its Rs. 550 for 86 lumens per watt; for Surya its Rs. 600 for 80 lumens per watt, for Havells its Rs. 600 for 74 lumens per watt and for Wipro its Rs. 650. This cost effectiveness helps Eveready to bid for government projects. Eveready recently bid for Madhya Pradesh government LED bulb tender which is its first tender in government order. It has been declared L2 and expects order of 70 Lakhs bulb pcs to be executed over 6months. The bid price is Rs. 64.6 per LED bulb and its impact on revenue is expected to be seen in 1Q and 2QFY17. As per industry sources, the total LED tender opportunity available in next 12months stands at 15 Cr pcs of bulb which will be either in 7W or 9W category. The company intends to participate in more such orders during FY17. The company also intends to set up its own manufacturing unit in the form of a JV with a domestic player by January 2016 and this will reduce costs by 5 % to 6 % and ensure its steady supply. Brand recall value, new launches, cost effectiveness, raising demand and government bids will ensure stable growth for Eveready and better margins will protect its profits and in all Eveready is all set to take advantage of new trend to use fuel efficient bulbs and appliances.  

Outlook and Valuation:

Eveready Industries Ltd has a well-diversified product portfolio spanning four products, with strong leadership in two key products segments such as batteries which has 52 % market share in the 2.7 bn pieces Indian battery market and in flashlights it has 75 % market share of the 35mn pieces Indian organised flashlights markets. It commands premium pricing over its peers driven by regular brand building exercise and vast distribution network of around 32 lakh outlets. Company’s battery segment contributes 60 % to revenues, flashlights contribute 19 % to revenues, lighting and electrical contribute 15 % to revenues while packet tea contributes balance 6 % to the revenue. Eveready will launch at least 19 products, such as ceiling fans, electrical kettles and mixer-grinders, which will be contract manufactured in China and India. Eveready will be launching at least 60 products over the next three months. Though it will position itself as a “value-for-money brand”, Eveready will split its home appliances between two categories: popular and premium. Put together, the company expects the category to yield an operating margin of around 10 % -12 %. The Rs. 15,000 crore home appliances market is fragmented and even a 2-3% share of the market will give a huge fillip to Eveready’s revenue and profitability. The company has so far been selling batteries, flashlights, LED bulbs and packet tea. Eveready has for long been trying to expand its product portfolio to get the most out of its pan-India distribution network and brand recall. Eveready’s existing distribution network should be able to sell at least 25 % of these new products. A bigger driver of sales is expected to be digital marketplaces. At least 30 % of home appliances currently sell through e-commerce platforms. The company is eyeing a 4-5% share of the home appliances market in three years. The sale of these goods in India is expanding at around 15 % a year. Eveready Industries may sell assets like land as well as close off some of its unproductive plants to cut costs and raise funds for its new diversification in response to continuing Chinese dumping. The company is looking to monetise surplus real estate in next two years. The company had a land bank comprising of properties in Noida, Kolkata, Lucknow and Hyderabad, which would be monetised depending upon market conditions. Eveready, which so far has been financing its foray into LED lighting category from internal accruals, now need money to fund its recent diversification into electrical appliances. The company will continue to invest heavily in brand building in the LED business that would help it to command a position among the top three players in the category. Eveready currently has plants at Taratola Road, in Kolkata, Tiruvottiyur in Chennai, Noida in UP, SIDCUL industrial estate in Haridwar, KIADB Industrial Area in Karnataka, Aishbag in Lucknow and at Vaikadu in Chennai. And are setting up a 400 million battery plant which would get completed by March 2017. As the north east still enjoys excise duties and IT exemptions we see a payback of three years for this investment. This gives them the flexibility of shutting down some of our older plants which run at higher costs. The unorganised segment, primarily cheap Chinese imports, has been rising for the past two years after the removal of the long-standing anti-dumping duty. Its share in the industry has risen from 7 % to 9 % over the past few quarters. As a result, even though the ‘AA’ and ‘AAA’ segments are growing at 6 % to 7 % and 13 % to 15 %, respectively. While the Eveready batteries business will continue to be the largest contributor to revenue and profits over the next few years, the new LED business should provide additional growth over the long term. As a result, it can be expected that the company can deliver a 35 % EPS CAGR over FY15-17F. The company has announced a capex of Rs. 100 Cr for shifting its battery manufacturing to Assam by March 2017 in order to enjoy excise and tax benefits. The management expects a payback after 2.5 years. A part of the capex will be funded through debt, though Eveready also has plans to monetize certain assets within 18-24 months, which will raise a similar amount as the required capex. On financial side Eveready Industries’ posted moderate 4QFY16 numbers. Its revenue grew moderately by 3 % to Rs. 283.3 Cr on account of a flattish growth in the battery business and decline in flashlights, which was compensated by a healthy growth in the LED business. Its EBITDA reduced its growth 39 % to Rs. 13.7 Cr while EBITDA margin declined by 2.20 % to 4.8 % mainly due to a mark down of LED bulb inventory and higher advertisement & promotional spend. According the management, there was a sharp decline in LED bulb prices in 4QFY16, which led to the mark down of old LED bulb inventory. Eveready’s battery business, which contributed 57 % of its total revenue in FY16, remained flat during the year due to the import of cheap Chinese batteries. As per management, there is a high possibility of anti-dumping duty being levied by the end of 1HFY17 and if this happens, then domestic battery companies are likely to record high growth and margin expansion. The lighting and electrical segment grew by 46 %, driven by LED and will remain in the high growth trajectory, helped by government order of 70 lakhs bulbs to be executed in FY17. Given this, Eveready will trade closer to FMCG multiples rather than capital goods companies such as Havells. Eveready will be able to deliver consistent mid-teens revenue growth over the medium term with possibility of driving some margin improvement as well. This will mean that the company’s earnings growth is more likely to be closer to the FMCG sector which is another factor which will mean the trading multiples will eventually be closer to the FMCG average. Eveready Industries has been able to build a strong brand over a long period which is clearly visible in the pricing power that the company has. The company will be able its sustain its leadership 52 % market share and enjoy competitive advantages in the battery segment. Robust growth in LED business, opportunity to diversify into new product categories like small home appliances backed by its brand power and vast distribution network, margin expansion, high RoCE and cash flows makes Eveready Industries an attractive play in the given sector. At the current market price of Rs. 239.95, the stock is trading at a PE of 27.58 x FY16E and 19.99 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 8.70 in FY16E and Rs. 12.00 in FY17E. 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) 1,278.901,323.301,532.601,773.90
NET PROFIT (₹ Cr)48.9050.6075.55109.00
EPS () 8.508.7012.0016.70
PE (x)28.7028.3020.4014.60
P/BV (x)2.902.702.502.30
EV/EBITDA (x)16.1015.9012.609.70
ROE (%) 10.20 9.8012.8016.30
ROCE (%)13.5013.8017.2020.00

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*As the author of this blog I disclose that I do not hold  EVEREADY INDUSTRIES 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. 


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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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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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