SKS Microfinance - In Choppy Waters

SKS Microfinance, India’s only listed microfinance lender, was supposed to pave the way for other microfinance lenders to approach the capital market to raise money. The debut was well-scripted and became the country’s most high-profile stock market listing last year. The stock went up to Rs 1,490 within one month of listing, yielding a return of 51 per cent on its issue price of Rs 985. However, what followed next was not something that anyone had expected. The strategy did not pan out as visualised and every-thing simply went haywire. The stock is currently trading at Rs 368, down by 75 per cent from its lifetime high and 62 per cent from its issue price.

The immediate fall in the share price of SKS was triggered by a recent report by J P Morgan Chase that slashed the target price of SKS Microfinance’s stock to Rs 200 from Rs 550. The reason given was a weakening of the business model due to regulatory changes making its business less profitable. In an earlier article, we at DSIJ had, in no unclear words, predicted this turn of events. “Going forward, higher spreads enjoyed by the company (for Q1FY11 it was 6 per cent) may come down. Another major macro incident which might ham-per SKS’s profitability is a possible cap on interest that can be charged by the company, though nothing concrete has been done yet. But the recent case of suicides and assaults related to MFI clients may expedite the process,” is what we had stated.

The most important regulatory change affecting the MFIs that occurred after the listing of SKS was the acceptance of the Malegam Committee report that, among other provisions, capped the interest rate MFIs can charge borrowers at 26 per cent, and their margins at 12 per cent. Even Andhra Pradesh, which accounts for a quarter of the total business of SKS, has introduced an ordinance that requires MFIs to take government approval before granting a loan, bans weekly collection of dues, and stops lenders from collecting instalments from a borrower’s house. This has made recovery very tough for the company and it dropped to 10 per cent from more than 90 per cent earlier.

All this has impacted the financial performance of the company and its Q4FY11 results stand testimony to that. The topline of the company decreased by 27 per cent on a yearly basis and was Rs 187.66 crore. Whereas at the operating level the company posted a loss of Rs 20.73 crore against a profit of Rs 129.26 crore in the same quarter last year. The reason for such a loss apart from lower income was the new provisioning norms by the RBI according to which if an MFI does not receive interest income for three months, it has to provide for 10 per cent of the loan amount. For the quarter ending March 2011, SKS put aside Rs 106.21 crore under provisions against only Rs 15.24 crore provided at the end of Q4FY10.

Even the bottomline of the company saw a sharp decline and it posted loss of Rs 69.77 crore against profit of Rs 62.89 crore during the corresponding period. Going forward we do not see the situation improving much as the management itself expects some more pain due to higher provisions for bad loans. Though the company is trying to put up a brave face and is seeking to turn around earnings by diversifying into new products like loans against gold, loans to grocers and consolidating its customers, we believe it will take some time and a lot of effort before any meaningful turn-around happens and hence would like to recommend that you should stay away from this scrip.