SKS Micro Finance - Nothing Micro About It

SKS Micro Finance (SMF) that started in 1997 as a public society in the form of an NGO, Swayam Krishi Sangam (also known as SKS Society or SKS NGO) has now metamorphosed into the largest micro finance institution (MFI) in India and the fastest growing MFI in the world. For the period ending FY10 Company has 6.8 million individuals as its borrowers or some 20 per cent of all MFI clients in India.   The company is now entering the capital market with an initial public offer of 1.68 crore equity shares of face value of Rs 10 each in the price range of Rs 850-985 per equity shares. There has been discount of Rs 50 for retail investors and one can apply only at multiple of seven shares. Out of this total issue fresh issue will be of 0.74 crore and offer for sale. This will constitute 23 per cent of fully diluted post issue paid up capital of the company. Through this issue company intends to raise Rs 1427 crore and Rs 1654 crore at lower and upper price band respectively. The fund so raised will mainly go to persons who are offering their share for sale and rest amount will be utilized for augmentation of capital base to meet future capital requirements, arising out of growth in business going forward SMF is operating in a very under-penetrated market, it is estimated that micro credit market is about Rs 240000 crore at the end of 2008 and total outstanding portfolio of different micro finance company was at just Rs 45200 crore indicating that roughly only 20 per cent of the market is penetrated. The entire industry is growing at rate of more than 30 per cent in last three years, hence market leader like SMF are definitely going to grow at similar or slightly higher rates due to owing to its large scale.

But whether these statistics justifies the offer price at which company is tapping the capital market? The offer price of Rs 850-950 gives market cap to sales of 6.4 – 7.4 times at lower and higher price respectively which looks little stretched. Since there are no comparable peers we compared it with one of the best financial institutions in India that is HDFC Bank, which is trading at 5.98 times. Even if we compare it with other parameter of price to book value, it again is on higher side of the valuation. The price to book value SMF will come around 4.4-5 times post equity expansion against 4.5 for HDFC Bank.

Despite such higher valuation we ask our retail investors to subscribe at lower price band. The reason for this is SMF’s strong financial position with healthy margins including good asset quality (NNPA of just 0.33 per cent), comfortable capital adequacy ratio (28.32 per cent) and better returns on equity and assets of 18 per cent and 4.9 per cent respectively. Apart from this we feel there is huge market which is  still not tapped and company’s CAGR of 205 per cent in topline between FY06-10 justifies the valuation.