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| Churning profits from rural hinterland |
| Sarath Chelluri / Mumbai Jul 30, 2010, 00:45 IST |
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Swayam Krishi Sangam (SKS) Microfinance is a microfinance institution (MFI) providing smaller loans exclusively to poor women. The loans are provided for use in income-generating activities (trade, services, livestock and agriculture) located in rural areas. With around three-fifths of business coming from the states of Andhra Pradesh, West Bengal and Karnataka, SKS has emerged as a leading MFI with around 21 per cent market share in terms of loan disbursements.
The company has come out with an initial public offer (IPO) of 16.8 million shares, including an offer for sale of 9.3 million shares. The fresh issue of 7.4 million shares will see SKS raise Rs 630-730 crore and augment its capital base to meet future business growth demand.
Rural-centric growth
Players like SKS came into existence to fill the vacuum between commercial banks and local money lenders. According to estimates, the current total micro-credit demand in India stands at $51.4 billion and the cumulative disbursements made by MFIs and self-help groups is at $4.3 billion. This demand-supply mismatch not only ensured faster addition of clients (50 per cent) but healthy growth of about 85 per cent in loans between 2007 and 2009 for the industry.
SKS managed to outdo the industry with about 150 per cent growth in client addition and 200 per cent in loans. Considering the large proportion of unbanked rural poor (penetration of just 10-15 per cent) and increasing demand for financing agriculture and related activities, the pie is large enough for all participants to achieve robust growth.
| ROBUST FINANCIALS |
| in Rs crore |
FY08 |
FY09 |
FY10 |
| Net Interest Income |
106.0 |
312.0 |
585.0 |
| Other Income |
7.5 |
47.9 |
85.4 |
| Operating profit |
33.2 |
137.5 |
319.4 |
| Net profit |
16.6 |
79.7 |
174.8 |
| EPS (Rs) |
5.4 |
16.1 |
27.5 |
| Source: RHP |
| ISSUE DETAILS |
| Size (Rs cr) |
1,428-1,655 |
| Price (Rs) * |
850-985 |
| Opened on |
28-Jul |
| Closes on |
2-Aug |
| CARE Rating |
4/5 |
| * Excluding retail discount of Rs 50 per share |
SKS typically lends at 25-28 per cent which – after accounting for cost of funds (8-10 per cent), operating cost (about 10 per cent) and other provisions – lead to net interest margins of over five per cent, one of the best in the financial sector. While such high margins could attract competition, its unique business model acts as a huge entry barrier.
Besides traditional loan product offerings, SKS is using its huge employee base (21,000 employees) and branch network (2,000 branches across 19 states) to cross-sell other financial products. It has entered into strategic alliances with the likes of Bajaj Allianz (distributed 2.9 million insurance policies), HDFC (709 $2.5-million pilot housing loans) and Nokia (140,000 mobile phone loans disbursed), for which it earns a fee-income (its share in total income has doubled to 13 per cent in 2009-10 over the last two years).
Further, the company recently obtained RBI’s approval to market and distribute mutual funds as an agent for an initial period of two years.
Investment rationale
On the back of a robust demand, SKS’ financials have grown rapidly in the last four years and are impressive. SKS’ business strategy of lending to a group of people in a village (wherein each of the members act as a guarantor for the other) ensures that defaults are very limited. This has ensured a tab on the asset deterioration — net non-performing assets (NPAs) stood at just 0.16 per cent.
However, as it scales up further in the coming period, maintenance of asset quality will be a key issue for the firm. Also, investors should note that risks also emanate from natural calamities, wherein the entire group of people could default consequent to loss of income.
The IPO pricing, however, is not cheap (a price-to-book value of 3.5 times, based on its estimated 2010-11 post-IPO book value at the lower price-band). This is higher than other listed banks, NBFCs (HDFC is trading at about four times) and smaller listed MFIs like SE Investments.
To sum up, SKS’ proven business model, growth prospects, superior margins and return ratios provide comfort and should ensure profitable growth. Invest with a two-year perspective.
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