Analysis: SKS Micro's turnaround won't be easy

The shortfall between its costs and income is likely to continue for the foreseeable future and fresh equity infusion is a possible route to profitability

For those who were expecting wonders from the new management at SKS Microfinance, the wait has just got longer. SKS Micro announced another round of poor results, posting losses to the tune of Rs 329.5 crore for the quarter ending March 2012. A substantial portion of the loss, Rs 272 crore, has been on account of writing off its bad debts originating from Andhra Pradesh. With this write-off SKS has written-off over Rs 1,000 crore of bad debts from its books (in the past six quarters), which is equivalent to nearly Rs 140 from every share.

What is disturbing is the rising share of other states excluding Andhra Pradesh in the write-offs. In the last six quarters, the company has written off Rs 212 crore in states other than Andhra Pradesh. In 2012, the company wrote off around Rs 180 crore.

So is the poison spreading to other states? It doesn’t look so, if one is to believe the company’s presentation, which says that collection figure is around 95 per cent.

The company in its press release says that it has achieved an 11 per cent quarter-on-quarter portfolio growth in non-Andhra Pradesh states. This, however, does not seem to be enough given the company’s cost structure. For the quarter ended March 2012, the company has posted an income of Rs 50 crore from interest income on portfolio loans, Rs 3 crore from assigned loans and Rs 4 crore as processing fees.

As compared to its income, SKS has financial expenses of Rs 42 crore, while its cost of operations is Rs 79 crore. In other words, the company is not yet earning enough to take care of its running costs. There is some saving grace from the fact that it earns Rs 15 crore as other income.

While the microfinance company has been restructured both in terms of operations and management, the effect is not yet evident in its financials. The company will need to balance growth and costs at the same time.

But the scope for growth seems to be limited. The company’s leverage is at the higher end of 2.3 times as compared to 1.1 times in FY11, though lower than 2.8 times in FY10. Write-offs have eroded the company’s net worth which presently stands at Rs 435 crore as compared to its peak level of Rs 1,781 crore in FY11.

Securitising its loan book has resulted in its highest cash level of Rs 690 crore since FY11. Given this scenario the company will still not be able to earn enough to meet its cost. It will need substantial amount of equity infusion to grow.