SKS Microfinance: Good show likely to continue

A banking licence, if awarded, could be a key trigger

SKS Microfinance posted strong operational results in the March quarter. Net profit at Rs 40 crore (up 49.5 per cent over a year), fell 16 per cent short of the consensus Bloomberg expectations of Rs 48 crore due to higher than expected provisioning of Rs 11 crore that was up seven times over the year-ago figure. The higher provisioning was to comply with the standard asset provisioning requirement on the Rs 1,000-crore growth in the non-Andhra Pradhesh loan book. However, pre-provisioning profit grew at a robust 99.7 per cent over a year to Rs 57 crore in the quarter and was led by 47 per cent growth over a year in non-Andhra loans.

The growth in profits was driven by net interest income (NII), which was Rs 91 crore, up 47.6 per cent over a year. Disbursements grew at a healthy of 57.7 per cent, while asset quality was good. The gross non-performing assets ratio remained unchanged at 0.1 per cent. Higher cash on the books impacted net interest margins, which contracted 100 basis points (bps) sequentially to 9.9 per cent. On a year-on-year basis, though, this metric improved 40 bps.

The management remains confident of the road ahead says it expects for 44 per cent loan growth and 58 per cent pre-tax earnings growth in FY16. Analysts, too, remain positive on the prospects and expect the company to post a compound annual growth of 31 per cent in earnings over FY15-17.  However, the near-term upsides for the stock appear limited, given the current level of Rs 482 and average target price of Rs 507, according to a Bloomberg poll of analysts. A key trigger for the stock could be grant of a banking licence by the Reserve Bank of India; the company has applied for one to start a small finance bank. Its grant, analysts believe could be a game changer for SKS. "We believe a migration to the banking platform will provide more scope to its business model and reduce the residual sociopolitical risk of the business", write analysts at Kotak Institutional Equities in a post-results note.

Operationally, a focus on efficiencies, along with improving recoveries from Andhra and stable asset quality, will aid profitability. Low penetration of microfinance in the country and limited competition (given the high-risk, low-ticket segment it caters to) are key growth drivers over the long run. Analysts are also enthused by the company's successful turnaround and recent instances of successful fund-raising.