SKS Microfinance to turnaround in FY15

Leading microfinance institution (MFI)—SKS Microfinance (SKS) has seen a host of positive developments recently which could result in reversal of fortunes for the lender. Last week, Supreme Court allowed the company to resume its operations in Andhra Pradesh after the state government had barred the same in 2010.

The company reported a marginal net profit in the December 2012 quarter after making losses for seven quarters in a row. Notably, it had provided Rs 1,350 crore towards bad loans in Andhra Pradesh which wiped away into SKS' profits. Analysts expect this profitability to sustain and estimate SKS' March 2013 profits to be between Rs 3-7 crore.

The company has also managed to raise funds efficiently via both equity (recent QIP) and debt routes. While banks shied away from lending to MFIs same time last year, the scenario has improved now with the company securitising loans worth Rs 981 crore in FY13 so far.

At Rs 121.70, the stock currently trades at 1.5 times its FY15 estimated book value and has under-performed both Sensex as well as BSE 500 indices over the past one month and three months periods. Going forward, passing of the MFI bill will be a major catalyst for the stock. Analysts remain positive on the stock given the higher appetite for MFI loans.

Nidhesh Jain, analyst at Espirito Santo Securities says, "We believe FY14 will be a transition year for SKS due to overhang of higher operating cost on the profitability of SKS. We expect the company to achieve more than 20% return on equity from FY14 onwards as company scales its loan book and operating leverage kicks in, given that the company’s current infrastructure is under-utilized.” He has a Buy rating on the stock with a target price of Rs 186.

Analysts expect SKS' loan book to double to Rs 3,000 crore by end of FY14 from Rs 1,500 crore levels in FY13 - even in absence of Andhra Pradesh lending. The company's asset quality has deteriorated in the past few quarters as it was writing off loans in Andhra Pradesh.

However, SKS completed writing off its AP loan book in the December 2012 quarter, resulting in negligible credit costs and collection efficiency of about 99%.

The company has increased its presence in states such as UP, Rajasthan, Gujarat, amongst others and are likely to drive growth going forward. While SKS has ventured into gold financing (pilotal stage) and mobile phone loans (less than 5% of loans), they are too small in size to contribute meaningfully to either top-line or profits of the company.

However, gradual scaling up of these business will enable the company to diversify its revenues.