Despite a bad quarter Bharat Financial keeps analysts' hopes high

Q4 loss of Rs 235 cr seen as one-off event, due to note ban-induced bad loan provision of Rs 335 cr

The analyst firms continue to hold their expectations high on the long-term performance of Hyderabad-based microfinance company Bharat Financial Inclusion (BFI) despite the earnings estimate cuts for this financial year, as the fourth quarter losses are seen as a one-off event.

Earlier this month, the microfinance company (formerly SKS Microfinance) has reported a Rs 235-crore net loss for the quarter ended March 2017, as it had to provide Rs 335 crore in the balance sheet towards the loan defaults in the aftermath of demonetisation among other factors.

The company said it has chosen to report a net loss of Rs 235 crore as it wanted to remain conservative by following the 8-week NPA (non-performing asset) classification and provisioning policy. However, the set back on the recovery front came as a reminder of the troubles it had gone through in the past.

On Tuesday, the company's scrip fell 1.92 per cent to close at Rs 759.60 on BSE.

"These are challenging times for MFIs manifested in a temporary lull in earnings. However, in the light of its robust franchise of 6.7 million members and a strong business practice, we expect BFI to scrape through these challenging times and get back to RoE (return on equity) trajectory upwards of 20 per cent by FY19E," Edelweiss said in a report putout after the company's financial results.

While listing out the inherent strengths of the company and a robust business model, the report has also cited the collection efficiency that was improved from 95.5 per cent in February to 96.6 per cent in March — excluding 3 Maharashtra districts, efficiency reached 99 per cent — as a basis for its optimistic view about the BFI's growth prospects.

The company had faced a near-death situation when its heavily concentrated loan portfolio in Andhra Pradesh had faced complete write-off after the government of the undivided AP brought an ordinance to regulate the microfinance activity in the year 2010.

Neither BFI nor any other microfinance company was able to restart their operations in AP or Telangana to this day.

With its operations now spread across 18 states, BFI was able to absorb similar shocks which it has received from parts of Maharashtra and Karnataka in terms of loan defaults.

Morgan Stanley in its recent report maintained that the company had reported a significantly better asset quality trends than the industry, following demonetisation. However, many firms including Morgan Stanley had cut the earnings estimates of the company for the current year.

"We believe it is better positioned, being a rural franchise with a weekly collection model. In the aftermath of demonetisation, BHAFIN is emerging operationally stronger with migration to 75 per cent of disbursements through cashless mode in quick time and pilot launch to enable cashless connections," Morgan Stanley said while maintaining that the company would return to growth quickly.

Analysts at UBS Securities have also noted the collection as a basis for their optimistic view on the company's ability to return to its growth trajectory quickly.

"The micro lender's gross non-performing loans increased from 0.6 per cent in the third quarter ended December 2017 to 6 per cent in the fourth quarter ended March, 2017. However, the portfolio at risk continues to decline from Rs 1,007 crore in December 2016 to Rs 800 crore in February 2017 and Rs 701 crore in March 2017," UBS Securities noted.

BFI, which is currently pursuing various strategic options including a merger, has also sought to dismiss any further headwinds while reiterating its medium-term target of 50 per cent growth in loan portfolio and earnings.