SKS fund-raising plan faces valuation hurdles

SKS Microfinance passed a resolution yesterday enabling it to raise Rs 900 crore, but it may find the going tough. The main hurdles are loss of confidence in the sector among investors and a sharp fall in the company’s stock price, according to experts.

“It’ll be very difficult for SKS to raise Rs 900 crore in this environment. The markets are bad, investors have lost money, and there are concerns over economic growth slowing,” Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, said.

He argued the qualified institutional placement (QIP) segment had not been active this year. Indian companies have so far raised Rs 3,344 crore through six QIPs this year. In 2010, Rs 32,631 crore were raised through 53 deals, according to SMC Capital.

SKS, India’s largest and only listed microfinance institution, will also face valuation hurdles. It has lost 80 per cent of its market capitalisation, from Rs 7,100 crore to Rs 1,500 crore, since listing in August 2010. The stock listed at Rs 985. It closed on Thursday at Rs 207.95.

A source in the company said promoters and existing investors might be open to reducing their stake significantly to persuade investors into infusing additional capital. “We are willing to give investors a fair deal. Dilution of stake is not a concern for us,” said the source. The top management was not available for comment, as the company is in a silent period ahead of its second-quarter earnings announcement.

According to the source, a dipstick survey was done, which indicated investors’ appetite was improving. SKS wants to raise the money by late December or early January. The funds will be used to strengthen its capital base and expand balance sheet.

There has not been much private equity (PE) activity in the space. Only four PE deals have taken place so far and the microfinance institutions which secured PE funds do not have a presence in Andhra Pradesh. The firms are Varanasi-based Utkarsh Micro Finance, Kolkata-based Bandhan Financial Services, Bangalore-based Janalakshmi Financial Services and Svasti Microfinance, which raised between Rs 4.5 crore and Rs 135 crore.

Mohit Bhatnagar, managing director, Sequoia Capital, said, “Deals outside Andhra Pradesh are taking place. Deals with Janalakshmi and Bandhan, which took place at attractive valuations, also do not have any exposure to Andhra Pradesh.” Sequoia Capital has a 13.9 per cent stake in SKS.

SKS’ net portfolio after provisions in Andhra Pradesh was 37.5 per cent at the end of June. The collection efficiency was 12.1 per cent in the state, one of the lowest among the states it operates. For April-June, it reported a net loss of Rs 219 crore.

Since the Andhra Pradesh Microfinance Institutions Ordinance restricted operations of microfinance companies in the state, the sector has found itself in deep trouble.

Most microfinance companies have had to take the corporate debt restructuring route of banks. SKS did not participate in that.

In the July-September quarter, SKS saw one of its billionaire investors, George Soros, reducing his stake. Soros currently has a little over one per cent stake in SKS, compared to 4.16 per cent at the end of June.