Bharat Financial prices in pain from note ban

Stock has fallen sharply after note ban, but company disclosures have improved sentiment

Bharat Financial Inclusion (BFIL) or erstwhile SKS Microfinance and other micro finance institutions (MFIs) scrips have corrected sharply post note ban announced on November 8. Given that a large part of their business is conducted in cash, investors feared that these companies' performance will take a knock in the on-going quarter, and possibly in the next as well. The BFIL stock had fallen 17.5 per cent till November 28, versus Sensex's fall of 4.5 per cent on these worries. However, with the company updating investors about the likely impact of the note ban on its operations, sentiment is improving. The stock recovered some lost ground on Tuesday and closed with gains of eight per cent. Leading foreign brokerage Credit Suisse also upgraded the rating on the stock from underweight to neutral on Tuesday citing inexpensive valuations and limited impact from demonetisation. So, does this mean that the stock has factored in the pain from note ban? Analysts are cautiously positive.

"BFIL's disclosures overnight show impressive resilience in collections, with cumulative 89 per cent of instalments due since demonetisation announcement being collected. This remains a key monitorable, and the next few weeks are crucial," wrote Credit Suisse in its report. The brokerage also indicates that the borrowers might have used their savings to maintain their loan servicing and hence it are monitoring the situation very closely.

Among other key highlights is that BFIL has gone slow on disbursements as it is recycling the notes received via collections and is disbursing only in those centres where collection efficiency is 100 per cent. Restrictions on current account/ATM withdrawals has limited availability of cash at bank branches, highlighted BFIL in its presentation.

Bharat Financial Inclusion Limited

Analysts while lauding MFIs for dealing with the note ban rather efficiently, also point to the differences between them. "Prima facie, BFIL's collections are better than most peers, which reported collection efficiency of 50-70 per cent," believe analysts at Morgan Stanley.

Given the disclosure of details by the management, the street is now estimating BFIL's disbursements to be flat or in worst case decline by 10 per cent in the second half of this fiscal compared with the first half. The company's gross bad loans, too, could leap frog to 2 per cent versus current levels of about 0.1 per cent, estimate analysts. "BFIL's tax benefits could apply for the whole of FY18, leading to 10-12 per cent earnings cuts for FY18 and FY19. We now build a slowdown in FY17 AUM (assets under management) growth to sub-20 per cent," adds the Credit Suisse report. They have trimmed their FY17 earnings per share estimates by 17 per cent.

However, most analysts also believe the risk-reward appears favourable as the BFIL stock seems to capture the pain. The stock currently trades at about 3.5 times FY17 estimated book value, down from peak levels of 4-5 times.