Long-term challenges for SKS Microfinance

After a strong September quarter, company upgrades FY16 gross loan portfolio and profit targets

It was yet another quarter of strong performance from SKS Microfinance as it scored above analysts’ estimates on every count. Gross revenue bettered its year-ago performance by 61 per cent in the September quarter at Rs 324 crore. Despite interest cost increasing by 74 per cent year-on-year, net interest income at Rs 181 crore expanded nearly 60 per cent compared to a year ago. Net interest margin was flat at 11.4 per cent.

Though term loans account for a major chunk of the company's source of funding, its dependence on them has reduced in the past one year. With the proportion of less expensive credit options (commercial papers and non-convertible debentures) increasing, the cost of borrowing stood at 12.1 per cent in the quarter. Also, the cost-to-income ratio softened from 58.2 per cent a year ago to 47 per cent in the September quarter. Profit after tax zoomed by 37 per cent at Rs 78 crore.

The company upgraded its forecast for FY16 to garner Rs 6,250 crore (as against Rs 6,000 crore earlier) of gross loan portfolio from regions other than Andhra Pradesh (AP). Revised net profit target stands at Rs 290 crore (versus Rs 235 crore earlier).

That said, analysts appear apprehensive about these targets. First, along with an increase in loan book by 70 per cent year-on-year, provision for standard and non-performing assets (NPA) also went up 82 per cent in the September quarter. Though collection efficiency was maintained at near 100 per cent, asset quality took a slight hit with gross NPA remaining at 0.2 per cent (versus 0.1 per cent a year ago).

Further, while the geographical loan portfolio mix is diversified, contribution from pockets such as Karnataka and West Bengal has seen a decline over a year ago. Also, the effect of the recent interest rate cut would reflect only in new loans added from October 1. Hence, the December quarter performance would indicate the company's ability to maintain costs at current levels. While near-term performance does not appear challenging, SKS may be pitted against small banks that would have access to cheaper capital in the next 18 months. To combat this pressure, SKS would require differentiation or strategy of diversification and execution in the medium term, say analysts at Emkay Global Financial Services. Whether this can be achieved through rate cuts alone needs to be seen. This could have been a factor affecting the stock on  Tuesday. The SKS stock gained five per cent initially on Tuesday. It closed 1.7 per lower than Monday’s closing price.