SKS Microfinance back on high-growth path

Company expected to report earnings CAGR of 83% over FY14-16 on strong loan growth

Microfinance institutions (MFIs) are back in favour. After the recent regulatory tightening, the risk to MFIs' portfolio has come down substantially, claim analysts. Also, borrowers are coming back to these institutions, providing stable growth to large players like SKS Microfinance. Its shares have risen 71 per cent over six months and 139 per cent in the past year. In contrast, the Bankex has risen 80 per cent and the Sensex by 50 per cent over a year. Analysts believe the stock could be headed for a rerating, if the MFI Bill of 2012 is reviewed and reconsidered by the government and a new Bill could be introduced.

With the government focusing on financial inclusion and the Reserve Bank awarding a banking licence to Bandhan, the business model of such players has got validation. Also, MFIs can now function as banking correspondents, which will help them improve their penetration and coverage.

Growth has already returned to the sector, with assets under management (AUMs) of non-banking financial institutions (NBFCs) and MFIs growing 35 per cent in FY14. In the June quarter, NBFCs and MFIs have reported a loan book growth of 44 per cent, claim analysts. The growth is driven by a higher geographical spread and ticket sizes. SKS has a strong capital position that will help drive its growth. SKS Microfinance's tier-I capital ratio is at 40 per cent, against the RBI-mandated 15 per cent. After the qualified institutional placement in May 2014, Morgan Stanley expects SKS' AUM to grow 37 per cent CAGR over FY14-17.

Other than this, there is a serious business opportunity, as the market demand potential is a staggering Rs 5,30,000 crore. According to Morgan Stanley, SKS is positioned well from a growth and risk mitigation perspective, with a diversified loan book over 15 states and average presence of six years. Also, SKS has the least geographical concentration among the top non-Andhra Pradesh MFIs. Strong customer additions should benefit SKS. Analysts tracking the stock expect earnings CAGR of 83 per cent over FY14-16. Antique Stock Broking values the stock at 3.5x FY16 book value or Rs 355 per share. Antique Stock Broking says asset quality continues to remain robust, with 180-day portfolio-at-risk for NBFC-MFIs, excluding corporate debt restructuring, improving to 0.1 per cent in 1QFY15 from 0.2 per cent in 1QFY14. However, a crisis similar to the one that broke in Andhra Pradesh would be a key risk even in times to come, despite regulatory tightening.