SKS Microfinance: Scarcity value

The premium valuation is a result of the company’s unique business model, but its consistency will be tested.

A merchant banker associated with the initial public offer of SKS Microfinance gave one reason for the issue’s success — scarcity value. “There are not many organisations like this available to invest in,” he said.

The micro-finance institution (MFI) will quote at around 3.7 times its book value at the lower price band of Rs 850 and 4.3 times at Rs 985. This is much higher than frontline commercial banks and several other non-banking financial companies.

The valuation looks attractive, as the model built by SKS Microfinance has seen that there is a low rate of default when there is a high rate of loan growth. Over the past four years, the company’s credit book has expanded at a compounded rate of 216 per cent, with the rate of repayment on unsecured loans at more than 99 per cent, point analysts. As of March 31, net non-performing assets stood at around Rs 4.8 crore, which is around 0.16 per cent of loans. The company’s lending model has ensured a certain discipline through mutual support and peer pressure within the group to make sure that individual members are prudent and prompt in repaying their loans. Moreover, the company has focused on lending to women. The saw retails formed around 29 per cent of the lending, while livestock and services accounted for 26 per cent and 20 per cent of the lending, respectively.

The company would also be leveraging corporate relationships, like the ones with Nokia and Airtel, and support them in increasing rural penetration. This is seen as the most exciting aspect of the business model. In fact, analysts expect this part of the business to scale up significantly in the times to come and take care of the biggest risk — lending at fixed rates when interest costs are changing. The company would also be tested for its ability to maintain this rate as it expands and faces regional catastrophes that India is know for. If it is able to endure these conditions, the valuations would truly be justified.