Professional Documents
Culture Documents
Financials
November09,2011
BUY
SKSMicrofinance
TargetPrice(INR)243
Bulkofthepainover,thoughrevivalsometimeaway
Rating SKSM reported a net loss of INR3.8bn, much larger than estimates,
drivenbyhigherprovisionsinthenonAndhraPradeshloanbookthan
LastPrice(INR)
192.8
thoserequiredasperregulatoryguidelines.However,withthebulkof
Bloombergcode
SKSMIN
creditcostsprovidedforin1HFY12,incrementalprovisionsarelikelyto
Reuterscode
SKSM.BO
belower.Wereviseourforecaststofactorintheacceleratedwriteoff
Avg.Vol.(3m)
413,195
Avg.Val.(3m)(INRmn)
108
in the Andhra Pradesh book. Disbursements are likely to see some
52wkH/L(INR)
1,019/188
improvement in 2HFY12 as demand for priority sector increases. We
17,570
Sensex
lowerourSep12TPtoINR243,primarilyduetofrontendedprovisions
MCAP(INRbn/USDmn)
13.95/282
inFY12.WeupgradetheratingtoBuyduetothesharpderatingsince
Shareholding(%)
6/11
9/11
Jul11.However,areboundinvaluationsislikelytobesometimeaway,
36.9
36.8
Promoters
astimelinesonthepassageoftheMicrofinanceBillremainuncertain.
MFs,FIs,Banks
5.2
6.1
FIIs
20.6
19.0
Public
Others
3.8
33.6
4.0
34.1
StockChart(RelativetoSensex)
1,200
1,000
800
600
400
200
AcceleratedwriteoffsintheAndhraPradeshbookpulldownearnings
SKSM reported a net loss of INR3.5bn, much larger than estimates, driven by
higherprovisionsinthenonAndhraPradeshloanbookthanthoserequiredas
per regulatory guidelines. The lender wrote off INR3.5bn during the quarter
ended Sep11; thus, lowering the outstanding Andhra Pradesh loan book to
INR8bn. However, with the bulk of credit costs provided for in 1HFY12,
incrementalprovisionsin2HFY12arelikelytobelower.Ourearlierestimates
for provisions and writeoffs in the Andhra Pradesh book were based on
currentprovisioningguidelinesforNBFCs.Wereviseourforecaststofactorin
theacceleratedwriteoffintheAndhraPradeshbook.Wemaintainourcredit
costforecastsofINR9.6bnoverthetwoyearperiodendingMar14f.
WriteoffsinnonAndhraPradeshbookaconcern
0
Nov10
Mar11
Jul11
SKS Microfinance
Nov11
Sensex Rebased
StockPerfm.(%)
1m
3m
1yr
Absolute
10.0
48.1
80.7
Rel.toSensex
18.2
49.7
64.3
03/11
03/12f
03/13f
SKSMwroteoffINR0.4bntowardstheWestBengalbookandINR0.1bntowards
lossesarisingoutoftheGujaratbook.Whilemanagementmaintainsthelosses
arising out of Gujarat to be purely technical, higher losses arising out of the
nonAndhraPradeshbookremainaconcern.
Disbursementsshrink,topickupduringthequarterendedMar12
Sho/s(diluted)
82 82 82
SKSMsdisbursementsdeclinedfromINR9bnintheJun11quartertoINR8bnin
the Sep11 quarter. The loan book continued to decline balance sheet loans
recordedan18%qoqdeclinefromINR31bnatendJun11toINR26bnatend
Sep11.Disbursementsarelikelytoseesomeimprovementtowardstheendof
2HFY12,asdemandforprioritysectorincreases.Theproposedequityinfusion,
if executed, is likely to improve the outlook for nonAndhra Pradesh growth.
WefactorinaCAGRof50%inloansforSKSMoverFY12fFY14f.
A.EPS(INR)
UpgradetoBuy,thoughneartermreboundinvaluationsunlikely
YoY(%)
Equity/Assets(%)
P/E(x)
ThetimelinesforintroductionoftheMicrofinanceBillintheParliamentandfor
passageofthebillintoanActremainuncertain.Onceenacted,thiscoulddrive
higher recoveries. A rebound in valuations is likely as and when these events
unfold.WelowerourSep12TPtoINR243,primarilydrivenbyfrontendingof
provisions in FY12. We upgrade the rating to Buy, due to the sharp derating
duringthepastthreemonths.Riskfactorsremainhigherthanestimatedcredit
lossesandlowerdisbursements.
Financials(INRbn)
NII
8 5 10
YoY(%)
40 (43) 105
Operatingprofit
A.PAT
1 (4) 2
P/B(Adj)(x)
RoA(%)
RoE(%)
QuarterlyTrends
12/10
03/11
06/11
09/11
Op.income(INRbn)
4 2 2 1
PAT(INRbn)
Pleaserefertothedisclaimertowardstheendofthedocument.
JayneeShah,+9102266842868
jaynee.shah@avendus.com
SKSMicrofinance
Exhibit1: ResultssummaryforthequarterendedSep11
(INRmn)
Sep10
Jun11
qoq(%)
Sep11
yoy(%)
Interestincome
3,420
1,636
24.8
1,230
64.0
910
629
16.2
527
42.1
2,510
1,006
30.2
703
72.0
Interestexpense
Netinterestincome
310
132
38.0
82
73.7
Operatingincome
Otherincome
2,820
1,138
31.1
784
72.2
Operatingexpense
1,410
1,131
4.7
1,078
23.6
Operatingprofit
1,410
4,755.4
294
120.8
1,978.5
Provisions&contingencies
170
1,837
92.4
3,533
Provisionfortax
430
357
94.9
18
95.7
Netprofit
810
2,187
75.8
3,845
574.7
NA
25
Keyratios(%)
Loangrowth
50
Source:Company,AvendusResearch
Exhibit2: Earningsrevisionsummary
(INRbn)
FY12f
FY13f
Old
New
Var(%)
Old
Netinterestincome
5,516
4,715
14.5
Operatingincome
6,486
5,926
8.6
109
96
Provisions
3,526
6,985
Netprofit
476
EPS(INR)
6
190
Operatingprofit
AdjustedBookvalue(INR)
FY14f
New
Var(%)
Old
New
Var(%)
10,707
9,670
9.7
15,626
15,332
1.9
11,752
11,035
6.1
17,756
17,008
4.2
11.7
4,642
4,221
9.1
10,092
9,595
4.9
98.1
2,575
956
62.9
3,567
1,718
51.8
4,038
748.6
1,198
1,700
41.9
3,205
4,273
33.3
49
748.6
15
21
41.9
39
52
33.3
158
16.8
157
167
6.2
190
194
2.3
Source:Company,AvendusResearch
AcceleratedwriteoffsinAndhraPradeshbookpulldownearnings
In the Sep11 quarter, SKSM reported a net loss of INR3.8bn, much larger than estimates, driven by
higher provisions in the nonAndhra Pradesh loan book than those required as per regulatory
guidelines.DuringthequarterendedJun11,asperRBInormsforNBFCs,thecompanyrecognizedthe
entireAndhraPradeshloanbook(INR11bnatendJun11)assubstandardassets,whichledtocredit
losses of INR1.1bn (at 10%). SKSM has writtenoff INR3.5bn during the quarter ended Sep11; thus,
bringingtheoutstandingAndhraPradeshloanbookdowntoINR8bn.However,withthebulkofcredit
costs accounted for in 1HFY12, incremental provisions in 2HFY12 are likely to be lower. The
unrecognizeddeferredtaxassetsonaccountofprovisionsofINR2.6bncanbeutilisedagainstprofitsin
future. We have not factored in any gain from the deferred tax assets in our estimates. Our earlier
estimatesforprovisionsandwriteoffsintheAndhraPradeshbookwerebasedoncurrentprovisioning
guidelinesforNBFCs.WereviseourforecaststofactorintheacceleratedcleaningupoftheAPbook,
whichdrivesacutinourearningsestimatesforFY12andincreaseinforecastsbetweenFY13FY14.Our
absoluteforecastsforcreditcostsoverFY12FY14remainunchangedatINR9.6bn.
Exhibit3: Revisedforecastsforcreditcosts
(INRmn)
ProvisionsinAndhraPradeshbook
ProvisionsinNonAndhraPradeshbook
Total
Mar12f
Mar13f
Mar14f
6,287
860
1,546
699
96
180
6,985
956
1,726
Source:Company,AvendusResearch
Financials
SKSMicrofinance
Exhibit4: Earlierforecastsforcreditcosts
(INRmn)
ProvisionsinAndhraPradeshbook
ProvisionsinnonAndhraPradeshbook
Total
Mar12f
Mar13f
Mar14f
3,173
3,217
2,310
353
357
257
3,526
3,575
2,567
Source:Company,AvendusResearch
WriteoffsinnonAndhraPradeshbookaconcern
SKSM wroteoffINR0.4bn towards theWestBengalbookand INR0.1bntowardslossesarising out of
theGujaratbook.WhilemanagementmaintainsthelossesarisingoutofGujarattobepurelytechnical,
higherlossesarisingoutofthenonAndhraPradeshbookcontinuetoremainaconcern.
Exhibit5: TrendinnonAndhraPradeshprovisionsforSKSM(INRmn)
699
466
233
0
Dec10
Mar11
Jun11
Sep11
Source:Company,AvendusResearch
Disbursementsshrink;topickupduringthequarterendedMar12
SKSMsdisbursementsdeclinedfromINR9bnintheJun11quartertoINR8bnintheSep11quarter.The
loanbookcontinuedtodeclinebalancesheetloansrecordedan18%qoqdeclinefromINR31bnat
endJun11toINR26bnatendSep11.Disbursementsarelikelytoseesomeimprovementtowardsend
2HFY12,asdemandforprioritysectorincreases.WefactorindisbursementsofINR47bnforFY12.The
proposedequityinfusion,ifexecuted,islikelytoimprovetheoutlookfornonAndhraPradeshgrowth.
WefactorinaCAGRof50%inloansforSKSMduringthetwoyearperiodendingMar14.
Reboundinvaluationsunlikelyinthenearterm
ThetimelinesforintroductionoftheMicrofinanceBillintheParliamentandforpassageofthebillinto
an Act remain uncertain. Once enacted, this could drive higher recoveries. In the interim, though,
recoveriesarelikelytoremainlow(c10%currently),tilllendingresumesinAndhraPradesh.Arebound
invaluationsislikelyasandwhentheseeventsunfold.
UpgradetoBuywitharevisedSep12TPofINR243
OurblendedtargetisbasedontheDCFandP/Bmethods.OurDCFvaluestandsatINR384,wherewe
assume a cost of equity of 14% and semiexplicit and fade period growth of 27% and 2.5%,
respectively.WealsoincludetheproposedequitydilutionofINR6bnduringFY13ftoarriveatourDCF
value. However, our base forecasts do not factor in the proposed equity dilution. The stock has
declinedby62%sinceJul11duetoadelayinthepassageoftheMicrofinanceBillandthelackofany
favourable outcome in Andhra Pradesh. We lower our Sep12 target price to INR243, from INR498
Financials
SKSMicrofinance
earlier,primarilydrivenbyfrontendedprovisionsintheAndhraPradeshbook.Weupgradeourrating
toBuy,drivenbythe68%deratingofthestockfromitsrecentpeakinJul11.
Exhibit6: AverageP/B
1month
3months
6months
12months
1.2
1.5
2.0
2.9
DCF(withdilution)
P/B
Weightedavg
Weights
30%
70%
Targetprice
384
183
P/Adj.B
Source:Company,AvendusResearch
Exhibit7: TargetpricebasedontheDCFandP/Bmethods
243
Source:Company,AvendusResearch
Exhibit8: OneyearfwdP/BandtargetP/B
1yearforwardP/ABV(x)
Average1yearforwardP/ABV(x)
8.3
7.0
5.7
4.4
3.1
1.8
0.5
Aug10
Jan11
Jun11
Nov11
Apr12
Sep12
Source:Company,AvendusResearch
Riskfactors
Regulatory and political: An Andhra Pradeshlike situation in any other state is likely to result in
highercreditcosts,therebyimpactingearnings.
Assetqualityrisks:AllofSKSMsloansareunsecuredwithnocredithistoryavailableforborrowers.
Hence, should the jointliability model collapse, credit losses could spiral, impacting earnings
significantly.
Unavailabilityofadequatefunds:RelianceondebtcontinuestoremainstrongforSKSM,withmost
ofthesefundscomingfrombanks,basedonprioritysectorlendingarrangements.Duringthecrisis
inAndhraPradesh,thissourceofborrowinghadvirtuallycloseddownwithbanksunwillingtolend,
fearingrisingdefaults.Unavailabilityofadequatecapitaltofundthegrowthintheloanportfolioisa
keyrisktoourestimates.
Scalabilityrisks:SKSMsbranchnetworkhasgrownrapidlyoverthepastthreeyears.Thenumber
ofclientsincreasedfrom0.2mninMar06to5.8mnatendMar10.Therapidexpansioncouldpose
operational and scalability risks, as SKSM penetrates newer geographies and increases its ticket
sizes.
Financials
SKSMicrofinance
Financials&valuations
Incomestatement(INRbn)
F iscalyearending
Netinterest income
F eeincome
Tradingprofit
Ot herincome
Totalo perat ingincome
Totaloperat ingexpense
O peratingprofit
Prov isionforbaddebt
Ot herprovi sion
PBT(reported)
Totaltaxes
PAT(reported)
(+)Shareinassoc.earni ngs
Less:Minorityint er est
Pri orperiodit ems
Neti ncome(reported)
Avendu sn et income
S haresoutstanding(mn)
Avendusdi l.shares(mn)
Avendu sEPS(INR)
DecompositionofRoA(%)
03/11
8.2
0.2
0.0
1.0
9.4
5.3
4.1
0.5
0.8
2.8
0.6
2.2
0.0
0.0
0.0
1.1
1.1
82
82
13.7
03/12f
4.7
0.2
0.0
1.0
5.9
6.0
0.1
1.6
5.3
7.1
3.1
4.0
0.0
0.0
0.0
4.0
4.0
82
82
49.4
03/13f
9.7
0.3
0.0
1.1
11.0
7.1
3.9
0.5
0.5
3.0
1.3
1.7
0.0
0.0
0.0
1.7
1.7
82
82
20.8
03/14f
15.3
0.5
0.0
1.2
17.0
7.8
9.2
0.8
0.9
7.5
3.2
4.3
0.0
0.0
0.0
4.3
4.3
82
82
52.3
18.5
39.8
41.4
782.4
35.8
46.1
9.7
42.6
13.7
212.0
461.7
461.7
51.1
105.1
31.3
70.8
142.1
142.1
81.8
58.6
69.5
69.5
151.4
151.4
87.3
2.2
43.5
11.9
0.0
79.6
3.9
1.8
68.1
35.3
87.6
2.8
35.7
15.4
0.0
90.2
3.1
54.2
25.1
0.0
03/11
21.4
0.5
2.6
24.5
13.4
11.1
6.2
0.4
1.6
2.9
03/12f
11.3
0.6
2.3
14.2
14.0
0.2
16.7
0.5
(7.3)
(9.7)
03/13f
18.4
0.6
2.0
21.0
13.0
8.0
1.8
0.5
2.5
3.2
03/14f
17.9
0.6
1.3
19.8
8.6
11.2
2.0
0.4
3.8
5.0
R oA
Assets/Equity
R oE
KeyRatios
Growthratios(%)
Loans
Neti nter est income
F eeincome
Prov isionforbaddebt
Avendusnet income
AvendusEPS
Operatingratios(%)
03/11
03/12f
03/13f
03/14f
38.2
2.4
2.5
0.0
10.6
3.1
3.3
0.0
25.1
2.8
3.1
0.0
10.0
2.2
2.7
0.0
14.8
14.8
217.9
212.5
0.0
49.4
49.4
168.5
158.1
0.0
20.8
20.8
189.3
166.7
0.0
52.3
52.3
234.2
194.3
0.0
Pershareratios(INR)
Balancesheet(INRmn)
F iscalyearending
Equity capital
Preferencecapit al
Reservesandsurpl us
Networt h
Totalborrowings
Totalliabilities
CurrentAsset s
Less:Current Liabil ities
Investments
Advances
F ixedasset s
Ot herassets
Totalassets
03/11
0.8
17.0
17.8
22.4
40.2
7.5
2.8
0.0
34.8
0.3
0.4
40.2
03/12f
0.8
13.0
13.8
29.6
43.4
5.5
0.7
0.0
38.2
0.4
43.4
03/13f
0.8
14.7
15.5
46.1
61.5
4.2
0.7
0.0
57.6
0.4
61.5
03/14f
0.8
18.3
19.1
90.9
110.1
6.2
1.4
0.0
104.8
0.5
110.1
BusinessRatios(%)
Loan/Deposit
Sharestoinvestments
155.6
5.3
128.9
100.0
125.1
100.0
115.2
100.0
BasicReportedEPS(INR)
DilutedReportedEPS(INR)
ReportedBookValue(BV)
AdjustedBookValue(ABV)
Dividendpershare(INR)
Return/ProfitabilityRatios(%)
Yieldonadvances
Costoffunds
Spreads
Netinterestmargin
Feeincome/Oprevenue
Opexpense/Oprevenue
CapitalizationRatios(%)
Equity/Assets
Loans/Assets
Investments/Assets
Dividendpayout
Internalcapitalgrowth
Capitaladequacy
AssetQuality
GrossNPLratio
NetNPLratio
NetNPL/networth
Loanlossreserve/GrossNPL
Loanprovisions/NII
Loanprovisions/Totalloans
Productivity/Efficiencyratios
Netprofitperemployee(INRmn)
24.7
92.6
0.0
12.4
25.7
17.1
94.0
0.0
14.0
23.9
17.8
(0.2) 0.1
0.2
Financials
SKSMicrofinance
AnalystCertification
I,JayneeShah,MBA(Finance),researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviews
aboutthesubjectcompany/companiesanditsortheirsecurities.Wefurthercertifythatnopartofourcompensationwas,isorwillbe,directlyorindirectlyrelatedtospecific
recommendationsorviewsexpressedinthisdocument.
Disclaimer
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DisclosureofInterestStatement(asofNovember8,2011)
Analystownership
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No
No
No
SKSMicrofinance
OUROFFICES
Corporateoffice
InstitutionalBroking
Bangalore
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Financials