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Future In Trouble

SKS Microfinance’s recoveries are likely to remain low & the company is expected to underperform in the near future…

Could you tell me about the fundamentals of SKS Microfinance? I own 168 shares that were allotted to me in its IPO. I am ready to hold the shares for one more year. Kindly advise.
- Aena Grover

SKS Microfinance Ltd, India’s only listed micro lender, made an impressive debut on the bourses on August 16, 2010. Its shares were issued at Rs 985 and they rose to a maximum Rs 1,402.30 (on September 28, 2010). However, the company’s fortunes have taken a knocking after corporate governance issues arose, and owing to a regulatory crackdown last year by the government of Andhra Pradesh (AP). At that time, AP was the country’s largest market for microfinance. AP introduced an act that restricted incremental lending as well as collections in the state by micro-finance institutions (MFI). These regulations brought SKS’s business in AP to a grinding halt.

In the September quarter, the company posted higher-than-estimated losses. These losses were driven primarily by higher provisioning in the non-AP loan book. The higher losses arising out of the non-AP book is a source of concern. The company’s return on capital employed (RoCE) and return on net worth (RoNW) declined 3.7 percentage points and 13.5 percentage points respectively in FY11 compared to FY10. Its operating profit margin and net profit margin have dropped drastically by around 19 percentage points and 10 percentage points respectively during the same period.

The stock has declined 89.3 per cent from its listing price and is currently trading below book value. It touched its 52-week low of Rs 110.5 on November 22, 2011. The company has been posting a negative earnings per share in the past three quarters.
An AP-like situation in any other state may result in higher credit cost for the company, thereby impacting earnings. Adding to its woes, all SKS loans are unsecured and the credit history of borrowers is not available. SKS’s business is facing significant pressures, especially in Andhra Pradesh, on two counts — loan book growth and quality. This is likely to result in substantial losses on its AP portfolio. The longer these regulations stay in force, the greater will be the eventual write-off for SKS.

It is uncertain by when the microfinance bill will get introduced in Parliament and then become an act. Once this legislation is enacted, there could be higher recoveries. In the interim, though, recoveries are likely to remain low and the company is expected to underperform in the near future.

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