SKS Microfinance Limited - A Successful Turnaround story.

SKS Microfinance Limited has been the pioneer of the Microfinance industry in India. Microfinance basically means Small Loans. This business is mainly operated in rural or semi-urban areas, where the average Loan Amount is less than Rs.30,000/- and the average Repayment Duration is generally a few months only. The Microfinance business grew in popularity mainly as a much better alternative to local money lenders, who used to charge exhorbitant interest rates & used muscle power during recovery of loans, if not paid on time. SKS Microfinance had initially focused it's operations only in the state of Andhra Pradesh (AP) and expanded to other states only after reaching a business substantial size. The company grew by leaps & bounds until the year 2011, when suddenly the entire Microfinance industry faced regulatory ire from multiple sources. The main trouble source was action by the State Govt of AP. Probably the money lenders of the state, who were rapidly losing business to SKS, grouped together and used their political clout to clamp down on SKS's operations.

There was an upheaval in SKS's operations with loads of uncertainties surrounding it's survival. Borrowers suddenly stopped repaying loans, the company couldn't recover it's dues, the company's Capital sources also dried up, and then there were quarrels within the company's management. The Institutional Investors of SKS Microfinance finally took control of the company's management. They sought clarity from RBI about regulations towards the Microfinance industry. Then they reconfigured the company's management & operations to comply as per RBI's regulations. While restarting the business, SKS had to write-off most of it's Loan Book Receivables from the state of AP. All these things were completed by the September'2012 quarter. And from December'2012 quarter SKS started reporting Net Profit again, though on a very small scale of operations, compared to what it was 2 years ago.

Quarterly Numbers

Over the last 2 years, SKS Microfinance has grown it's operations at a pretty good pace. The company is back to over Rs.200 crores in Quarterly Total Income. All this growth is coming from SKS's operations outside the state of AP. SKS is making sure that a single state does not contribute more than 15% to 20% of the company's business at any given point. As other measures to limit the credit risk, SKS is keeping a close tab on the quality of assets contributed by each of it's branches. As soon as the percentage of Bad Loans from a particular branch goes above a certain level, the company immediately cuts incremental funding to that branch until the loan quality is back to normal. The borrowers of SKS Microfinance mainly comprise of farmers who need money to buy Livestock or cattle, or Ladies & Small businessmen who need money for their Tailoring operations or small Kirana stores. In short, the company focuses on giving loans to people who need that money for generating Income. This way there is a better chance of that borrower returning the money in the stipulated time period. 

SKS Microfinance has already reached a scale where it is disbursing loans amounting to about Rs.1200 to 1500 crores each quarter. The company securitises part of it's receivables regularly to improve it's Capital Adequacy Ratio as well as De-risk it's Loan Book. Since the quality of it's Loan assets is very good, the company is not facing any difficulty in securitising it. As per recent updates, SKS Microfinance has already securitised over Rs.1000 crores of it's Loan assets in the current fiscal.

Valuations: As you can see, SKS's stock was around the Rs.100/- mark in July'2013. From there the stock has rallied strongly over the last 20 months to reach a level of around Rs.450/-. As of December'2014, SKS's trailing-twelve-months EPS stands at close to Rs.14/-. That means the stock currently trades at over 32 times it's trailing EPS. Since SKS Microfinance can continue to grow at over 30% over the next 2 years, this valuation cannot be termed as expensive. With over 50% of India's population living in rural areas, there is unlimited scope for growth for all players working in the MicroFinance & Rural Loans space. The Govt of India too is trying to ensure that traditional banking services reach the masses living in the Rural areas and the Jan Dhan Yojana is one step in that direction. With more & more farmers getting access to formal modes of finance, the exploitation by the local money lenders will reduce & we will see improvement in life for people living in villages. Hopefully things will be a lot better on this front in the next 5 years. So I just hope that companies like SKS Microfinance continue to grow at a measured pace & help improve life in rural areas, without compromising too much on the quality of assets.

Happy Investing!!!